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Lindab International AB
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Ladies and gentlemen, welcome to the Lindab First Quarter Report 2018. Today, I am pleased to present CEO, Fredrik Von Oelreich; and CFO, Kristian Ackeby. [Operator Instructions] Gentlemen, please go ahead.
Thank you. Good morning and welcome to the presentation of Lindab's results for the first quarter. My name is Fredrik Von Oelreich, and I will present the report together with our CFO, Kristian Ackeby. Our agenda today is that I will take you through the general overview, the highlights and the outlook, and Kristian will go through the numbers. And at the end, we open up for questions.Moving on to Slide 4. The first quarter was characterized by strong growth in all areas. Overall sales grow with 16%. The operating result increased to SEK 104 million, which will be compared to SEK 79 million last year. It's especially encouraging to see the significant improvement that we register in Building Systems. Moreover, we generated a positive cash flow, and our net debt decreased with SEK 90 million in the quarter compared to last year. When it comes to the strategic assessment of our non-ventilation-related businesses, we are progressing. And we are, right now, investigating the possibility to divest Building Systems.On the next slide, we can see how sales have developed across the regions. It's very satisfying to see good growth in all regions. In our biggest region, the Nordics, we registered strong growth, both in Sweden and in Finland. The strongest growth, we registered in Eastern Europe and former Soviet Union. We had double-digit growth in Building Systems in the important Russian market, but we also see very solid growth in the East European region, mainly driven by ventilation. In Western Europe, we had a bit slower growth, but still good growth generated in important markets like France and Germany.The product areas, on Slide #6, mirrors the geographical growth. All product areas are progressing, except Rainwater & Building Products, which were affected by the cold and long winter in the north. It's also good to see that our smallest product area, Fire and Smoke, has started to grow again.And with that, we move into the financials, and I hand over to Kristian.
Thank you, Fredrik. Moving to Slide 8, group financial highlights. During the quarter, net sales increased, with close to SEK 300 million or 16%, of which 13% organic. In fact, this is the highest organic growth in a single quarter since 2011. EBIT improved by 32% to SEK 104 million. The higher EBIT is mainly explained by higher volumes in both segments, which have been partly offset by reduced gross margin within Product & Solution and positively impacted by leverage on SG&A... Financial net has improved as a result of lower net debt and higher interest income.Tax rate did come in lower than last year, thanks to improved performance in a number of countries creating less tax losses, contributing to an improvement of 10% on earnings per share. However, if we adjust for one-off items, the improvement from higher-adjusted EBIT, together with improved financial net and tax rate, the adjusted EPS would increase with more than 70%. Turning to next page. Product & Solutions, strong sales development. Organic sales increased with 8%, and net sales amounts to SEK 1.9 billion. Continued positive sales development in all regions, but especially strong in CEE, and CIS and in the Nordics. We have the highest recorded sales in a first quarter ever for Sweden. EBIT amounted to SEK 118 million, positively impacted by the higher sales, which was largely offset by lower gross margin. The lower gross margin is attributable to 2 main reasons: an unfavorable product mix and higher raw material prices.The product mix is estimated to have had a negative impact on gross margin with 0.7 percentage points. Largest contributors to the negative impact is explained by much larger share of the more project-based Building Solutions, combined with the lower share of Rainline due to the weather conditions. Prices at the end of the period are higher than the end of last quarter, and additional price increases are scheduled for Q2.Currency had no impact on EBIT. Positive impact from translation is offset by negative from transaction. For example, that we buy steel for our steel service center in Sweden that are priced in euro. Moving to next slide, Building Systems. Strong sales development in the quarter. Organic growth for the quarter was 56%, and there was a favorable currency effect of 1%, positively impacted by Europe and negatively from the ruble. The EBIT improvement versus last year is mainly explained by the larger volume increase, but also improved gross margin. Currency had a small and negative impact on EBIT in the first quarter due to stronger euro, where we made losses, offset by weaker Russian ruble, where we made profit in the quarter. Backlog at the end of the period was higher than the same period prior year, though the part of the backlog that has increased compared to a year ago is scheduled for the second half of the year.Moving to next slide, cash flow. Adjusted free cash flow increased SEK 92 million to a positive SEK 21 million, positively impacted by the change in working capital. During the quarter, net debt has increased sequentially with SEK 60 million, which is mainly related to currency impact. Net debt-to-EBITDA ratio, stable and improved to 2.1 from 2.4 last year. This concludes the financials, and leaving the word back to you, Fredrik.
Thank you, Kristian. On the next slide, we pinpoint a few highlights from the quarter. In Building Systems, sales are developing favorably and the backlog is higher than last year. It's worth noting that we took 7 order with a value of over 2 -- SEK 10 million each. In our biggest market, Sweden, we had all-time high sales, and that was very much driven by important building project sales. In Finland, we see good growth. And we are successful in selling our ICS systems and also the new UltraLink, which we presented in the previous quarterly report.In Eastern Europe, where we registered the highest growth within Product & Solutions, we have several markets that have actually double-digit growth in the quarter. And one we pinpoint here, which is Romania, which have been very successful with several projects during the quarter.If we then move over to the next slide. In March, we participated in one of Europe's most important trade shows for HVAC products, and that one was in Italy, in Milano. And here, Lindab showed a full ventilation system, from air handling units to diffusers, including our new UltraLink with the new Bluetooth feature. This was very well received. And step by step, we are building up our credibility as the solutions provider within ventilation. Moving to the next slide. When we start to offer complete solutions, we can also start to improve approach end customers. So we are going from selling products to installers, to being prescribed by architects, consultants and real estate owners. And we already have quite some success in the marine sector, which is one of the target customer segments that we approach. So step by step, we are approaching these important end-user segments. And we could say that this is a transformation in our strategy, going from a push strategy, pushing product, to a push and pull, where the Lindab brand starts to be prescribed by important end-customer groups.If we then move forward in the presentation to the outlook, starting with the marketing -- with the market development. We can see continued market growth. Although it's a bit slower than last year, Euroconstruct has a forecast of a growth of 2.3%, and last year, we were close to 4%. The growth is particularly strong in the whole CEE, Eastern Europe region.We could also mention that we see some signs of softness in the Nordics, namely in Norway and Sweden, but this is mainly in the residential area where Lindab has quite low exposure. Roughly, our sales goes 20% to the residential segment and 80% to the nonresidential segment. It's also important to note that steel prices are moving upwards again, and we foresee increases in the range of 3% to 5% during quarter 2. If we then move over to the summary. To sum up, all in all, we had a very good start of the year, with a strong top line and an EBIT improving with SEK 25 million.And to end up, as we have discussed before in the quarterly reports, we focus on 5 areas. We have to manage the increasing steel prices in order to protect our margin. That work is going on continuously. We are executing on the turnaround plan in Building Systems, and we are following that plan that we presented in the last quarter. We are addressing, step by step, the low-performing units that we have in Products & Solutions. And we are building a foundation for organic growth by investing in our Energy & Climate Solutions [function]. And then last but not least, we are going through the process of focusing on our core business, being ventilation and indoor climate.With that, I say thank you, and we open up for questions.
[Operator Instructions] We have a question from Max Fryden from Danske Bank.
Max Fryden from Danske. I have a couple of questions. And the first one is on the price increases, which you mentioned here. And it's not yet sort of offsetting the increasing input costs. Then maybe you can just help us understand, where are you in the process of catching up to the market compared to where you were, let's say, at the start of the year. Should we expect continued negative effect in Q2? Or should we start to see a cost-neutral effect from the price increases?
Yes. We have partly increased the prices in the first quarter. As we can see, that is not enough to make up for the loss in gross margin. However, as Kristian mentioned, that is also affected by a worse mix in the first quarter. And we have also price increases coming in quarter 2. And our expectation is that, that should help us moving in the right direction. Of course, we then have to lift a finger for that. We see the steel prices are also starting to move up again. However, there will be a certain delay before that will affect our COGS. So all in all, that means that we should be progressing in quarter 2. And then we have to have a readiness for possible additional price increases depending on the move of the steel prices.
That's very clear. Then for the Product & Solutions division, is it possible to quantify the volume growth out of the 8% organic growth?
Of the 8% organic growth, slightly more than half is volume, and you should expect 3% to 4% in price.
Perfect. And then finally from my part, on the Building Systems. The positive or at least not negative result in the quarter, that is normally seasonally weak, right? And then you have the strong order book that you mentioned with the 7 times SEK 10 million orders, the higher backlog and the increased gross margin. So I presume then you have a high profitability in the backlog with a high gross margin, and then the effect from savings program. So is it realistic to say that you should have positive results here with this capacity utilization throughout the year? Or am I missing something?
I think we do not guide on a full year number here. But what you should expect and what we also included in the quarterly report is that, for the second quarter, we do not expect to see a significant volume increase, just helped by the volume and production planning. And for the cost program, I will leave it to Fredrik.
Yes. As Kristian mentioned, there will be more impact volume-wise in the second half of the year. When it comes to the cost reduction program, as I mentioned, we are following plan, but that will gradually start to impact. And as we said, this is a program going over 2 years, with the ambition to reach a total full impact of SEK 50 million on the bottom line. And the majority of that is coming in next year. And when it comes to this year, what will affect is mainly coming in the second half of the year.
We have a next question from Douglas Lindahl from Kepler Cheuvreux.
A few questions from my side. First of all, the one-offs in Q1 here, negative SEK 33 million. Is that -- I mean, looking at the full year, it seems to be a quite somewhat high number. How should we look at this number going forward throughout the year?
We do not give a guidance on the OTC number specifically based on this SEK 33 million. To start off, this SEK 33 million, you have one part related to the strategic assessment and one part related to Building Systems and this turnaround program. What we have said in last quarterly report, we communicated that we expect the program in Building Systems to have a positive impact on EBIT of around SEK 50 million, and to have a payback of approximately 2 years. So that gives you a feeling for the numbers on that one. And then also, like Fredrik earlier stated, that it will be performed during a 2-year time.
Okay. So nothing has changed basically on your cost expectations for the cost-cutting program?
No.
Okay. And then just a second question here, Kristian, with regards to your replacement. Has there been any change there? Or -- I guess, this is a question for Fredrik, maybe.
When it comes to finding a replacement for CFO, that was your question?
Yes, exactly. Exactly.
Yes, we are moving forward on that, and we are in the end phase of that process. Then of course, it all depends on notice periods and so on when a person can actually start. But we are at the final stage of appointing a new CFO.
Our next question is from Predrag Savinovic, Nordea.
Maybe I missed this part, but you said, in ruble terms, the profitability in Building Systems is positive this quarter. Could you say what margin it is at right now or in Q1? And maybe, seeing that order movement is very strong, does this perhaps change your -- I mean, the price tag, what do you expect and see how much you can gain from the sale of this asset also?
I will start with the first one with margins, and I will leave the second one for Fredrik here. But the first one referring to margins, we will -- I will not give comment on margin by specific country or currency. But just to highlight here that we are, like I said earlier, profitable in Russian ruble. What you also see when we look into the second quarter, it will be more, how should I say, the capacity utilization will equal out somewhat. In Q1, we have a larger part in Russia than we will have in the second quarter. And then the portion for Russia will increase again in Q3 and Q4 based on our production planning. So I'm not sure if that gives you the total answer, but I will stay with that for now and see if I get any additional question on that topic. But for the second one, I leave it to Fredrik.
Yes. Your question was what to expect in terms of if we would divest Building Systems. I mean, we clearly cannot comment on that in detail. But I think it is important to state that the main driver for the company and the board to go in this direction is to focus on the core, to have a clear group structure and focus on the core. That's the main driver, the strategic driver. Then of course, we have to realize that we are potentially selling an asset which is making a loss today. So that has, of course, been -- have, of course, been taken into the picture. We have to realize that. Then it is very good to see that it's moving in the right direction for Building Systems. So that's strengthening Lindab, and that is also, of course, making the potential divestment more attractive. What is important for us also is that, as long as we are an owner of a company, we professionally manage it and we execute the program of making a business profitably, sustainably over the longer term as long as we are the owner of the asset.
All right. Are we looking at any winter effects here? I mean, as in, is the underlying sales momentum even stronger than the figures you posted in Q1? And also, my comment on the market growth or the outlook slowing, as you mentioned Euroconstruct, et cetera. Is that not a bit contradictory considering what you -- I mean, the very solid growth you posted here today? So it's relevant even to have that kind of forecast in mind. Or how should we view it?
No. I think the quarter 1, very strong growth shows that the company is doing very well and we are in a strong flow. I would say that we are taking market shares in several markets. We are growing faster than the market in average. Then, of course, Euroconstruct is an average growth, the growth in East Europe is very much stronger. But in general, Lindab has [to have] solid growth in all the regions. When it comes to the market overall, the construction market is slowing down a bit. As I mentioned, the times we have seen so far is more related to some countries and it is more related to residential, where we are less exposed. So, so far, so good. And we have a good activity level in the company in the various regions.
All right. And on the winter effect, is there any new [indiscernible] today?
Yes. And again, that you could say, it displays that we are doing well. So this is despite the winter effect and also the Easter effect, we have strong growth. Having said that, of course, we do see a slightly negative growth in the Rainline product and the Building Products, which were affected in the Nordics, which is the important market for those products. So there, clearly, [the teams] were not able to go outside the house. They were more busy with shoveling snow than constructing houses in the quarter 1.
On these new solutions and concepts you are presenting, what is then -- you can give me on what are your expectations? I'm assuming it's going to be helpful for the margin. And when will this kick in? What kind of implications are we looking at? What kind of time frame to expect?
Yes. I mean this, of course, is difficult to guide on. And the question is whether we guide on it? But this is -- I mean, this is a long-term strategy. It is step by step. It's not replacing our product sales. It is complementing our product sales. So it will start to kick in step by step. But we are, right now, at the very early stage. But we are working in -- with the platform thinking. And our ambition is that the first platform when the products connect together, when they can be built together, that stage should be ready by the end of this year, so we can actually connect them and propose a system. And then we are also working on platform #2, where also this sort of first systems for specific, then customer segments also can communicate. So there will be communication possibilities in the system that we propose to our customer segments. And then we will see how the market receives those solutions, of course. So it's step by step, building the systems, using the digital possibilities to make them communicate, and then addressing segment by segment. I mean, we are right inside a customer segment, so we don't go out to the whole customer group in one go. We take it step by step.
Okay. And a follow-up on the price increases that you're doing right now. I mean, could you just walk us through maybe the coming quarters, assuming constant input prices on what to expect on the gross margin, all else equal, for -- just some kind of guidance to see us in, since we'll always -- kind of expectations on how much this actually impacts you in the quarters? Some flavor will be helpful.
Yes. I mean, we don't give more clearer guidance than what I said in the previous question that was asked. I mean, there are different price windows in different markets. Some may increase in 1st of January, 1st of February; other, like U.K. and Ireland, they end up in quarter 2. So there are different price windows in different markets. And this is sort of the effect that we see when price increases kick in, in different quarters. But as I said, our belief is that quarter 2 should take us in the right direction, but it will not cover up for the full margin differences compared to last year that we have.
We now have Johan Dahl from SEB.
Could you just clarify what the implications of -- that this strategic assessment is entering a new phase? I'm not exactly sure what message you want to send there. Alternatively, can you just explain the outcome of the first phase of this assessment? We know you want to focus on ventilation, but if you could be a bit clearer there, please?
Yes. As we said from the start, we are evaluating businesses that roughly represents 30% of the group turnover. And when we say that we are entering a new phase now is that, actually, when it comes to Building Systems, we have prepared that business area for a potential sale with all what that involves. And Kristian also mentioned some of the costs we have taken for this strategic assessment, and that is, of course, relating to preparing a potential sale and making the customer's due diligence processes and so forth. So in that sense, we have entered a new phase and we are looking at the possibility now concretely to divest Building Systems. And that, of course, representing roughly 1/3 of the total businesses that are being assessed.
Yes. Will you report this as assets held for sale shortly or the Building Systems?
By doing the evaluation, it's not then held for sale. Then it's -- when you have decided to sell, then it's asset held for sale.
All right. Finally, the cost-out measures taken in Building Systems so far, what exactly are those activities? And how much savings does that account for? I mean, decisions taken until the end of Q1.
Yes. I mean, the main initiatives so far is relating to headcount reduction. And then we are also in the phase of preparation when it comes to moving some production from the west to the east, meaning from Luxembourg to our site in the Czech Republic. Those are the initial steps taken. And then when it comes to the impact, I think we commented upon that before, that in the second half we will start to see impact of the cost savings, and the full impact will come next year.
Yes. So the decisions taken represent quite a significant share of the targeted [ fifth ] here?
I think to clarify this, this is a 2-year program. And we have -- in the quarterly report, you could read that SEK 10 million has been taken so far, and that is mainly related to severance. And if you look into headcount for Building Systems, you will see that headcount is relatively flat in total. But that under next level, so to say, headcount has decreased in Western Europe and increased in Eastern Europe.
Our next question is from Kenneth Toll from Carnegie.
Yes. So 2 questions. Now that you have sort of separated the Building Systems division more, could you say anything about the potential negative synergies in divesting it?
Yes. I mean, we can say it like this, that there are very limited synergies between Building Systems and the rest of Lindab.
Okay. And also, now we have discussed Building Systems a lot, and the way I personally interpret this is that you have interest for that division. Can you say something about the interest for the remaining 2/3 of the businesses that you are sort of looking to divest? Are there interest for those?
Yes. I think that there are interest for all of these activities. I mean, in particular, the other parts we look at because they are profitable. As we discussed before, Building Systems come from a loss-making position. But also, as we said, we are most advanced when it comes to the Building System, which is also the part of the business which has the least links to Lindab as a whole, so that is more of a clear-cut. The other parts, we are still in the process of assessing exactly what is the optimal structure for the Lindab group.
Yes. So you haven't sort of carved those out yet from the Lindab group?
No, there is no such carve-out that has been executed yet.
We have no other questions for the moment.
Very good. I think that then we conclude here, and we say thank you very much.
Thank you, gentlemen. Ladies and gentlemen, this concludes today's conference. Thank you all for your participation, you may...