Earnings Call: Q1 2021

May 5, 2021

Hello and welcome to this call. My name is Ole Ringgold and I'm the President and CEO of Lindner Group. I'm sitting here together with our acting CFO, Madeline Jernberg. Please start on Slide 2. Some key highlights from the Q1. Lindepl starts the year in a strong way and the positive trends from the end of the previous year continued into the beginning of 2021. Both ventilation systems and profile systems deliver organic growth, while building systems project sales continue to be impacted by the uncertainties due to COVID-nineteen. Net sales came in at SEK 2.2 SEK 48,000,000 and it's a reduction of 4% in comparison to previous year. There was a strong negative currency effects of minus 5%. However, there was a slight organic growth coming in at 0.3% positive. And we see this as a sign of strength considering that the Q1 of last year was relatively unaffected by the pandemic. Sales strengthened gradually during the Q1, and the month of March was particularly strong. Lindab has continued to prioritize profitability over volume growth. I will comment a bit more on that when we cover the topic of increasing steel prices later in presentation. The adjusted EBIT during the quarter was record high for the Q1. EBIT increased to SEK 193,000,000 and the adjusted operating margin to 8.6%. The adjusted EBIT margin for more than 12 months was 10.2%, in line with our long term targets. Linde has a strong balance sheet and the cash flow improved during the Q1. This enables us to continue with our strategic investment program and pursue acquisition opportunities. We move to Slide 3 and the geographical development. In the Q1, ventilation systems had solid sales in all geographic regions. Growth was especially good in the UK and in France compared to previous year. But then we also know that previous year, we saw negative effects from lockdowns towards the end of the Q1. Propeller Systems continued to grow sales in the Q1, driven by high growth in both Eastern Europe and the Nordics. Drilling Systems sales decreased During the quarter, due to the uncertainties related to COVID-nineteen, this had a negative impact on the Eastern region and in Western Europe. Our Nordic region in terms of sales, the Nordics reported positive organic sales growth, while Eastern Europe was in line with previous year. Western Europe decreased slightly organically, which is entirely driven by Building Systems since several major investment decisions have been postponed there. Overall, we are pleased with the geographical sales development given the market conditions. Now I would like to hand over to Madeline, who will take you through the financials, starting on Slide 5. Thank you, Ola. First, the group financial highlights. Net sales amounted to SEK 2,248,000,000 During the quarter, organic growth was unchanged or slightly positive, about 0.3% for the group, Oil currency had a negative impact on grades by 5%. Structural changes related to Linde's complete list acquisitions and divestment in previous year contributed positively by 1% in the quarter. Overall, sales have continued to be impacted By the uncertainties related to COVID-nineteen, which has mainly affected the project related sales of building systems in terms of Lindepp. In general, the construction activity continued to recover in most of the European markets during the quarter as restrictions continued to ease. This gradual recovery contributed to organic growth in both ventilation systems and profile system. It should be noted that the comparison period was affected to a lesser extent by COVID-nineteen and the restrictions related to it. Restrictions that were implemented during the second half of Q1 previous year. Despite a bit lower sales for the group, the adjusted EBIT Increased to SEK 193,000,000 during the quarter and adjusted EBIT margin improved to 8.6%. For Linde, this is at a record high level for the Q1. The improvement in adjusted EBIT was mainly driven by structural changes, But also to organic growth in both 2 of the business segments. The EBIT included governmental grants of SEK 6,600,000. Net profit for the quarter amounted to SEK 140,000,000 an improvement of SEK 4,000,000 compared to the same period previous year And the earnings per share equal SEK 1.83. Now we take a look at our different And we start by Ventilation Systems at the next slide. Net sales for ventilation systems amounted to SEK 1,469,000,000, a decrease of 3% compared to the Q1 previous year. However, organically, sales increased by 1% and Structural changes related to Lindebs completed acquisitions and divestments in previous year also contributed positively by 1%. Currency effect had a negative impact on sales growth by 5%. During the quarter, there has been a continued sales recovery as COVID-nineteen related restrictions started to ease more in certain markets. This was particularly evident for Western Europe, which reported good organic growth during the period. The sales development in the Nordics remained solid and declined only slightly organically. It should also be kept in mind that Nordic countries in general were the countries to first announce price increases versus customers. We've aimed to compensate for the historically high raw materials prices we have at currently and profitability have been prioritized before volume. In the CIS region, sales development continued to vary between the markets and there were still uncertainties related to the ongoing pandemic, which continued to impact the construction activity. Despite this, Sales only decreased slightly organically for the region as such. The adjusted EBIT of Ventilation Systems increased to SEK 160 SEK 3,000,000 during the quarter and adjusted EBIT margin improved to the level of 11.1%. This is the highest ever reported for the Q1. The improvement was mainly explained by structural changes and the main acquisitions of Skordak, Kona, Ekovem and the father in the previous year and also the divestment of I and P Kleiman Group. However, adjusted EBIT was also positively impacted by the organic sales growth and the strength in gross margin. Moving on to the next slide. Net sales in Profile Systems increased by 7% and amounted to SEK 630,000,000. Organically, sales increased by 10% Our currency had negative impact on growth by 3%. The strong organic growth related To most of the markets within Profile Systems, with particularly strong organic growth within the Western Europe and the CIS region. The largest region for the segment, the Nordic, also reported good organic growth during the period. It can also be mentioned that significant deliveries were made to a large logistic terminal at the Swedish market, which contributed to that the total sales In terms of major individual industrial projects were in line with previous year's high levels. During the quarter, adjusted EBIT increased to SEK 58,000,000 and the adjusted EBIT margin improved to the level of 9.2%. The improved EBIT despite high comparable figures was mainly related to strong organic growth and lower operating. Then we move to the financial highlights of Building Systems on the next slide. For Building Systems, net sales amounted CHF 148 million, sorry, SEK 49,000,000 decreased by 37% compared to the corresponding period previous year. Sales decreased organically by 28% and currency effects had a negative impact of 9%, mainly related to the weaker Russian ruble. The decreased sales during the quarter was mainly explained by the general slowdown in most markets related to COVID-nineteen, Well, several major investment decisions have been postponed and larger investment projects have been put on hold. Due to the clearly reduced sales volume, Building Systems reported a loss in the quarter and adjusted EBIT was negative by SEK 15,000,000. The adjusted EBIT margin equal to minus 10.1%. The effects of low sales were partly Set by strength in gross margin, but this in combination with taking cost saving measures to adapt the business to a lower sales volume And also reduced utilization could, however, not compensate for the low volumes we had. Net order intake decreased during this period and the total order backlog at the end of Q1 was lower than a year ago. Moving on to the next slide. Linde reported a strength in cash flow from operating activities compared to funding period previous year. This development was primarily related to the quarter's change in working capital and positive effect from accounts payable and cash Advances from customers within Building Systems. The free cash flow of the group was negative by SEK 45,000,000, which actually is an improvement of SEK 62,000,000 compared to Q1 last year. It should be kept in mind that Q1 of the year normally has a weaker operating cash flow. The investing activities during the quarter amounted to a net of SEK 105,000,000 kroner compared to SEK 133,000,000 the corresponding period last year. This was solid cash flow related to the ongoing investment program with aim to increase efficiency, capacity and safety within the group. There were no monetary transactions related to M and A activities during the quarter. Compared to the end of March last year, net debt has decreased by 16% and amounted to SEK 1,000,000,000 SEK759,000,000. The net debt to EBITDA ratio for the group equal to 1.3 compared to 1,500,000 by end of March a year ago. And that concludes the financial highlights of the Q1 2021. And with that, I'm giving back to Wojcie, Uro. Thank you, Madeline. Now I'm moving to Slide 11, where we to talk a bit about the strategic investment program that Lindblad is currently implementing. So our increased profitability has given us financial muscles to implement a large and strategic investment program. It is the largest we've seen in Indev's history. For the past 2 years, we've been purposefully investing in increased automation, production capacity and optimized logistics. In 2020, we invested SEK 425 1,000,000 in dozens of important projects. And in the Q1 of this year, we continued to invest SEK105 1,000,000. We are expanding our production facilities for ventilation in strategic locations, and we are installing highly automated production lines in our production facilities, both on a regional level, but also in our central ventilation factories in Sweden and the Republic. We continue to see very attractive payback periods for the investments, and we see already now a positive effect for our business and our gross margins. And for those who are interested in finding out a bit more about some examples on these investment projects, we have today released a Video addressed to the shareholders, since we couldn't have a live annual general For our shareholders, we have released a video on our website where you can see a bit more examples from the ongoing investments throughout the Linde Group. Now let's talk a bit about the strategy going forward and how we are building a stronger Lindau for the future. We move to Slide 13. So our vision is to become the leading ventilation company in Europe, specialized in distribution and air diffusion. Those are the parts of the ventilation system where Linde has its core strengths. We focus our strategy on 5 areas. We aim to be the market leader in the markets where we operate, And we focus on selected countries so we can create really strong customer relationships. This means that we are now operating in fewer countries than we were some years ago. I remember when I joined Lindab about 3 years ago now, we were active in 32 countries. And today, we focus on a bit more than 20 countries, so it's quite a clear reduction. And in those countries where we do operate, we aim to create the strongest possible position and we'll focus on profitable growth. We want to be and remain a company operating locally in a very decentralized way. We want to be close to our customers and offer what we demanded in each market. This means that we adapt our product range and our distribution model to the local markets. And on the theme of efficiency, a major focus area for Linden. Most of what we do is manufacturing and distributing standardized products. And by doing that, we can achieve a high degree of automation leading to high cost efficiency, high availability and a safe working environment. At the same time, we improve our digital channels to the market and we design smart software to help our customers choose the right solutions. Quality should always be a trademark of Lindab, and we are known for the best quality in our industry. We have well known brands that the customers know that they can trust. Our employees have the right skills to give the right advice and service to all our customers. And this all boils down to that we want to be a trusted partner for our customers. We deliver what we promise on time And the trust that we have built through many years of entrepreneurial spirit and local presence It's built upon the capabilities of our employees to take responsibility and solve problems when they arise. On top of these five themes, we, of course, add the important aspect of sustainability. So if we move to Slide 14. Linde has been working with the within the sustainability area for a long time, but we haven't always called it sustainability. Now we are gathering all the efforts we are doing under the headline Lindab for a better climate. And we have divided that into 3 different parts. First of all, we want to contribute to creating healthy buildings. We want to improve the indoor climate for everyone working or living in buildings. The indoor air is key for our health and for our productivity. We spend an absolute majority of our time in those. So this is an important area for us to continue to contribute to. Secondly, we aim to help our customers to reduce the environmental impact of constructing buildings, but also of running and heating these buildings. We do that by offering smart products that can reduce the energy usage. Business represent a large share of the total CO2 emissions in Europe, and Linde can directly contribute to a better climate for our planet by supporting more energy efficient buildings. And the 3rd topic here, we, of course, ourselves want to drive a sustainable business within Lindab's own operations. We work with reducing emissions and energy usage in our production facilities and when transporting our goods. We screen our suppliers very carefully to make sure that we have a sustainable sourcing pattern, And we're also improving safety and work on how to become a more attractive employer. In the local communities around our facilities, We try to act as a responsible company, taking part in the local communities. Then on the theme of the EU taxonomy, which many are paying attention to, we are currently working in detail with our analysis for the EU taxonomy. And our best estimate at this point in time is that 65% to 70% of our revenue will be aligned with the taxonomy. And on the theme of ESG, Our current DoD rating according to MSCI is AA, and we are working on improving that further. So that's on the topic of sustainability. We move to the next slide, number 15. And Here we have some comments on the market development and the rapidly increasing steel prices that I know that many are interested in. So in general, we believe that throughout 2021, we will see an Increasing construction activity as societies reopen after the pandemic and there is increasing investing in Confluence out there. However, there are also some challenges with raw materials increasing in price. It is not only steel, it's also concrete and wood and many other raw materials. And we see that steel as a challenge for the entire construction industry. For Lindner, we did, of course, the rapid increase in Steel prices that are in focus. And we, as a large buyer of steel, pay extra attention to this. Lindel has long term contracts and this gives us a good visibility of future changes and we are currently negotiating the steel prices for quarter 3 quarter 4 for 2021. In the market today, there is currently a shortage of steel and the delivery times are long. But as a large buyer, one of the largest ones, we have an advantage and we can see quite far into the future and ensure that we get The right quantity is delivered and that we have a good possibility to plan for the increase in feed prices and adjust our prices to the customers at an early stage. Our aim is to protect our gross margins, and this is So what we try to do by giving notice early to our customers so that they can prepare for the increasing prices. Linde have made a strategic decision at an early stage to prioritize profitability over volume. There has been a lot of demand for our products during the Q1, but we have chosen to prioritize our existing customers and not push fully to increase volume. We believe that it is very important that we safeguard our stock of steel so that we can be a reliable supplier to our customers in the long run. And we expect that steel prices will continue to rise during the rest of 2021. And we also foresee that there will be continue to be a Quite difficult situation in the steel markets for the months to come. So we need to make sure that we have enough steel so that our operations can run without interruption. We take a cautious approach. We focus on delivery reliability and profitability rather than going after short term margin growth. With that, we go to the next slide and a short Summary. So to summarize, quarter 1 was a good quarter for Linde. We are satisfied with the sales level and especially so for pump ice systems and ventilation systems. The EBIT margin was record high for the Q1 and will continue to improve profitability on a growing 12 month basis. We have a strong balance sheet and we will continue to implement our strategic investment program and we will continue to pursue acquisitions. All in all, a good start to the year, and we also see a good long term growth potential as the construction activity starts to increase again after the pandemic. With that, I would like to thank you for listening, and we open up for questions. Thank Janberg. Our first question comes from the line of Kenneth Thore from Carnegie. Please go ahead. Yes. Thank you. So first on the outlook for large Projects in profile systems, you have talked about it for some quarters now. But is it A few very large projects that run out in the short term or should we see support from large projects also in Q2, Q3? We don't have any reason to believe that we will have a shortage of projects within the project sales in Profile Systems. However, it is we usually make the comment that between the quarters, it can fluctuate. So that is the nature of the project sales. But we have a strong Pipeline of projects, so I feel quite confident that the demand is there. So I'm not concerned about any sudden drop in volume when it comes to that project business. Great. And the project business as part of the whole divisional sales, is it And it's probably hard to define what is the project and so on, but could you say that it's a quarter or around half or 2 thirds or That's a very rough In Propellor Systems, I would say that it is less than a quarter of the sales that can be seen as projects related to the more standard sales. Okay, great. Then also coming back to steel prices, of course. When do you expect to see the biggest hit In the P and L, I would guess that steel prices would be higher In the Q2 than in the Q1, is that a correct assumption? Steel prices will be higher in the Q2 than in the first, and they will be higher in the Q3, and they will be even higher probably in the Q4. They will gradually increase throughout the year and we are talking quite significant increases. Already now we can see that the Spot prices for the kind of steel that we are buying is at the level approximately 100% higher than it was during June, July last year. So we are talking significant increases. And we believe that this will continued to increase during the year due to the shortage of material in the market. That said, Lindab is in a good position to make sure that we have material and that is more than most of our competitors can say. So there is Actually an opportunity for you to gain market shares here, if smaller competitors may find it more difficult to get material. There can be an advantage for Linweb in this. However, it is a complicated markets to act on today. The delivery times are long, getting extra volume beyond your forecast is quite difficult And it's a global game here where everybody is trying to look for more material. So I think we act in a prudent way. We follow our, budgeted sales targets and we don't aim to do too much expansion and take too much market share because that can also bring you some trouble. We prioritize our existing and loyal customers. Then from a modeling point of view, these price increases will support organic Sales growth. But do you know what is sort of the average price increases you have made on your products, just very roughly, so we can put it into our models to get the organic growth. You have to show me that model you cannot do it. Yes. Well, I mean, you know you have seen our products There is obviously quite a lot of steel in them. And while we I mean, we are not selling steel, but of course, there is a a high share of steel in the product. And we aim to protect our gross margins. So and but we don't aim to overcharge our customers. We are living in symbiosis with them and we want them to survive as well. So we try to act very responsibly in this and give our customers an early warning and pre notice that these things are happening because we see perhaps a little bit we have a longer perspective on this than most others might have, because we are in direct dialogue with basically all steel mills throughout the world, because we are such a large buyer still. So then the question is, can we adjust prices Quick enough, how does that play out with our customer contracts and our sourcing contracts? And that will But it is very difficult even for us to model that. But we aim to forward the price increases to the next player in the chain. I heard another CEO in the Building Material Space. He said that it has actually never been so easy to increase prices of this product than what it is right now. And he was pointing to the fact that it's not only one raw material that is increasing, but all raw material prices are up. So there is an understanding in the construction industry that input components need to be increased in prices. Is that something that you would agree with or? Yes, I think that people are aware that these things are happening. However, if you have promised to build something and that takes 2 years. Then of course, we might not have added it into your calculation. So there will be pain somewhere in this value chain. And that burden, of course, needs to be shared somehow. We are in this game for the long run, and we want to see our customers also succeed in their business. So somehow you have to operate together here. But there is no single player that can take this Complete burden, we have to share it. Okay. And then on the M and A side, your balance She is very strong. And as I read the report, you are happy with the acquisitions you've done In the last year or so and also with the divestment. So are you seeing more Opportunities now when some countries are opening up their societies a bit more to travel and be more active on acquisitions Going forward. Yes. I think that when the travel restrictions are now relaxed A bit, we will be able to start to travel quite soon. It hasn't happened yet, but it's probably in the near term. That will make it a bit easier to approach companies, especially outside Sweden where we are able to travel. We have a very interesting Acquisition pipeline with companies at different stages and we are hoping that we will be able to complete some acquisitions this year, but it's always difficult to foresee how many and how big and so on. But we are working very actively on it and hopefully, when the restrictions ease, we will be able to act even more on that. Yes, sounds great. Thanks a lot. Thank you, Janberg. And as there seems to be no further questions, I will hand it back for any Closing remarks. Well, then we say thank you. Thank you for listening in and We'll see you next time. Thank you very much from Madeleine and myself. Thank you for your time. Thank you. Bye.