Ladies and gentlemen, welcome to the Lindab Q2 Report 2018. Today, I am pleased to present CEO, Ola Ringdahl. For the first part of this call, all participants will be in listen-only mode. Afterwards, there will be a question and answer session. Speakers, please begin.
Hi, everyone, and welcome to this call. My name is Ola Ringdahl, and I'm the new President and CEO for Lindab. I'm sitting here together with our CFO, Kristian Ackeby. We move to Slide two and the agenda. In today's presentation, the agenda is as follows: We start with a summary and overview, then financials, highlights, and outlook, and at the end, we will open up for questions. Now, let's start with the highlights on slide number four. To summarize, the second quarter of 2018, Lindab Group had strong organic growth, but a challenging development of the cost margin. Net sales increased 13% with an organic growth of 8%. Operating profits of 148 million SEK is overall in line with prior year, but operating margin declined as a result of the lower growth margin.
Raw material prices continue to increase, and we have increased prices to compensate for this, but need to increase even further to compensate fully. Profits for the period decreased to SEK 91 million, negatively impacted by one-off items. We move to the next slide. Second quarter had strong organic growth in all major markets. To summarize, in the Nordics, we had positive sales development during the quarter, and the Nordics represents 45% of our total business. All countries showed good organic growth. In Western Europe, we had growth of 5%, with the strongest growth coming from Ireland and France. In the Eastern Europe region, we continue to see positive sales growth of 6%, mainly related to the Czech Republic and Hungary. Now, we look at the next slide on sales by product area.
The positive sales trend in ventilation continues, where we see continued good growth for ventilation products and indoor climate solutions, while the Air Movement product area had a weaker quarter due to large project deliveries last year, mainly to the Middle East. Fire and smoke also had strong growth in the second quarter, driven by all regions. Rainwater and Building Products had good sales in the Nordic region, supported by previously delayed purchases due to harsh winter conditions in the first quarter. The more project-based Building Solutions continue to grow strongly as a result of continued good development in the largest market, which is Sweden. As for Building Systems, the increased sales during the quarter are mainly due to positive growth in the Western Europe region and in Africa. Now, we move to the next slide and the financial section. I hand over to our CFO, Kristian Ackeby.
Thank you, Ola. Slide number eight, group financial highlights. During the quarter, net sales increased by close to SEK 300 million or 13%. EBIT margin declined, which is mainly explained by the higher prices of raw materials, which have been partly offset by the volume increase in both Products & Solutions & Building Systems. On the positive side, we do have leverage on SG&A with continued improvement in percent of sales. Financial net and tax rate are both in line with prior year. Let's have a look at Products & Solutions on the next slide. Organic sales increased with 9%, net sales amounted to SEK 2.1 billion, which is the highest sales ever in a second quarter. If you look at product groups, ventilation has close to 20% higher sales this quarter than the peak of 2008.
Continued positive sales development in all regions within Europe. EBIT increased to SEK 167 million, positively impacted by the higher sales, which was largely offset by the lower gross margin. The lower gross margin is mainly related to higher raw material prices and continued unfavorable product mix. We continue to implement price increases, and our customers and current market conditions indicate stable raw material prices in Q3. Moving to next slide and Building Systems. Financial performance for Building Systems was, as expected, weak in the second quarter. Organic growth was 4%, and there was a favorable currency impact as well. The EBIT decline versus last year is mainly explained by unfavorable mix of building types, which has resulted in higher engineering costs that put pressure on the gross margin.
We've had a good order intake in the quarter, and the backlog at the end of the period was significantly higher than the same period prior year. Moving to the next slide and the cash flow. Adjusted free cash flow declined with more than SEK 120 million, negatively impacted mainly by the change in working capital. The impact on working capital is mainly due to higher accounts receivables as a result of the higher sales. Investing activities, net was very low last year as a result of sale of fixed assets. Tax paid is higher in the quarter and year-to-date, which is mainly related to timing. Current tax are overall in line with prior year.
Net debt amounted to SEK 1.5 billion, which is an increase compared with prior year, and net debt has increased compared with prior year of more than SEK 100 million related to currency. This concludes the financials, and turning the word back to you, Ola.
Thank you, Kristian. We move to Slide 13 and some highlights. A few highlights from this slide, at the Nordbygg Trade Fair, Lindab released a solar panel to the market. Our solar panel is integrated to the metal roof, and it has particularly good weather resistance. It's very thin, around 2 mm, and lightweight. It can absorb sunlight even on a cloudy day. In Finland, we showed very healthy growth and had good order intake as well. Within the indoor climate solution product range, we received orders close to EUR 1 million. In the Nordics, our operations in Finland show the highest organic growth in the entire region.
In Russia, we received an order for a complete ventilation solution, including all products from our different product areas. This was a prestige project for us and a big step forward in the Russian market. We move to the next slide. The Building Systems. Building Systems had a good order intake in the quarter, with nine orders above SEK 10 million, total order value, approximately SEK 150 million. We have challenges still with the gross margins. We are reviewing our quotation and pricing models to improve those margins. That work is continuing with great intensity. We move to Slide 16. The outlook. Market outlook. We see the market continuing to grow, although at a lower pace in Europe. We have some uncertainties in the market, like other companies.
We follow the U.S. trade negotiations and the processes around Brexit with great interest. When we look at the numbers for the European construction market, it is important to note that of the Lindab sales, 80% is related to non-residential buildings, where the fluctuations are perhaps less than within the residential area. We move to Slide 18. We conclude the quarter. In summary, we saw strong organic growth for Lindab Group, but the growth margins are under pressure. We have increased prices and will continue to do so. We saw an increase of the raw material prices in Q2, but the indications we get is that the Q3 steel prices will be more stable. This should be if this is true, if this holds true, it should be positive for Lindab Group.
With this, we conclude our presentation, and we open up for questions.
Thank you. If you have a question for the speakers, please press zero one on your telephone. There will be a brief pause while questions are being registered. Our first question comes from the line of Predrag Savinovic from Nordea. Please go ahead. Your line is now open.
Thank you very much. You speak of good market conditions overall, and they're going to growth now, and Q2 and in Q1 has been really solid. Should we expect that the growth rate will persist for Q3 as well?
I think if you look into the market and the different markets here, we don't give a guidance. We do not have any indication that the market is dropping currently. We don't have that. We should have in mind that on the Building System side, we work with a backlog, and on the Product and Solution side, it's much shorter lead times. We do not have signs overall that the market is dropping.
All right, a follow-up on that one is, on H2 for Building Systems, is as if you allude that the backlog is very good, is that how we should expect it? Can you quantify it in any way?
We will of course, be careful about giving guidance. For Building Systems, to the same extent we said earlier, we had a higher backlog at the end of Q1. We have a good order intake in Q2. The backlog is continue to be higher than prior year. What we have scheduled is a significant improvement compared with prior year. It all remains to be seen, of course.
All right. On the material prices, you expect them that they will stabilize, but you will still continue to hike some prices come Q3, et cetera. Do you have any expectations on how much, in percentage terms, you can raise them? Also, if you can elaborate a bit on your input costs, how that has progressed.
We will continue to increase prices. I will not give a guidance on the price increases, we will continue. If looking to the prices we currently have, we are approximately 4% higher on net prices compared with one year ago, we are say up to 2% net higher on prices compared with Q1. That gives you a feeling for the movement, so to say. We had the steel prices increases in Q2 of approximately 3%-5%. To have in mind that in overall for Lindab, 20%-25% of our sales is raw material. Of course, it differs a lot from product to product. That is important, we will have the mix effect.
That gives you some numbers, but I will not tell you how much we will increase prices net the coming quarter or half year.
Perfect. That's very good. Could you remind us on the residential exposure in the Nordics? I mean, you said 80% is non-resi for the group, but in the Nordics in particular?
We don't have it split on that one. What we could say about the Nordics is that it is higher portion on non-ventilation products and a lower portion on ventilation products.
Okay.
Related to residential.
Just a final one from me, maybe. What about the wage inflation, in particular in the Czech Republic, where you have a lot of production at the moment? I hear it's around 6%, 7% wage inflation there now. How can you manage this? Does this impact you in any way?
It is correct, as you state, that the wage inflation in Czech Republic is relatively high. On top of that, we should also mention that the Czech koruna has strengthened, both against the Swedish krona and the euro, during the last one and a half year. Our way to weight that or to work against that is, of course, to increase the automation. We also see that when you are looking, and now I'm not talking only about Czech Republic specifically, but you see also that, globally, in cost competitive countries, so to say, you see that it's less and less blue-collar worker available, so that will also drive the automation.
What we have done is that we have driven the automation, and investments we made last year as well as the year before, are, to a large extent, related to improved production lines that are more robotics involved also in Czech Republic. Earlier, we have had a bigger portion of automation in, for example, Sweden, but the part potential and the usage of automation in Czech Republic is also increasing. Not to be too long here, but also if you look into headcount, our headcount in Czech Republic has decreased if I compare today with one year ago, and the output has increased.
Thank you very much. Just one more, maybe for you, Ola. Any particular changes that you will bring now to the group when you're heading the organization?
It's still very early days for me. I've been one month in the job now, learning a lot, of course, and meeting all the good colleagues around me. I think it would be unfair of me to say too much at this point. It's a big organization and a lot to get to know. I am relatively used to being a change leader, so I think that I will try to bring those qualities also to Lindab. I will have to come back later about what and when and how.
Thank you very much for taking my questions.
Thank you.
Thank you. I remind you that if you want to ask a question, that you will have to press zero one on your telephone keypad. There will be a further pause while questions are being registered. Our next question comes from the line of Daniel Lindkvist from Handelsbanken. Please go ahead, your line is now open.
Thank you. Hi, guys. Just a few questions on the drop-through from the gross margin down to the SG&A. We're looking at the Q3, just trying to understand the gross margins. It seems like you have a naturally stronger product mix helping the gross margins in Q3. That's my first question. The next question, are there any lagging effects in the COGS, that is, buying the steel prices and getting more and more effects from the price increases we've seen on those over time? Just if you have some new, some measures on the SG&A with further cost cuts or intensifying the work with your cost side?
Okay, okay, Daniel Lindkvist, thank you for that. I start with the first one, so I forgot already, so I take it.
I will remind you if necessary.
Yeah, I'll start with the second one. Lagging COGS, that will of course differ, so I cannot give you a number today, but for example, for high runners, we have a short lead time in our inventory, and some are there for a longer period of time. So that can and probably will have an impact, but I cannot estimate that for you. That was the short one on that. Can you please repeat now the first question?
Yeah, the first question was just with if you have some natural help with the gross margin from the product mix in Q3, it just seems so from historical numbers.
I don't have the Q3 in front of me, I must admit, I cannot do on that. What I can say is about the product mix in the second quarter and also in the first quarter, where we have negative impact, you will see that Building Solutions have been very strong. Building Solutions is an area with low gross margin. That will be one item to have in mind for that one. I'm sorry, I don't have that in front of me, I have to come back to you about that later on.
Okay, no problems. Just for the SG&A side, it seems you can keep the SG&A under tight control. Have you done any further measures during this quarter, and what can we expect for the future?
I think I can take that question. As a new CEO, I think it's natural that you review the different parts of an organization. The SG&A costs will be reviewed over the coming few months and trimmed if needed, expanded in terms of sales resources where appropriate. I think it's not one action that will cover all parts of the Lindab organization. We are in so many geographies, we are in so many different product areas and customer segments. We will have to design the appropriate measures for each product line, each business, each geography.
Overall, it is clear to me that Lindab, as well as all other organizations in our times, we need to become more and more efficient every day, every month, and that is what Lindab will work on.
Yeah. Just putting it together, you have a strong market now. Will you focus on the margins rather than taking further market share if you need to take the choice?
With the current gross margin development, I think it is important for Lindab to strengthen our position in terms of pricing, and gross margin developments. There will be cases when we will have to say no to certain business when the margins are too low. We are prepared to do that.
Okay. Perfect. No further question from me. Thank you, guys.
Thank you.
Thank you. Our next question comes from the line of Predrag Savinovic from Nordea. Please go ahead. Your line is now open. Hello, Predrag Savinovic. Your line is now open. You may now ask your question.
sorry, I was muted. Hi, again, guys. Could you give us any news regarding the sale of Building Systems? I mean, you say that the disposal of the segment is an option you still consider, but is this the primary track as you see it, or do you have any other options for it?
This is Ola. I think I should also comment on that. As you can understand, there are many, many questions for me to familiarize myself with during this first short period, Building Systems is one of them. I know that there has been this strategic assessment of certain parts of the Lindab Group, and we are reviewing those options now. We are not ready to share the plans at this moment. I need a little bit more time to get to know the organization and the business, we will come back to you all in due time when those plans are more firm.
All right. Thank you. One last from me: You speak of efficiency measures for raising the margin. Could you talk a little about more, what these efficiency measures are? If you were able to quantify them in any way, that would be really helpful. Thank you.
I'm not able to quantify them right now, but when it comes to efficiency, I think it's important that we, when we increase volume, when we increase sales, we should see positive effect in our P&L, both on gross margin and on overall EBIT development. I think with a high capacity utilization and an organization which is really running 24/7 to meet the demands from the customers, there's always a risk that the costs will increase too quickly. We need to work on efficiency in our manufacturing units, in our logistics and supply chain, as well in sales and administration, so that our costs are not increasing at the same pace as our sales.
I think this has been challenging for Lindab over the past few months, when the economy is very, very hot, we also see that in quite a lot of other organizations at the moment with inflation, et cetera. I will address this challenge within Lindab the best I can, together with my colleagues, and we must improve efficiency to make sure that the numbers move in the right direction.
Cool. Thank you very much.
Thank you. There are currently no questions at this time. I will hand the call back to the speakers. Please go ahead.
I think, I thank everybody for listening in, and thank you for the questions asked. We close today's meeting. Thank you.
This now concludes our conference call. You may now disconnect.