Earnings Call: Q2 2021

Jul 20, 2021

Hello, and welcome to this call. My name is Ole Ringdahl, and I'm the President and CEO of Linden Group. I'm sitting here together with our Ex PINK CFO, Madeline Jendeij. We go to Slide 2. Some key highlights from the Q2. Linde Group had a very strong year so far, and Q1 was strong and Q2 was even better. We had record high sales in the quarter also compared with 2019. Billing activity in all parts of Europe is getting back to previous levels. Linde Group is performing well in all business areas, all three of them showing good organic growth. Ventilation Systems and Profile Systems have the highest sales ever for a single quarter. And those of these business areas are also reporting the highest operating profit ever for a single quarter. The adjusted operating margin for the past 12 months was 11%, and that's higher than our long term target of 10%. The strong performance is supporting the case for our investments and acquisitions. We are conducting the largest investment program in Lindel's history, and we are continuing at a high pace during the quarter. We've also completed 2 acquisitions, 1 in May and 1 in July, adding additional value to the Lindel Group. Now let's move to Slide 3 and the geographical development. In the Q2, demand was high in all geographic regions. Western Europe took the lead with an impressive organic growth of 39%, followed by Eastern Europe with 37% and the Nordics, our largest region, with 15%. Sales was particularly high within ventilation systems and profile systems, driven by growth in all geographic regions. The smaller business area, Building Systems, also reports positive organic sales growth, thanks to good performance in the Eastern region. The comparison period, Q2 of the previous year, had the most extensive restrictions related to COVID-nineteen. So that is, of course, impacting our growth numbers. But the actual revenue level is high also compared to earlier years. And now I would like to hand over to Madeline, who will take you through the financials. Thank you, Herna. First of all, highlights of the group. Net sales for Linden Group amounted to SEK 2,747,000,000. The organic growth was strong At 7.26 percent, while currently had a negative impact on growth by 4%. Structural changes related to Linde's completed Acquisitions and divestment during the last 12 months contributed positively by 2%. Overall, the sales development was strong during the quarter, especially within Ventilation Systems and Profile Systems. Both these segments have been positively affected, For Linde Group, continuing being a reliable business partner. Linde Group has in fact been able to manufacture and supply customers with demand of products During the quarter, despite a general imbalance between supply and demand of raw material. The adjusted EBIT increased by 60% to SEK 356 1,000,000 and the group recognized an adjusted EBIT margin of 13%. This is the highest adjusted EBIT and EBIT margin for an individual quarter since 2,008. Improvement was mainly driven by significant sales growth, structural changes, continued good cost control And the strength in gross margin as a result of the cost efficiency measures from the ongoing investment program. The EBIT included received governmental grants of SEK 2,000,000 compared to SEK 3,000,000 in the corresponding period previous year. Net profit for the quarter amounted to SEK 278,000,000 an improvement of SEK 202,000,000 compared to the same period previous year. It should be kept in mind that the net profit in Q2 last year was impacted by one off items and restructuring costs Equal to DKK 74,000,000 related to the strategic decision to close down I and P team group. Earnings per share in Q2 equaled SEK 3.64 billion. Now we will take a look at our different segments, and we'll start by ventilation The next slide. Net sales for ventilation systems amounted to SEK 1,628,000,000, An increase of 26% compared to the Q2 previous year. Organically, sales increased by 26% and structured changes Also contributed positively by 4%. Currently, FX had a negative impact on sales growth by 4%. During the quarter, there has been a continued clear sales recovery of the construction activity in most European markets. In terms of Linden, this was particularly evident for Western Europe, which reported strong organic growth during the quarter. The sales development in Nordic remains solid, and this region also repurchased fairly good organic growth. The adjusted EBIT of ventilation systems increased to SEK 230,000,000 during the quarter, And the adjusted EBIT margin improved to the level of 13.1%. This is, as Ole mentioned earlier, the highest ever reported Value from individual quarter in terms of ventilation systems. The improvements were mainly explained by significant sales growth, Structure changes and the strength in gross margin. Worth mentioning is that all sales and production Unions have been fully operational during the quarter in comparison to the period last year, where there were significant restrictions in some markets. Moving on to the next slide. In terms of profile system, net sales increased by 27% and amounted It's SEK 873,000,000. Organically, SAIF increased by 29%, but currently had a negative impact on growth by 2%. The strong organic growth was related to most of the markets of Profile Systems. The largest region of the segment, the Nordics, We reported good organic growth during the period with good growth in all product areas. It can also be mentioned that significant deliveries were made to 2 larger logistics terminals on the Swedish market, which also contributed to the total sales growth in the Nordics. Today's development in the Eastern Europe increased during the quarter due to strong demand in most of the markets. During the Q2, adjusted EBIT increased to SEK 149,000,000 and this is the all time high for the segment in terms of profit. The improvement in adjusted EBIT by high comparable figures was mainly related to strong organic sales growth And a strength in gross margin. The adjusted EBIT margin for the quarter improved to a level of 17.1%. Then we move on to the financial highlights of Building Systems on the next slide. For Building Systems, net sales amounted to SEK 246,000,000 and increased by 4% compared to the corresponding period previous year. Sales increased organically by 14% and currency effect had a negative impact of 10%, mainly related to the weak and Russian ruble. The increase in sales during this quarter is mainly explained by strong growth in both the CIS and CE regions, Our sales in Western Europe declined. The market development within building system remains uncertain, There has been a clear face recovery during the Q2 in relation to the Q3 of the year. In Q2, adjusted EBIT amounted to SEK 12,000,000 and adjusted EBIT margin equaled 4.9%. The slightly lower EBIT is mainly explained by some increased costs and the currency tailwind linked to the Russian ruble and the euro. However, these effects are partly being offset by a strength in gross margin and organic sales growth. Should be noted that the government has granted cost reductions related to COVID-nineteen, reported EBITS with CHF 1,000,000 Compared to SEK 7,000,000 in the corresponding period previous year. The next order intake decreased during the period, and the total order backlogs At the end of this, Q2 was lower than a year ago. Moving on to the next slide and cash Development for the group. Compared to the corresponding quarter previous year, Linden reported a strong cash flow from operating activities before change in working capital. This development is primarily related to Strong underlying performance and a strengthening operating profit. In terms of working capital, more cash was tied up in the statement of Financial position and development was different compared to last year, much as a consequence of the different credit side for the quarter. Last year, Linde recognized cash flow effects that, among other things, were linked to COVID-nineteen. Included to this year, the change in working capital is Mainly related to increased capital tied up in stock and operating receivables as a result of Lindem's strategic focus Of high delivery performance and a higher demand from customers. I think that concludes the financial highlights of the quarter, And I'm giving the word back to you Ole. Thank you, Marlene. Now let's talk about the investment program, and we start on Slide 11. The increased profitability during the past couple of years has given us the financial measures to implement the largest investment program in Lindel's history. For the past 2 years, we've been purposefully investing in increased automation, production capacity and optimized logistics. We've already invested in dozens of important projects. And in the Q2, we continue to invest this time SEK 86,000,000 in different parts of Europe. We are expanding our production facilities for ventilation in strategic locations. We are installing highly automated production lines in our manufacturing facilities, both regionally and in Lindel's central ventilation factories in Sweden and the Czech Republic. The payback period is short, typically 3 years or less for machine equipment. And the First, investments have already had positive effects for our business, especially now when demand is high and increased capacity is needed. This means that we when we grow, we don't need to add a lot of people, but we can instead run the machines in an automated way. Now let's talk about how we are building a stronger Lindel for the future on Slide 13. So acquisitions are a key part of Linde Group's strategy. And in May, we signed an agreement to acquire the Norwegian ventilation company, H. A. Helgesen. They are specialized in the production of rectangular ventilation ducts, and that complements our ventilation business very well. Rectangular ventilation ducts are bulky and thus difficult to transport, but Helgesen have built up in an efficient distribution network in Western Norway. As with the previous acquisitions that we've made, This is a well managed business with high EBIT margins. H. A. Helgesen has an annual sales of NOK 15,000,000 Norwegian kroner, and they have 9 employees. This will be reported as part of ventilation systems Numbers in the Q3 as the formal ownership is transferred to Linden during that quarter. And then on Slide 14, we mentioned another acquisition. We signed this acquisition in July, just after the closing of the quarter. The company, Kami, they are a Swedish roof specialist, and this is our first acquisition in a long time in the business area of Profile Systems. Kami are producing their own unique metal roofs with a sand coated surface, which make them look like tile roofs. And we think that we can contribute with a far wider distribution network and improve sales even further. Kami has an impressive revenue number per employee. So with only 2 employees run a SEK 100,000,000 business with high profitability. Kami will also be part of the numbers for this 3rd quarter and will be reported as part of Business Area Profile Systems. Now on Slide 15, Let's talk about the steel price development. And as you can see on the graph, there has been quite a dramatic increase in Steel Prices. This graph is describing the development of hot deep galvanized steel, one of the major Steel categories used in the Linde product range. We see an increase compared to 1 year ago of roughly 150%. So it is dramatic and historic. Linden has managed a Shortage of steel and the high steel prices well in the quarter. But it is, of course, challenging to keep up and adjust the prices both frequently and quickly when it's when the development of this is this dramatic. As a large purchaser of steel, however, Linde can secure the deliveries for a long time period, and we have good visibility into the future. Right now, we are securing volumes for the Q1 next year, So we have a long planning horizon. We expect steel prices to continue to be at the high level for the coming quarters, and we plan our actions accordingly. Now let's move to the final slide and a summary. So on Slide 16. The Q2 was a good quarter for Linden. We have Set a number of new records for both sales, profits and profitability. We see a broad improvement across All business areas and all geographies, and we believe that this is a sign of strength. Furthermore, Linde has a strong balance sheet, And we will continue to implement strategic investments and continue to nurture our acquisition pipeline. All in all, the Q2 was an important step in our long term plan to build a high quality company with good profitability. With that, we would like to thank you for listening, and we open up for questions. Thank you. Our first question comes from the line of Karl Reinestam from Nordea. Please go ahead. It's Karl here from Menor D. A couple of questions from my side. First, maybe it's hard to assess, but But would you say that you might have any pre buying effects in the quarter sort of temporarily fueling the demand? Not to any significant extent, I would say. We, of course, see Occasionally, patterns of people sending in quite many orders just before a price increase. But since we are updating our prices very frequently, I think this evens out over this time period that we are speaking of now. So the short answer is not any significant effect on that. Perfect. And in terms of the demand, obviously, quite strong, and you seem quite confident when listening to here. But have you seen any fluctuations And during the quarter, is the demand stronger in the beginning or stronger in the end? Or We have seen A strengthening demand, say, from the beginning of this year, so stronger and stronger month by month, I would say. So it is there seems to be an increasing confidence in the industry and in the building sector. Perfect. And also, I mean, in general, we know that You have been very active when it comes to price increases. And I guess it's a fine line We've working with price increases and sort of maintain a good relationship with our customers. And would you say That your customers have a good understanding of the unprecedented situation? Or do you fear That the pricing could, in the long term, impact your relations or your relationship with your customers when the sourcing or Supply of material normalizes. Or do you see that your competitors are doing pretty much the same? I think our customers have different kinds of concerns. The main priority is to be sure that they get the products that they need at the right time, at the right quantities And that they can trust when they are dealing with Linden. So that is really the first priority. Never run out of Products don't let your customer down. Then with good communication and also we're talking about people who are also reading the newspapers can also read these types of graphs. Then they have a good understanding. They understand why prices need to increase. However, it, of course, creates difficulties for them because they might not have imagined that something like this could happen so quickly. So we, of course, work closely together with our customers to try to find solutions so that they don't suffer too much. We are doing business with people all the time. So we try to work in partnership with our customers. We want them to Survive and thrive because we believe that they will be our customers for a very long time. Okay, perfect. And the final one from my side, if I may. I mean, could you describe the impact on the margins sort of between the net Between your price increases and the raw material headwinds and also what we could expect the coming quarters? What we could expect how do you mean, Karl, what we could expect in the coming quarters still? I mean, obviously, the price increases Will be tougher or the raw material situation will become tougher when you worked through when it worked through your inventories in Q3 and I guess also Q4. So in Q2, I guess, you implemented price increases at a faster pace than the raw materials impacted you, I guess, or True. I mean, it since we were very quick to increase prices, we realized this situation perhaps a few months before Others did. So we started to act on this more than half a year ago, and we have been very quick in implementing our price increases. We sit on huge monetary values in stock that is, of course, very costly. And we are selling that stock at new prices. So there can be some Tailwind from that. But it is out of the improvement in the profitability of the Linde Group, It is a smaller amount. The main effects in our profitability improvement come from operational efficiencies. We are becoming a more and more efficient company through both working practices, structural changes and definitely through our investment program. So given the pace that these So raw material increases came. I think that we are still it's still working in our favor because of our large stock. In Q3, it can be a little bit tougher because we will see increasing effects in our own inventory from the steel price increases. And we are continuing to increase prices to compensate for that. We have a priority to safeguard our gross margins to continue to drive profitability improvements. And this has historically been something that Linde Group has been quite good at, and this is how our business system is built up. So I have good confidence that we will handle this well also in Q3 and Q4. Perfect. Sounds great. Thank you. Thank you, Karl. And the next question comes from the line of Douglas Lindel from Kepler Douglas, if your line is on mute, can you please unmute yourself? So hello. Hopefully, you can hear me now. Thanks for taking my questions. Coming back to organic growth and pricing To some degree, organic growth obviously being very strong here in the quarter. Is it possible to give some sort of indication on how much of the organic growth came from volumes How much came from pricing in this quarter? And I guess going forward in Q3, more and more will be sort of pricing based on the logic that we just discussed? That's my first question. Since we saw a sales recovery last year in Q3 compared to Q2, the comparison numbers are, say, more difficult in the next quarter in terms of sales, because at the in the Q3, more and more countries were going back to at least being partly open. So yes, I think proportionally, more of the sales growth will come from price increases in the Q3 and 4th compared to the Q2 when most of the sales increase came from volume increase. Okay. And no sort of indication on Q2 organic growth, how much came from volumes and pricing? Significantly, more than half of the sales increase comes from volume. And on the gross margin, Dantel, do you think it's reasonable to see gross margins at around 30 Throughout 2021, I guess you already said that you expect to handle these raw material issues quite successfully throughout the year. When studying our gross margin development, I see well, There are 2 things to mention. When we describe in our reporting what you read there as gross margin, In those cost of goods sold, you have partly variable costs like direct material and direct labor, But you also have quite a lot of costs that you could say are fixed costs, the cost of the factories, the white collar workers in the factory and so on. So it's the cost of goods sold is a mix of variable and fixed cost. And if we study how that how the variable part of our Cost of Goods Service Developing, we see very good stability. And I think we have a business system in Lindab that is focusing on keeping stable gross margins, particularly on that variable cost side. And then we get a lot of efficiency improvements on the Fixed part of the cost of goods sold and definitely also below cost of goods sold on the SG and A Costs. So a large majority of the profitability improvements during the Q2 came from So operational leverage and efficiency improvements, and a smaller part came from the extra boost that you can get from Price Increases. Yes. Okay. Final one from my side on M and A You're talking to you now. Can you talk a little bit about the pipeline? How you view the markets? I guess multiples are quite Hi. In a historic context. And also maybe any comments on the plans for billing systems in the future, how you see that? Thanks. I can try. I think it's true that the multiples have come up on acquisitions. However, we try not to focus too much on anticipating bidding processes that we prefer to find and contact the desired targets ourselves. And then we can avoid a little bit of this price inflation or multiple inflation that we see elsewhere. So we have a very healthy acquisition pipeline, very many interesting candidates. Now we can also start to travel a bit more, so it's easier to also do deals outside of Scandinavia. So I'm quite hopeful that we'll see good progress there, but it's, of course, very difficult to Saving Certainty. But we're aiming to make more acquisitions this year. When it comes to Building Systems, I think that they are showing A good performance given the sales level they have. They are showing a stable Margin and now we have seen for the last 5 or 6 months in a row increasing order intake, a lot of inquiries. So I'm a little bit optimistic that we have seen the worst, and we are moving in the right direction in terms of orders and sales volume. So as long as they can show this type of stability and performance, Then I'm quite pleased. And then we have some upside going forward in their performance as sales will hopefully start to Increase in the coming quarters. And does that mean you feel more comfortable with being a long term owner of that asset? Or should we Strategically, the fit is not perfect. So we will have to see about that. But at the minimum, they need to perform and contribute to the group total. And as long as they do that, then There's no panic about that situation. But as I've said in several calls before, The synergies are very limited between Business Systems and the rest of Lindel. And we run it as a separate parts of our group. Okay. Thank you, Roeland. Thank you. We have a follow-up from Karl Reigenstrom from Nordea. It's Karl here again. Just A quick question here. In Q2, other operations, I guess, central cost expanded to €1,000,000 versus historical pace of roughly €10,000,000 So I wonder what is behind that? I you can't see that, but then looking at Madeline, I think historically, 10%, you say. I think that we had low we had unusually low Central Cost previous year, because we cut our salaries and we did short term work. The group management, we cut our salaries. So and we, of course, put a break on everything. So that is one explanation. And then we also have, of course, some costs related to Strategic work we do for the future, Andy? That is true also. Strategic projects and acquisition related costs and so on. And IT costs also Can be an explanation. We are now picking up the pace again in rolling out new ERP system or so. So there's no extraordinary thing behind that number. I think the comparison number So last year is probably a bit skewed. Okay, perfect. And then one more, if I may. On Profile Systems, would you say that the primary growth driver behind obviously very impressive organic growth is bread and butter Yes. So would you say that you also see high volumes for Linden Wallen, for instance? We did see high volumes Lindel have them because of 2 large logistics centers being erected and invoiced. But the bread and butter business has developed It's really strong there as well. So it is a combination. All product categories within Transfer Systems performed really, really well. Part of that is Thanks to our own excellent performance, of course. And part of it, I think, is because our competitors have a very difficult time to supply. So we when we have the when we can and when we have enough material, We, of course, bring in new customers. When we feel that volumes or raw material Stock is not on the safe side, then we decline new customers. But we, of course, help when we can. So that's an extra boost from that as well. And we have also discussed before the do it yourself Trend and the favorable situation due to that. Do you see it continuing still, the do it yourself trend or? Yes, we do. I think people have more time to look after their house. And This trend, I think, will continue for some time. So that trend is strong, but also renovation in Public projects and upgrading of existing buildings all over, it's a very strong trend out there. So We benefit from several of those trends. And for Lindel Wallen, is it the logistics side? Or is it I don't know what you call it in English, but paddle quartz, I guess. We supply these building kits to erect this puzzle racquetball holes. But that is not a significant explanation why we are growing so strongly. I will bet my money more on the bread and butter business and the logistic terminals for E Commerce. And we have one more question from Kenneth Toll from Carnegie. The last And then probably on the investment program that we see the success of now. How long do you think that you will keep this Elevated investment levels, is it that the more you do, the more opportunities Pop up so that you are prolonging the plan for higher investments? Or do you see that you have soon sort of done what you needed? I think that in terms of value, we have peaked already. I think we peaked last year. But we will still remain on a high investment level for the coming Around 3 years, that's my best estimate today. You are very correct that we as we are Investing and upgrading, we continue to find new opportunities. And we are sometimes amazed by the enormous effect we have on both capacity and efficiency. So The more we do this, the better we become at doing it. So I think that we will have At least for another 3 years, high level, not perhaps as high as in 2020, But we will probably be instead of SEK 400,000,000, we will be at SEK 250,000,000, SEK 350,000,000, SEK 350 1,000,000. And this can vary quite a lot between quarters, whether we are activating And a large investment during the quarter or not. So the quarter by quarter, the numbers can swing quite a bit. Okay. Sounds great. Thank you. Thank you. And as there are no further questions, I'll hand it back for any So Madeline and I would like to thank everybody for listening and for sharing interest in Linde. And We are looking forward to a couple of weeks holiday after this report. So we'll see you next time, and we wish you all a good summer.