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Lindab International AB
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Ladies and gentlemen, welcome to the Lindab audiocast with teleconference Q1 2022. [Operator Instructions]
Today, I am pleased to present President and CEO, Ola Ringdahl, and CFO, Jonas Arkestad. Dear speakers, please go ahead.
Thank you very much. Hello, and welcome to this call. My name is Ola Ringdahl, I'm the President and CEO of the Lindab Group. Next to me I have our CFO, Jonas Arkestad, who will help me to answer questions towards the end.
We will start on Slide 2. Some Q1 highlights. The demand for Lindab's products remained strong during the first quarter of the year. Lindab continues to be a very reliable partner to all of our customers. Our robust supply chain and high availability is appreciated by the customers. Net sales increased in the first quarter by 30% year-on-year, and sales reached a record level for our first quarter with SEK 2.7 billion. We see some growth from volume increases, but the majority of the sales growth is driven by price increases to compensate for the historically high raw material prices. It's worth mentioning that the comparison numbers in this presentation are excluding the divested business area, Astron Building Systems. So you have full comparability between the numbers.
The strong sales development enabled us to reach a record high adjusted operating margin of 12.4% for Q1. Adjusted operating profit increased by 63% to SEK 340 million. This is the highest ever for our first quarter for the Lindab Group. We see positive effects from the ongoing investment program and the acquisitions. You should also note that the operating profit is adjusted for onetime costs of SEK 19 million related to the phase-out of the operations in Russia. We do not see any need to make further provisions related to Russia in the future.
Now let's take a closer look at the sales development on the next slide. And on this slide, we have described the quarterly sales for Lindab Group and Ventilation Systems and Profile systems, so that you can see a little bit of trends historically. During the quarter, the price of steel, which is Lindab's most important commodity, has increased even further. And in the sales graphs above, you can see that the price increases started to have significant effect on the indexed sales from the second quarter of last year. This is when the higher steel prices really kicked in and have a major effect. You can also see that it is particularly valid for Profile Systems, who have increased sales quite dramatically from the second quarter of 2021. It would be fair to notice that Lindab is facing tougher comparison numbers for sales growth going forward.
In the first quarter, both Ventilation Systems and Profile Systems showed strong sales growth and reported record high sales for our first quarter. Ventilation Systems reported an organic growth of 21%, with strong sales in all geographic regions. And Profile Systems reported an organic growth of 26%, primarily due to strong sales in the Nordics, where significant deliveries have been made to several individual construction projects.
On the next slide, let's take a look at the EBIT development. Lindab has had a strong margin development during the past years. Both 2020 and 2021 were exceptional years. First, we had COVID-19, which affected sales quite a lot, but we managed to keep a good solid profitability. In 2021, we were hit by shortages of steel and historically high raw material prices. Despite this, we have managed to increase EBIT in a very stable and good trend. And we've gone from an EBIT margin of 6.8% in 2018 to 13.1% in 2021. Ventilation Systems recorded an adjusted operating profit of SEK 235 million and an adjusted operating margin of 12.4% in the quarter. One-time costs of SEK 19 million for Russia affects the business area Ventilation Systems. Profile Systems reported an operating profit of SEK 122 million and adjusted operating margin of 14.6% and we are very pleased with this exceptionally strong performance.
Now let's move to the next slide and some other financials. Lindab has a strong financial position, and we have a very solid balance sheet. Net debt-to-EBITDA ratio is unchanged at 1.0. The onetime costs that I mentioned before related to Russia are mainly affecting the balance sheet and not the cash flow. Cash flow before change in working capital improved by SEK 99 million during the quarter and reached SEK 315 million. Cash flow from operating activities was negatively affected by the increased value of raw material. When there was a raw material shortage in 2021, Lindab decided to keep stock levels at a good and guaranteed level. And given the high price inflation on steel, these values have increased during the second half of last year and also into 2022. Lindab is prioritizing high delivery performance and this of course has its effect on working capital, but we know that this is one of the absolutely most valued advantages of the Lindab Group in the eyes of our customers.
With that, I would like to move to the next part of the presentation and how we build a strong Lindab. Let's jump directly to Slide #7. A little bit of repetition for those who have listened before.
Lindab has now completed the 3-year strategic transformation program according to plan. Lindab is in very good shape and we have a solid platform to grow from. We are the leading ventilation company in Europe with a clear focus on our core business and we are present in the countries where we have a strong market position in demographic Europe. We have a leading product offering and an efficient manufacturing and distribution network. And with our sustainability profile we benefit from a market that's focus on reduced energy consumption and healthy indoor environment. And as you can see on this slide, we have taken a number from our recently published Annual Report and confirmed the taxonomy alignment at 66%, while we before had an estimated range between 65% and 70%. Lindab is now accelerating the growth activities, and I will talk more about them on the following slides.
Let's move to Slide #8, Investments. Our investment program plays an important role in our efforts to grow organically with healthy profitability. In the first quarter, we invested SEK 106 million in our European operations and we will continue to invest on a higher level until 2025, but it will be gradually reduced from the peak that we had reached in 2020. We estimate that we have come about halfway through the program when it comes to decisions and about a third when it comes to implementation. The payback periods on these investments are very short, and the investments are already contributing substantially to our improvements in both efficiency and profitability. And part of that can be seen in our quarter 1 results.
Another important area for profitable growth is acquisition. So let's move to Slide #9. Acquisitions strengthen our product offering and also our geographical presence. Lindab's strategy is to acquire well-managed successful companies that complement our offering in selected regions and also in selected product areas. We let the acquired companies continue to operate independently under their own brands, while at the same time benefiting from the indexed sourcing agreements, expertise and sales network at their chosen pace.
In December, we announced the acquisition of Alig Ventilation and we closed the deal in January this year. Alig Ventilation is a Swedish company focusing on residential ventilation and they have annual sales of approximately SEK 65 million. And I must say that the start of 2022 has been very successful for Alig and we are very pleased with their performance so far.
And in January, Nord Trade was acquired. This is part of our strategy to strengthen our presence in the northern part of Sweden. This is a geographical area with many ongoing investments such as, for example, the Northvolt battery factory in Skelleftea. Just to happen that Nord Trade is located in Skelleftea in the northern part of Sweden, and this gives us a good platform to further grow from. Current annual sales is around SEK 20 million.
And in March, we announced our largest acquisition in many years. Felderer is the name of the company, and they are the leading ventilation wholesaler in Germany and complement our current business in Germany very well.
I believe that the German market has great potential for the Lindab Group. Just like in the Nordic countries, the buildings in Germany are well insulated and need efficient, high-quality ventilation. And in addition, the German authorities are focusing on reducing energy consumption in both new and existing buildings. Felderer has annual sales of approximately SEK 700 million. This means that we will increase our ventilation sales for Lindab Group by approximately 10% through this acquisition.
Sales and distribution of Felderer takes place in 7 locations in Southern and Western Germany. This acquisition of ventilation sales in Germany will more than double, and Lindab gains a strong position throughout the country. Acquisition was conditioned by approval from German antitrust authorities and that was obtained on March 30. And tomorrow, I will go to Felderer in Munich and officially close the acquisition. Felderer will be part of the Lindab Group from April 29.
Now let's move to the next slide and talk about our priorities going forward. The year has started at a good pace for Lindab, and we still haven't seen any signs of slower business due to war or anything else. It is of course difficult to predict the market demand for the second half of this year and for next year. We believe that there is a risk that Russia's war and the ongoing cost inflation and increasing interest rates, can have a dampening effect on construction activity in Europe. However, there are also reasons to be optimistic about the future demand for Lindab's products as the interest in energy savings and healthy indoor climate is growing substantially. This is also supported by stricter legislation and the EU Green deal. And I should add here that Lindab's sales is typically around 50% to the new buildings and 50% to the renovation and upgrading. So we have an exposure to both of these segments.
When it comes to our priorities for 2022, well, delivery performance is absolutely key in times of turbulence and the high availability of Lindab is extremely appreciated by our customers and is one of our most important competitive factors. We always have material. We always have products in the right place at the right time and we deliver on our promises even during difficult times such as COVID pandemic, steel prices or war.
Then on the sustainability side, with the EU Green Deal, we expect the demand to increase for ventilation products, improving the indoor climate and reducing the energy consumption. We have developed some quite exciting products in this area, and we continue to invest in R&D and product development to launch new products in this area. The investment program, I can confirm that it is proceeding according to plan, and we continue to implement it at a high pace.
I mentioned already acquisitions. I believe we have a very interesting acquisition pipeline, and there will for sure be more acquisitions to come. This is a very relevant growth driver for Lindab going forward. Further on sustainability: in the annual report that was just released, we communicated our updated sustainability plan, including the outcome for 2021. We're also doing a pre-study on science-based targets that will form the base for our continued work to lower our emissions. Fossil-free steel is one important activity in this plan.
We would now like to conclude the presentation with some highlighted activities on the next slide, upcoming events. Slide 11. Our Annual Shareholders Meeting is held on May 12 at our new head office in Grevie. It will be a physical meeting, and we are looking forward to meeting our shareholders in our nice new head office and Experience Center. It's a meeting designed according to the Board of Directors' proposal. The first dividend of SEK2 will be paid on May 19 and the proposal is to pay-out SEK4 in total, but shared on 2 occasions, one in May and one in November.
We're also very pleased to welcome investors to our capital markets event in Grevie, our head office on June 20. The first half of the day will include a factory tour and product demonstrations on site in Grevie. In the second half of the day, we will have presentations from Lindab management and also from one of our largest customers. The presentations will be possible to follow online, including questions.
With that, we thank you for listening and open-up for questions.
[Operator Instructions] Our first question comes from Carl Ragnerstam, Nordea.
It is Carl here from Nordea. A few questions from my side. Firstly, with, of course, the ongoing inflation in the construction industry, and of course, everywhere else for that matter. But have you seen customers postponing projects or post ongoing projects into cost overruns et cetera? Is it too early?
We have not seen those signs yet, but one should maybe add that we are not -- if we talk about the ventilation part, we're a little bit later in the cycle when our products are installed in the building and we read occasionally in the newspapers that there are some hesitations about starting new projects. But overall, we see very strong building activity today. So we have not noticed anything for Lindab yet.
Okay. Perfect. Brilliant. And on the margin uplift of 250 basis points year-over-year, how much would you say is the pricing effect of that?
Indirectly, there is some pricing effect because of course if your top line or your sales reaches a higher level thanks to this type of inflation, there is of course, more, more money on the top line to cover your fixed costs further down in your P&L. So there is help from the price increases, but it is absolutely not the only explanation. We have managed to strengthen gross margins because we have improved efficiency and part of this is, of course, the investment program that we have been working on now for the last 3 years. I believe we are also taking a little bit of market share because we are a reliable partner who can deliver when there is shortage of material and when others are struggling.
We are also seen as a very sustainable partner. We are not sourcing material from Russia, for example. We haven't suffered any consequences from having to shift suppliers. So I think that we are seen as a very clean and sustainable and ethical partner to deal with.
Perfect. And in terms of the recent steel price upticks, would you say that with the price increases you are implementing in May are on par with those, or do you need even further price increases when we're entering the summer period, or...
Price increases that we implement now, they reflect the quarter 2 material pricing from our suppliers. We don't yet know the quarter 3 prices. We know that we have guaranteed availability of material, but the exact prices will be determined later. So yes, we are making necessary adjustments of the prices to our customers now and we try to do that every month basically. But what they would look like in the third quarter and in the fourth, that is too early to say.
But I guess your contract prices you are buying from, they come with a lag to the spot price, right? So your Q3 buying prices might be up versus the Q2 prices. I guess then the third or second price increase in summer might be necessary, or...
If it is necessary, then we will implement it. We do not have the possibility to absorb major price increases on steel. We have no choice but to forward them on. So we will do what we need to do.
And in terms of Felderer, which you acquired, do you know if they have the same pricing discipline as you have with regards to steel prices?
They are a ventilation wholesaler. They are not -- well, they have production, but it's relatively light production and only a smaller portion of it. So the nature of their business is a bit different. They buy and resell. So if they have the same price as business, we have -- I will find out tomorrow; that is when we will start to talk about that. But they are good business people, and they have a wholesaler pricing discipline. That is for sure.
Yes. So you are not overly concerned there. And in terms of -- the final one is regarding the investment program. You said that one-third is implemented right? And is it fair to assume that the return on investments is somewhat lower as we go, as I guess you're making them more attractive investments earlier on, or...
I understand the question. It would be natural to think that way. And I think on say, an annual average, it is probably true. They might move from average payback 2.5 years and then to 3 years and then to maybe 3.5 years. But we are still talking short payback times for machine equipment. But you also have a situation where if you want to build a new factory, for example, in order to increase output in a certain region, first you need to build and create the building.
Payback of that is difficult to calculate. But before you've done that, you cannot install machine equipment. Once you install machine equipment, that payback is extremely short. So it is a bit mixed, but most likely seen over the course of this 5 or 6 year program, it will be more and more difficult to find returns that are as attractive as we could in the beginning. And that is also why we are tapering down the program gradually now until 2025. So we have the same strict requirements on the investments today as we had when we started this program in 2018.
Our next question comes from Douglas Lindahl, DNB Markets.
Look forward to the CMD this summer and also gain some feedback from your Felderer meeting tomorrow. But coming back to your sort of forward-looking statement. In your CEO comments, you seemed a bit cautious. And I guess you've said that a bit more during this call, but just to clarify the cement issues that are ongoing in Sweden, do they cause any concern for you or have you had that in consideration when writing your uncertainty comment, so to say? That's my first question.
I did not have a cement issue in Sweden, in particular, in mind. I'm looking more at the European picture. And of course, seeing what happens to energy prices, construction material prices, interest rates, it would be natural to assume that there is a risk that you will have a slower activity in the construction sector. But other people are more skilled to make forecast about that. I think it is prudent for Lindab management to have a little bit conservative view here and be prepared if demand should drop by a few percentage points in the next 3 years. I'm hoping it will not and I'm hoping that we will -- by gaining market share and being strong will have good sales. But surely, there must be some risks in this area.
No, I just wanted to sort of isolate that and see if that was any concern for you or if that was the reason for your [indiscernible].
If the cement production in Sweden stops, then it is a concern, not only for -- it's a concern for the country.
Okay. Of course. And on growth in Profile Systems, I think you mentioned that Sweden was doing well, Sweden is 50% of that, so roughly what can you say about the other 50%?
We've had very good development in Profile Systems in most of the markets, I must say, very, very strong start of the year. So Norway has strong growth in Central Europe, but Sweden is the engine in our purpose. If it goes well in Swedish operations, then the Profile Systems, they are doing well.
Okay. And just to come back on your M&A opportunities here in 2022, I mean, I don't expect you to disclose the pipeline, but what sort of products or geographies or what sort of ticks your interest, I would say, can you give some sort of clarification on that?
Rather than expanding geographically in the periphery, we prefer to make our net record of geographical sites more dense. So we are looking to grow almost inwards rather than out. So we are finding the local white spots where we can strengthen our position. We are looking for products that can do kind of the same, meaning they will fill some spots in a product program that are a little bit white or soft today. The ventilation products in Europe, you have many different national standards, you have many different preferences. So you can be very strong with a product in 10 countries, but in some other countries that product doesn't -- isn't the norm. So combining the products and the geographical approach, you will find these spots that you need to improve and that is what we're trying to do. And this is mainly when we talk about these, say, smaller-to medium-sized companies. And that is the main focus for Lindab right now.
Okay. Coming back on products and product development, you hinted on that a bit. But can you give some examples of which type of products you're focusing on? I'm guessing energy efficiency into products like the Ultra BT system, for example, UltraLink, is that where you're seeing more opportunities or...
The Ultra BT is, I think it's an amazing product. So basically what you can do with that is you can take a ventilation system in an existing building, let's say it's a 20, 30-year old building, the ventilation system is not very efficient. It's a constant process, meaning the fans are working hard to push out air into the building at a constant pace.
In the modern building, you do a demand control ventilation. So you direct the flow to the rooms where it is needed through testing sensors and temperature [indiscernible]. And with the Ultra BT, you can actually make an old ventilation program new and smart. You can transform it from a constant process to a demand control one in a very simple way because you cut out a piece of the duct system, you install a very smart measuring device, measuring the ultrasound, the air flow and then the quality of the air.
And then with the control valves you use, you allow more or less air to flow through different parts of the building. We have measured energy savings in the ventilation system from this up to 70% compared to a normal system. So without having to rip-out all the old equipment, you can do this in a very surgical way and the payback is fantastic. So this innovation is receiving a lot of interest from property owners in Europe who see this as a very good -- as a shortcut to achieving high savings quickly.
So would you say that this is sort of a great example of a product category where you see development opportunities branching out of it?
So many millions of buildings in Europe that have to be upgraded. So you need to find these various smart solutions have to do about in the existing systems, because there's no way that we will be able to keep this kind of renovation pace needed to reach the climate [indiscernible] out of that. So here I think Lindab plays a very important job because the measurement devices and control in that system will be key to achieve this.
Our next question comes from Sofia Sörling, Carnegie.
And sorry if repeating any previous questions. I'm having some technical problems here. But let's start. So about demand, similarly as you have secured material and delivery capacity, do you believe your customers have done the same during Q1 and that it might dampen demand in Q2?
Sofia, do you mean that they might have built-up a lot of stock? It's difficult to hear. If I assume that your question is if there can be some stock effects with our customers, the answer is no. I don't think that our customers have built up big stocks during Q1, for the simple reason that this is extremely difficult and expensive to do so. We have tens of thousands of different articles, and they don't know what they need 2 weeks from now. So the answer is no.
All right. And also a question about your profitability target now that building system is fully divested. And you are now by far over-exceeding your target of minimum 10%. Is your guidance to reach above 10% going forward or can you give us some color on that?
We are very pleased to be well above 10%. It is a relatively new phenomenon in for the Lindab Group. We've struggled for many years to reach it. And the Board of Directors updated our financial profitability targets in September last year when we announced that we were going to divest [indiscernible]. If we continue to perform at a high profitability level, I'm sure that the Board will look again at this time. However, [indiscernible] stay about 10%, maybe should be on that over the year as lower rather than the target. And it allows some flexibility to make acquisitions where, the Felderer acquisition, for example, it is Felderer is a company making less than 10% operating margin. We will have to work on that and improve their margins. So they can be from acquisitions and dilution of margin. But we are not seeing that this target here is limiting us in any way today.
All right. And my last question is about new regulations. So you're operating in several different countries. Have you seen any new potential regulations that would give some government support for, for instance that will boost your sales of type of products to, I mean, government support related to energy savings in buildings that actually would support your sales going forward?
There are many. I think one of the most prominent countries in this area is Germany and that is why I'm extra happy that we are close to tripling our sales in ventilation in Germany, because there is a lot of state subsidies and a lot of focus coming over. But I know that in many other countries, there are also programs to improve, especially energy efficiency. And now with the energy crisis caused by Russia's war on Ukraine and the risk that there will be no gas deliveries and we'll have to cut down energy consumption, I am very convinced that all governments in Europe will do a lot more to reduce energy consumption in their countries. I mean buildings represent around 40% of energy consumption, so this is an area that they have to address.
[Operator Instructions] We have no further questions. Dear speakers, back to you.
Then we would like to thank everybody for listening, and we wish you a nice day. Thank you.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for attending; you may now disconnect.