Ladies and gentlemen, welcome to the Lindab Q2 Report 2019. Today, I'm pleased to present Chief Executive Officer Ola Ringdahl, and Chief Financial Officer Malin Samuelsson. For the first part of this call, all participants are in listen-only mode. Afterwards, there'll be a question and answer session. Speakers, please begin.
Hello, everyone, and welcome to this call. My name is Ola Ringdahl, and I'm the President and Chief Executive Officer of the Lindab Group. I'm sitting here together with our Chief Financial Officer, Malin Samuelsson. We move to slide two and the agenda. We will follow this agenda during today's meeting. I'll not go through it here, but instead start with the overview on slide number four. Some key highlights and summary of the Q2 of 2019. Net sales increased by 7%. 5% was the organic growth. Adjusted operating profit increased to SEK 238 million, and the increase in operating profit comes from all 3 business areas, and there were several positive contributing factors.
The profit for the period increased to SEK 181 million, which is the highest profit for a Q2 for the Lindab Group since 2008. We continue our focused work to improve efficiency throughout the organization, and we are pleased to see that the results start to show. Finally, during April, Lindab acquired all the shares in the company, Ductmann Ltd., whose business is mainly focused on the production and sale of rectangular ducts and fire-rated ducting for ventilation systems in the U.K. We move to the next slide, number five. With a geographic overview, the Q2 had good sales development in most regions in Europe, with the exception of the Nordics. In Western Europe, we had growth of 14%. The strongest growth in absolute value come from France, Germany, and Switzerland.
In the Central Europe and CIS region, we continue to see positive sales development, with sales growth of 14%. The growth was especially strong in Hungary. In the Nordic region, we had negative sales development during the quarter. The decline for the region mainly relates to tough comparison versus same period last year, but also fewer industrial building projects since we are now more selective in our project-related business. We try to balance between volume and profitability in all our segments with a clear objective to improve earnings. Now we move to the financial section, and I hand over to you, Malin.
Thank you, Ola. We go to slide number seven. We take a look at the group financial highlights, and we see a quarter with continued strong operating leverage. The net sales increased by SEK 107 million or 7%, of which the organic growth amounted to 5%. Net sales was SEK 2.569 billion, which is an all-time high for a Q2. The largest positive currency effect on sales in absolute terms come from EUR, followed by DKK, GBP, CHF, and PLN. No unit had a negative currency effect. EBIT increased mainly as a result of sales growth, improved gross margin, and improved efficiency. All three business areas contribute to the increase in profitability, and as mentioned before, the balance between volume and profitability continues in all three segments.
This results in an operating leverage of 48% on EBIT, excluding IFRS 16 in comparison to the same period of the previous year. Net profit increased to SEK 181 million compared to SEK 91 million during the same period last year. Let's have a look at the Ventilation Systems at the next slide number eight. Our business area Ventilation Systems delivered stable organic growth and improved profitability. Net sales increased by 8%, equal to SEK 111 million. The organic growth amounted to 4%. The largest positive currency effect on sales in absolute terms come from Euro, followed by British pound, Danish krona, Swiss franc, and Norwegian krona. The quarter had continued positive sales development in all regions within Europe, with particularly strong growth in the CE East region.
EBIT increased to SEK 163 million, which is the strongest EBIT result ever in absolute terms for Q2 for our ventilation business. The improvement was mainly related to increased volume and improved gross margin. The costs have at the same time been stable, which also contributed to the positive improvement in EBIT. This results in an operating leverage of 45% on EBIT when excluding IFRS 16, compared to the same period previous year. We move to the next slide number nine. In Profile Systems, the EBIT improved despite lower volume. Net sales decreased by 6% to SEK 625 million. The organic growth was negative with - 7%. The sales decline relates to a slowdown in the Swedish market, especially related to industrial building projects and the strong comparison versus last year.
We continue to balance the volume and profitability, and especially with regards to our product related business. The EBIT increased to SEK 60 million, compared to previous year's SEK 58 million, despite the volume decrease, mainly as a result of improved gross margins and lower operating costs. We move to the next slide number 10, and Building Systems. The business area reports very strong sales while continuing to be on track with the turnaround plan. Net sales increased by 39% and amounted to SEK 384 million, which is an all-time high per quarter. Organic growth amounted to 34%. The final phase of a few projects with significant deliveries in Central Europe contributed to strong sales development. The largest currency effect on sales in absolute terms come from Euro, followed by Polish zloty, ruble and Czech krona.
The EBIT increased to SEK 27 million compared to five last year, sorry, -5 last year, mainly due to strong volume growth and improved gross margin. The net order intake decreased compared to last year, but the total backlog at the end of Q2 is higher than last year. We move to cash flow on slide number 11. The adjusted free cash flow amounted to SEK 97 million versus SEK 26 during the same period last year. The improvement in adjusted free cash flow year to date is due to higher operating profits, which was largely offset by changes in working capital and higher investment. The net debt, excluding the effect from IFRS 16, decreased to SEK 1,265 million, and the Net debt/EBITA ratio amounted to 1.2 compared to two the previous year.
That concludes the financial section, and I hand it back to you, Ola.
Thank you, Malin. We move to slide 13 and some highlights. Highlights from the Q2 2019. As I mentioned, in April, we acquired the company Ductmann in the U.K. It is a good and natural step for Lindab to further strengthen our product offering for Ventilation Systems in the U.K. Ductmann is certified for production of fire-rated ductwork systems, which is an important and growing product segment for us. I think the combination of the two businesses will provide excellent opportunities to increase the service to our customers in the U.K. The annual net sales of Ductmann when we acquired it was SEK 43 million.
Within Profile Systems, we have, during the quarter, concluded an updated cooperation agreement with the Swedish builder merchant company called Woody, where Lindab will be upgraded to become an A supplier, capital A supplier. This is expected to positively contribute to the sales of Lindab's roof products and rainwater systems. Woody currently have 91 shops nationwide in Sweden. For Building Systems, we have, during the quarter, signed agreements on three major orders, each worth more than 10 million SEK, and that's one each in Switzerland, Russia, and Kazakhstan. We move to slide 14 and the current focus areas. Those of you who listened to our presentation for quarter one, will see that the symbols and texts are the same this time as well.
Our focus areas remain the same, and they will remain the same probably also the next quarter. We work a lot with decentralization and clarification of accountability. The P&L responsibility for well-defined business units, that's very key for Lindab going forward. We focus on businesses where we can achieve satisfactory profitability over time, and we have increased our emphasis on delivery excellence. We mentioned last time that we have also increased the pace of investment, and our higher investment level is driving efficiency improvements throughout the organization, and this continues at a high pace. Now, we move to market development on slide 16. Market development.
We analyze the statistics available, as I'm sure many of you do, and we see that there is market growth, but it is forecasted to be at a lower pace. The European economy continues to slow down. Euroconstruct forecasts the annual growth rate in the European construction market to flatten out at around 1% in the coming two years. Euroconstruct's updated forecasts from June 2019 only had minor changes relative to the one they released in November 2018, and you can see the difference there in the graph. The sentiment in the construction market remains good in the CEE region, but we see that it has weakened in markets such as Sweden, Germany, and the U.K. We continue to improve our customer offering and our efficiency to remain resilient in a possible future slowdown.
We try to be prepared for all different scenarios. Now we move to slide 18. You recognize the summary slide. To summarize from my side, we are pleased to see that the improvement efforts within the Lindab Group are delivering results on the bottom line. We will continue our efforts to improve our business units at a high pace. This concludes our Q2 report. We are now open to receive questions.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name has been announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel. Once again, that's zero one to ask a question or zero two if you need to cancel. Our first question comes from the line of Carl Ragnerstam of Nordea. Please go ahead, your line is open.
Morning, it's Carl Ragnesten from Nordea. I have a couple of questions. First of all, in Profile Systems, you reported a - 7% organic growth. How much of that is you phasing out, or declining a profitable volumes, and how much is the underlying market? Can you also comment on the calendar effects? In addition, can you also remind us of the portion of Swedish sales in that segment?
We, when we try to estimate how much is market influence and how much is, there are our own selective actions, our best estimate is that it's half of that effect. We are declining orders, we are pushing harder in negotiations, and we are prepared to sacrifice certain volume to be able to lift profitability in the company. That's hopefully an answer to one, or maybe the two first questions you had. Can you repeat the rest, please, Carl?
How much does Sweden represent, I mean, in terms of sales for Profile Systems?
We don't supply that detailed number.
It is the most important market for Profile.
For Profile Systems, the Nordic region, is 71%, and Sweden is a large part of that. Sweden is a substantial part, of the Profile System business.
Okay, perfect. Related to CapEx, in the quarter was SEK 80 million. Is that the level we can expect for H2 as well? I mean, given your plans in, on investing in, efficiency and capacity, or should we still expect a ramp-up during H2 and probably into 2020?
I think we can say that we have started some of the investment programs in the factories, and we will see further investments coming through. In the quarter two, we have had also an investment in the building. That was more of a single decision investment. Yes, we can see that, as we said before, that the investment pace of is ramping up. We will see gradually, like we described first, in the Q1, that investment will increase.
Okay. But the SEK 80 million level, is that to expect? I mean, you mentioned that you invested in a building, if we adjust it for that, what's the CapEx level then?
We don't provide such details. We said last time that we will increase the investment pace significantly. We talked about it becoming, you know, more than two times the depreciation level, and that plan is still valid. Then how much of those investments are actually happening in each and every month, that is more difficult to say. These projects, they can have an investment or a time from decision to actual equipment on site from anywhere between three months and 18 months. They are planned over a longer period, and our program is not a one-quarter program, it is a three-year program.
Okay. The final one for me, probably a broad one, but, I mean, if it's probably no news that the Swedish market is turning more soft, could you compare Lindab to a few years back, if possible, how resilient you are? What you can do to defend margins in a more soft market?
I'm not able to answer that question, in a good quality way, right now. We will have to make sure that we are resilient. That's the best answer I can give.
Okay, thank you.
Thank you. Our next question comes from the line of Douglas Lindahl of DNB. Please go ahead, your line is open.
Hi. Thank you. Good morning, Ola, good morning, Malin. A few questions from my side as well. Start off by the Building Systems. If we exclude that exceptional 34% organic growth that we saw in the quarter, which seems to be somewhat of a one-off, judging by your comment there, by some large projects driving this, what sort of underlying profitability should we sort of look at instead, do you think? Or is this level a sustainable level, even excluding those large projects? That's my first question.
The, the improvement program, the turnaround program at Building Systems is proceeding according to plan. On top of that, we had a very strong invoicing in this period, and thanks to a couple of very large projects with significant deliveries in Q2. The underlying, there is underlying profitability. Even if you exclude those projects, we are profitable in Building Systems, and we follow the plan that we have. I would say that it gave an extra boost, but it is not the only explanation why we are making positive results in Building Systems now.
Okay, that is a sustainable number, so to say, judging by your answer there, Ola.
Yes, if But of course, if we cannot expect to have such strong invoicing every quarter going forward, it was an extraordinarily strong invoicing, and that we want to also make clear.
Okay, thank you. A comment on just a comment on pricing. Did it have any sort of significant impact on profitability levels in the quarter?
We are continuing to try to adjust our pricing so that we catch up with what we missed in the last two to three years. We were not able to compensate for the pricing, material prices over the past two or three years, and we have worked very hard during the last 12 months to catch up. We are getting there, and we have, on average, a higher price level today than we had a year ago. It is one part of the explanation why our gross margins are increasing, but it is not the only explanation why the gross margins are improving. We also have significant efficiency improvement throughout our production and logistics organization.
Would you say that you have fully caught up now in terms of raw materials and pricing?
No, I would not say that. I think, but I think the largest steps are probably taken. Now there is more fine-tuning to be done, but there are always things that can be done to make sure that your pricing is on the right level, and we have to be faster in our reaction, should there be such a raw material price fluctuation in the future.
Just a final question. Thanks for the market development update, which gives a good picture on the longer term, but if we can focus on the very short term for just one second, and specifically maybe for the Swedish market or the Nordics. Do you expect that to turn even worse in the second half of 2019, if we look at purely now deliveries?
That's very difficult to say, to be honest. We had a month where, you know, strong, good levels in April and May, June, a bit slower, but you also have a calendar effect in June, where there were quite a, you know, significantly fewer working days in June compared to previous years. It is a little bit difficult to analyze, to be honest, but we do see some softer signals in the Swedish market at the moment. I'm not able to say if that is just a short-term blip or if it is something that we can expect to continue in the next one or two quarters. It's very difficult to say, to be honest.
Okay, thank you very much. Just if I can end off with a request, would still be the pro forma figures historically, if you have that, would be, would be excellent. I guess we're getting those as the year ends, but.
The pro forma figures for the quarterly of the two new business areas, those are available at the webpage now.
Okay, excellent. Thanks so much.
Total numbers. Total numbers on net sales, EBIT and EBIT margin, are available from our website from Q3 2017.
Perfect.
To today.
I missed that. Thank you so much. That's it for me. Thank you.
Thank you.
Thank you. Our next question comes from the line of Carl Deijenberg of Carnegie. Please go ahead, your line is open.
Yeah, thank you. The new organization that you implemented at the year-end, you've had it there for six months now, and I saw that there is a change in leadership on the Building Systems side. Other from that, can you talk a little bit how the reception has been and the effects of the new organization, please?
It is correct that we have appointed a new head of the Building Systems business area. That person will start in September, and I'm very pleased. It's a good recruitment. Our existing director of that business area is retiring from the position now. He's done a really excellent job, and we had to find a successor, and I'm very pleased with the person that we found. When it comes to how it has been received, how we have split up the company, well, I think externally, there are not so many reactions. I don't think that any of our customers really notice how we are divided into business areas.
They meet Lindab in the local environment, in the local shop, with the local sales people. We have strong national and local organizations, you know, country by country. In some places, they represent mainly the ventilation part, in some, they represent the building system part, et cetera. Some shops have more than one assortment. I don't think that the customers really will notice much. If anything, they will notice, you know, positive effects in terms of product development, product assortment and so on, but not yet. That will take a bit longer. I think it's probably right now more on the internal side where we have the positive effect, a much clearer responsibility of each key manager. What am I responsible for? What are my tasks?
What is the strategy? What's my action plan for the coming months, et cetera? That's where I think we see most of the effects right now. Over time, I hope that we will also be able to sharpen the product portfolio and marketing strategies and sales techniques, et cetera. That takes a bit more time.
Okay, you feel that your, the, yeah, the organization is in place now to make more acquisitions as you're right, going forward?
I think so, yes. I think we have spent some time now to get in shape to start several important action areas, including the necessary investment programs. After 10 relatively tough years where we have not invested as much as we would have liked to, we have some catching up to do there and some very attractive investment opportunities in terms of payback. We need to get the fundamentals in place, we need to get the delivery position and the, you know, internal efficiency in place. We are getting there. I feel that now we can start to look at growth opportunities that can be organic growth opportunities, but it can also be add-on acquisitions. I'm not looking for any big play or any, you know, huge acquisition.
We are looking for smaller ones that we can digest, and that we can easily integrate without it becoming any huge project. Little bit similar to what we have done lately with Ductmann in the U.K. We did one last year in Ireland, and those have so far been very successful, and that's a concept we can continue to build on.
On the structural side, if we talk about potential divestments and so on, if there are areas that you're not happy with the performance and so on, I think now there's a new organization, and it's only been there for half a year, but could we expect something like that potentially next year, or?
We have had, we have many subsidiaries in Lindab today, and we have many activities. Two years ago, we had many more subsidiaries than we have today. I think we have closed more than 10 subsidiaries only in the last 12 to 18 months. To somehow clean up our structure and to make sure that we are not present in countries or in product areas where we are unprofitable. There is still work to be done. We have done the most obvious things, but there are still things to be done. Whether that means that certain businesses will be restructured, or they will go through a turnaround program, or they will be closed or divested, that is too early to say right now. First, we try to get all the units to a sound profitability.
In most cases, we are succeeding. In some cases it's more difficult, and then we have to take the decision, you know, should we continue to try or shall we do something else? I will not go into more details now, but we are looking at all of these things, definitely.
Okay, thank you.
Thank you.
Thank you. Our next question comes from Marcelo Klein at Handelsbanken. Please go ahead. Your line is open.
Thank you. Good morning. Could you speak a little bit about the competition situation in the Nordic market, and especially in Sweden, that you are facing right now?
Well, it depends a little bit on what kind of area we are talking about, and I don't mean geographic, but rather what kind of products and businesses. We have many competitors, but we also have many industry colleagues that we cooperate very well with. I have not seen any major change in how the dynamics is working between us and our competitors. No big changes in the past quarter or the year compared to before. We have within our core product areas, we have a strong position in Sweden. This is our home market, and that goes both for Ventilation Systems and Profile Systems. A lot of companies, a lot of producers have had very busy factories with high demand, and that includes Lindab.
We have been running at a very high pace in our production units to cope with the demand. You see from our growth the past two or three years, that we have grown quite quickly. I don't see any worrying signs or something or any change in the competition landscape right now.
Basically, no new entrants or competitors getting more aggressive given the weakening Swedish market in your view?
No, we have not seen that, no. Of course, if volumes go down, existing players will, at some point, become more aggressive to try to keep up their factory utilization. That is a potential scenario, but that's not something that we have felt the effects of now.
Thank you. Could you also speak a little bit more about your M&A ambitions? Obviously, the net activity level is quite low. It seems that you have already done a lot of work focusing on the efficiency in your current organization. Does that free more resources, even management resources, to look at M&A and where and what?
I mean, we have the financial capacity to acquire companies. I underline that we are not looking for any, you know, huge acquisitions. We are talking smaller ones. My personal preference is to make several smaller acquisitions rather than one or two big ones. We have not worked very actively with acquisitions in the past two years. That means that we have to, you know, restart efforts, refresh connections, and build a good pipeline of prospects. That work that is what I'm referring to. That work can start now because now we are in a better shape than we were before. It takes time. These things take time. Don't expect any major results from it in quarter three.
This is something that I think we will aim to start to realize, during the autumn, but, and hopefully there can be acquisitions happening in 2020.
As you mentioned, the work to build a pipeline starts now. If you don't have any near-term targets, would there be potential for extra dividend as well for 2019, or you're not even thinking in that direction?
That is not something we have discussed.
Thank you. A final question regarding input materials. What is your situation there right now? Are you comfortable with the current levels or is it an issue?
How do you mean, Marcelo, are we comfortable?
Both steel and other input materials.
Well, we have a more stable situation today. After very rapid increases in raw material prices in 2016, 2017, and partly into 2018, it has now stabilized on a, but on a relatively high level. We feel that we can cope with it as it is now. There are no major fluctuations in pricing at the moment. That can, of course, change, so we have to be prepared for that. We buy a lot of the raw material on three-month contracts, so they don't change from day to day, but they do change a few times a year. We have it on the agenda in every meeting in Lindab.
Raw material pricing is, we are, of course, exposed to that in a significant way.
Thank you for answers. That's all for me.
Thank you, Marcelo.
Thank you. Once again, if there are any further questions, please dial zero one on your telephone keypads now. As there are no further questions at this time, I'll hand back to our speakers for the closing comments.
We, from my side and from Malin's side, we say thank you very much for showing interest in the presentation and in the report. We want to wish you a nice summer, see you in quarter three.
Thank you so much.