Earnings Call: Q3 2020

Oct 23, 2020

And welcome to this call. My name is Ole Ringdahl, and I'm the President and CEO of the Lindal Group. I'm sitting here together with our CFO, Marlin Sommersson. On Slide 2, we have today's agenda, and I will quickly flip to Slide number 4, where we talk about the highlights from the Q3. In the Q3, we saw stability and recovery. We increased sales compared to the Q2, and we see a clear recovery in the major markets. Compared to the Q3 previous year, sales was a bit lower as many countries are still impacted by COVID-nineteen. Installation Systems had a challenging second quarter but is now back on almost the same level as previous year. Profile Systems, they have continued to perform very well and showed growth in the Q3 and high margins. Billing systems have had a tougher time and been more affected by the weaker market climate due to COVID-nineteen. But despite the significant sales decline, we have maintained a satisfactory operating margin. We are pleased that we reached an adjusted operating margin of 11.4% in the quarter, and this is the highest operating margin for Lindab in more than 10 years. We have achieved this thanks to a decentralized organization that has adapted very fast to the new reality. In the Q3, we also had a strong cash flow, both from operating activities and in total. And this is enabling us to continue our strategic investment program, where we are upgrading many of our production facilities to increase both capacity and efficiency. And then we have our M and A activities. We have acquired the company Krenna in July. Krenna is a leader in rectangular ventilation in Sweden. And at the beginning of October, we acquired EcoVent, a leader in ventilation and fire and smoke protection solutions in Sweden. We are also pleased that we have found a long term solution for I and P Klima Group when we divested the company in September to the Dutch company Orange Climate. And last but not least, we had another positive event in the quarter when we were awarded an energy prize in Denmark for our innovative solar roof solution. This is a product that combines our extensive experience of sheet metal roofs with the solar power technology. Now we move to Slide 5. We look at the sales growth per geographic region. In our largest region, the Nordics, we saw organic growth of 3% in the quarter. The growth for the region is mainly related to purpose systems, thanks to increased sales of industrial building projects in Sweden. But I would add that also the roof solutions and rain line systems showed a very positive development. The Nordic region has had the lowest impact of COVID-nineteen out of our regions. Building sites have remained open throughout the quarter. In Western Europe, several countries have recovered after a tough second quarter, especially at the end of this period. Eastern Europe, however, has continued to experience more impact by the uncertainties related to COVID-nineteen. Now we move to the financial section and Slide number 7, and I hand over to Juman. Thank you, Ulla. And as you can see, we are now on the group financial highlights in Slide 7. And we can see that net sales decreased 6%, and it amounted to SEK 2,302,000,000. The organic growth decreased by 4% and currency had a negative impact on growth by 3%. Structure changes contributed positively by 1%. The adjusted EBIT margin improved to 11.4% compared to previous year of 11.1%, and that is due to reduced costs but also strengthened gross margin. Only a smaller part of the reduced cost is related to received supplemental support as Linde group wise only received SEK 9,000,000 during the Q3. Net profit amounted to SEK 198,000,000 compared to SEK212,000,000 during the same period previous year. And now we look at our different business areas and we move to the ventilation systems. The net sales for ventilation systems amounted to SEK 1,405,000,000 and that is a decrease of 4% during the quarter. The organical sales decreased by 0.03% and the currency effect was a negative impact by 3%. Structural changes contributed positively by 2%, and that is mainly related to the acquisitions of Prena and Tordax. In relation to the Q2 of the year, there has been a clear sales recovery, especially in Western Europe. Nordics continued to show stable development. Despite Despite the uncertainties related to COVID-nineteen, Ventilation Systems reported a solid adjusted EBIT margin amounting to 11.2% compared to 11.5% previous year. We have successfully managed to reduce costs to balance the lower sales volume. We move to the next slide and the profile systems. Net sales in profile systems increased by 3% to SEK 654,000,000 Swedish Krona. The organic growth was positive by 5%, while currency had a negative impact of 2%. Sales increased mainly due to deliveries on industrial projects in Sweden, and that is compared to last year. Sweden also had a good growth in rainwater system products, which have benefited from this stay at home effect, driven by an increased demand from the consumer market. Adjusted EBIT margin increased to 15% compared to 12.9% previous year. And the improved adjusted EBIT is explained by strong volume growth and strengthened gross margin. And we move over to Building System on Slide 10, where we can see that the net sales amounted to SEK 240 3,000,000 and the decrease in sales during the quarter as compared to an unusually strong Q3 last year in 2019, where we had deliveries to primarily France and Poland. The adjusted EBIT margin was 6.6% versus the 9.5% previous year. And the lower EBIT margin is explained by significantly lower sales volume and also, to some extent, by the weakened Russian ruble. This has been partly offset by strength in gross margins and lower costs. During the quarter, a number of cost saving measures have been implemented, and the quarter included cost of SEK 5,000,000 related to a voluntarily early retirement program. In addition, billing system has benefited from received fundamental support of SEK 3,000,000. The net order intake decreased in the quarter, but the total order backlog at the end of Q3 is lower than a year ago. And we move over to the next slide, and we see that the strong long term cash flow trend from the operating activities continue. The free cash flow adjusted for M and A amounted to SEK 346,000,000, which is in line with last year. The improvement in cash flow from operating activities is driven by changes in working capital, which was partly offset by higher paid tax. Net debt decreased to SEK 1,740,000,000, which gives the net debt equity ratio of 0.3. That concludes the financial session, and I hand over to Ulla. Thank you, Maarten. We will talk a bit about acquisitions and structural changes, and we start on Slide 13. In the second quarter, we took the tough decision to close down IEMPIKIMA Group with its operations in Slovenia and subsidiaries in surrounding countries. IEMPIC Lima was acquired in 2015 to establish a presence in the air handling unit market for Lindbergh Group. But despite our joint efforts, IEMP Klima has shown weak development, and it has been a loss making business for several years. After announcing the planned closure, we got in contact with the Dutch company Orange Climate, and we eventually agreed that they would acquire the business. That was very well received by the employees of IEMP Klima as it will save many jobs. In Q2, when we took the decision to close down, we took onetime costs of SEK74 1,000,000 for the closure. And after the divestment, we have reversed SEK4 1,000,000, and the onetime costs year to date are now SEK70 1,000,000. Now we move to Slide 14 and the acquisition of Krenna. At the beginning of July, Lindab acquired Krena, and Krena is a market leader in rectangular ventilation duct systems in Sweden. Rectangular ventilation ducts make up around 40% of the Swedish market and the rectangular solutions are usually combined with circular ducts in the same system, circular ducts being the traditional expertise of the Lindbergh Group. With the acquisition, we will now have a complete range of ventilation DAK systems for the Swedish market. Krena's revenue is approximately SEK120 million, they have 85 employees. Their operating margin is in line with Linde's margin. Krena's Managing Director, Mr. Niklas Huttstein, will remain in the company and drive the business. And Krenna is now part of our business area, ventilation systems. As we can see on the photo on this slide, Krena has already started to interact and benefit from Lindab's network called ProShops. On this photo, Krena is promoting their express delivery service in a Lindab shop. Now we move to the next slide, number 15, and the acquisition of EcoVent. EcoVent was acquired on the 1st October, so it is not part of the Q3 numbers, but still worth mentioning here. EcoVent is a leader in ventilation systems and fire and smoke protection in Sweden, as it can also serve the wider Nordic markets. Ecovent is based in a town called Vellinge outside of Malmo in Sweden, and it also has offices in Stockholm and Gothenburg. The revenue is SEK 123,000,000 and their operating margin is in line with Lindox. Currently, EcoVent is employing 64 people, and it will be part of our business area ventilation systems. Both Krenna and EcoVent are good examples of companies we like to acquire. They are strong in the local markets with high quality products, well run and with good margins. We now have an interesting pipeline for future acquisition targets that we are investigating, and we are well prepared to manage them as part of the Lindel Group. Now let's move to Slide 17 and take a look at our current focus areas. And to those of you who have been in previous calls with Lindab in the past year, you will most likely recognize this slide. It's one of my favorites. Our strategic focus there has remained despite the COVID-nineteen situation. We continue to strive for sustainable profitability in line with our targets. And that, we achieved through a decentralized approach with very clear accountability. We believe that our decentralized approach has served us very well in these challenging COVID-nineteen times, and all business units have stepped up to the challenge in a very good way. Customer satisfaction is more important than ever. During the corona crisis, Lindab has stood up for its customers, and we have kept a very high delivery performance throughout this period. We have walked the extra mile to secure deliveries to customers even during lockdown, and this includes important examples like hospital projects for emergency use. While handling the short term challenges, we must also plan for the future. We continue to implement the key elements of our strategic investment program, especially the projects that will lead to improved efficiency and safety. That said about our current focus areas, we move to Slide 18 and the summary. When we summarize the 3rd quarter, we see a stable quarter with improved margins, continued investments and value adding acquisitions. We have confidence in our decentralized organization to adapt to the challenging times we are facing. We have a good plan on group level for how to improve efficiency and safety throughout the company. All in all, we see Alinda that is prepared to continue to drive both growth and profitability improvements going forward. With that, we open up for questions. Thank Our Our first question is from Carl Van Gassam from Nordea. Please go ahead. Hi, it's Carl Van Gassam from Nordea. I have a few questions. So first of all, could you give some flavor on the recovery pace with the Inventilation Systems during the quarter, possibly month by month, if you could? Thank you, Karl. We had a relatively slow start in the quarter in back in July. And then gradually, we saw an improvement in August and September looked quite strong. Now whether that is truly a fundamental demand increase or if there are some catching up effects after the summer period, it's difficult to say, but September looks good. And have you seen this continuing in October as well? Or is it too early to say? We are cautious to go into that, but there has been no dramatic difference in October, but we do see that the virus spreading throughout Europe can, of course, mean something in the future. But we don't notice any negative effects of that yet. Okay. Perfect. And regarding the gross margin, you managed to increase that by roughly 50 basis points year over year. Could you please explain the main drivers behind that? We had there are several effects, of course. Efficiency is one of the drivers. The product mix is another one. We had a good performance in Turbine Systems and Ventilation Systems. Building Systems had a slightly weaker or clearly weaker development. And the Marlon, you can help me to say something smart about this. Because there's a mix of effect. But efficiency and being very cautious with cost is the main driver. But I think there are also mix effects between the business areas and product segments. Yes. But I think clearly, we can see also that we have, over time, been more focused on making sure that the different projects we engage into and that we understand the possibilities. So I think it's a very good effort to engage in projects where we make reasonable margin. Okay. Perfect. And on Profile Systems, that segment has been boosted by Linde Halle in the past quarters. Could you say something on the backlog for Lindaballen? And maybe also quotations for such projects? I mean, the e commerce exposure must be rather favorable, I guess, in these times. Indeed, the ecommerce trend is very strong. And Lindabahalen, as you say, the our Nordic ore building concept is perfect for those kind of solutions. So we have a lot of interest, a lot of quotation activity. We have a good backlog there. I think that we can continue to grow in that segment, but we should also say that between the quarters, there can be quite a lot of variation depending on when these larger projects are invoiced. So it is not something that will grow equal percentages every quarter. But overall, we are fundamentally positive to that segment and that development for the coming years. Perfect. And the final one from Alsair is, I wonder if you have seen any changes in demand between the project sales and sort of bread and butter business And also how much of your sales could be defined as project business or project related businesses? Most of the revenue in Building Systems in that business area is project based. Of course, there are smaller projects and there are larger projects. We see normally in a business downturn, we see more stability in the smaller projects within Building Systems and more uncertainty in the larger projects. That we see now as well. So the bigger the financing decisions become, the more things can influence the decision process and cause delays in such in such decisions about large buildings. So I would say now depending on how you define projects, I would say that Building Systems is purely a project business. When it comes to Profile Systems, we have a part of it, but it is a minority share of profile systems that can be turned project based. And in ventilation systems, it's minimal. There, it is mainly bread and butter sales. And I hope that answers your question. Okay, perfect. Thank you. Our next question is from pipeline. Is there is there more focus on ventilation? And what is your pipeline in other areas? Marcelo, well, it is correct that we are mainly focusing on ventilation systems when we are creating our acquisition gross list or pipeline. But it does not exclude the possibility that we will also look at other attractive areas. We have some very interesting and high performing areas also in profile systems where it can make sense to have a look. But the main focus is very much on ventilation systems. And we see quite many opportunities there because our industry is not so very consolidated. There are many, many, many players active. And another question regarding the delayed construction project. Are you able to adjust your capacity or replace them with anything else? Or you just have to pull through? I mean to a certain extent, we can adjust, But there is always a critical level when a factory starts to cost money, when the capacity utilization is too low. When we see the relatively large contraction for Building Systems, I think we are showing that we are quite resilient and that we can adjust costs in a substantial way. We are still making a decent margin ability even at way lower invoicing and production levels than we saw a year ago. But there is, of course, a limit. And if we if volumes go down too much, also have a difficult time. But we are better prepared now than we might have been in the past. Our next question is from Kenneth Toll from Carnegie. Please go ahead. Yes. Thank you. So the results the margins were very good in this quarter. And you said also that the savings were a big contributor to that. But how much do you think that operating costs could come back when economies are opening up more and traveling comes back? Or are you seeing operation as normal now? Yes. That's an interesting question. Do habits change or do we go back to normal after a while? I think some habits will change. I think that the COVID-nineteen crisis will help companies to become more efficient, And it will also help Lindab to become more efficient. So I think that we can maintain many of the savings that we have captured in this period and also in the future. We are not an organization that travels immensely. I mean, we are a decentralized and relatively local organization. So that is not maybe the biggest cost account that we have normally. But of course, it helps and adds to the savings to some extent. Then on acquisitions, the last couple of ones you have made in the Nordics, do you think it's hard to sort of realize acquisitions or close acquisitions in other countries now when you we have this pandemic running around? Yes, it is more difficult. Travel restrictions can create chaos in your plants quite quickly. When we divested I and P Klima to Orange Climate, I think it was like 24 hours before they should come and visit in Slovenia, that Slovenia closed the border to everybody from the Netherlands. And we had to ask the interior ministry for a special permit for them to come and visit, which was granted. But yes, it is more difficult to meet people you haven't met before. It is difficult to travel. So the international acquisition agenda can be impacted. However, in the countries where Linde is looking for interesting acquisitions, we already have a strong presence. So we have people on the ground in those countries. And right now, we are looking at making smaller acquisitions where the local Managing Director will be involved. So I think for Lindab, it is not completely blocking us from pursuing our acquisition agenda. We can do it, but it probably slows it down a little bit because of the travel restrictions. Do you think that it has affected prices of acquisitions, that it's have become cheaper now? That I think that is a very difficult question to answer. I can speculate. I speculate that companies that are well run and profitable, in good shape, for them, the price tag has not gone down. For more vulnerable companies who are not withstanding the crisis in a good way, the price tag is lower today. And then finally, for building systems that have a difficult situation right now. What do you think would need to change for the outlook to improve? Or yes, the big question is when, of course, but what are you looking for that business and demand there to recover? History repeats itself. As billing systems, they have seen these fluctuations before. And I think that we will continue to have a tough situation in Building Systems for the coming months. Then Europe will come to a time when we start to be more optimistic about the economic growth going forward, and then infrastructure will start to be built again on a big scale. So we are prepared for some more tough months. But long term, I have a positive outlook on Building Systems and especially their expertise in e commerce buildings and warehousing and logistic buildings in the multistory car parts for dense population areas and some other niche segments where they are really very, very competent and have a very good solution. So I am optimistic, say, medium- and long term and cautious short term. And we currently have no further audio questions. I will hand the word back to the speakers. Then from Marlon and myself, we'd say thank you for showing interest and listening in and hope to see you soon again or hear you soon again. Thank you, and have a good weekend. Thank you. Bye bye.