Lindab International AB
STO:LIAB
Earnings Call Analysis
Q4-2023 Analysis
Lindab International AB
Amidst a challenging market climate, Lindab has delivered sturdy fourth quarter results with the highest sales in its history. The growth in net sales was moderate at 2%, impacted by a 5% dip in organic growth that reflected the prevailing market sentiment. However, the ability of the company to increase its operating margin to 8% and push the operating profit to SEK 261 million, up from SEK 244 million, demonstrates resilience and operating efficiency.
Contributing three-quarters of Lindab's business, the Ventilation Systems unit exhibited tenacious performance, achieving record Q4 sales driven by structural growth and favorable currency impacts. In contrast, Profile Systems, with high stakes in the slowing Swedish market, adjusted operations to the changing landscape, managing a satisfactory quarter given the circumstances.
Lindab's cash flow has reflected strength over five consecutive quarters, climaxing in a quarterly high of SEK 589 million. Concurrently, the annual dividends proposed increased to SEK 5.46 per share, marking a 4% hike from the previous year and exceeding the company's dividend policy, indicating a solid financial foundation and a commitment to shareholder returns.
The company's foray into the year surpassed SEK 13 billion in total sales, with 10% of this growth stemming from recent acquisitions. Despite organic growth retraction of 9%, operating margins nearly reached the targeted 10%. Adapting effectively, the Ventilation Systems sector still recorded a commendable operating margin of 10.1% for the year even as Profile Systems grappled with nearly a 20% volume decline amid falling market demand.
Though the European ventilation market saw an estimated 5% decline, it displayed relative consistency due to the requested energy-efficient systems and rise in renovation activities. However, the Swedish market was more volatile, with a significant 20% drop for Lindab's Profile products, although this has now begun to stabilize. Lindab anticipates a weak installation market at least through the first half of 2024, with the potential for an upturn if interest rates decrease.
As Lindab anticipates continued market challenges, it has reduced its workforce by 8% to align with demand levels, signaling a proactive approach to efficient management. The company remains focused on maintaining profitability amidst external pressures, emphasizing proactive cost control and the pursuit of growth opportunities through acquisitions. With a robust plan tailored for expansion and adaptation, Lindab is poised to continue its trajectory toward its 2024 goals and beyond.
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Hello, and welcome to this call. My name is Ola Ringdahl. I'm the President and CEO for Lindab Group. Next to me, I have our CFO, Lars Ynner.Lindab ended the year reporting its highest fourth quarter sales ever. Net sales increased by 2%, but organic growth was minus 5% due to the current market situation. The operating margin improved compared to the same quarter the previous year. The operating margin reached 8% for Q4 and the operating profit increased to SEK 261 million versus SEK 244 million the previous year.Business area Ventilation Systems, which represents around 3 quarters of Lindab's total business, at the solid development and also reported its highest sales ever for a fourth quarter driven by structural growth and currency.Business area Profile Systems has high exposure to the Swedish market where construction activity is still slow. Profile Systems has adjusted the business to changing market conditions and reported a satisfactory quarter given the circumstances. Lindab has had a strong cash flow for 5 quarters in a row now, and cash flow from operating activities was a record high SEK 589 million in the quarter.Now, let's move on to the full year highlights on the next slide. Full year sales surpassed SEK 13 billion for the first time, which is 6% higher than the previous year. Organic growth was minus 9%. Our successful acquisition journey continues and the acquired companies contributed with 10%. We reached 9% in operating margin for the full year, slightly lower than our financial target of 10%.Demand within Profile Systems, particularly in the Swedish market declined faster than we could react and compensate for, and this explains the deviation versus our group target.Operating profit was SEK 1,178 million and we didn't report any one-time costs during the year. Business area Ventilation Systems has adapted very well throughout the year and reported an operating margin of 10.1% for the full year, and that we are very pleased with.Profile Systems, despite a very tough market reached 7.2% in operating margin, which is lower than the previous year, but still on a solid level considering the volume decline of almost 20%.Cash flow from operating activities was record strong in 2023. It more than doubled to SEK 1,711 million compared to SEK 691 million in 2022. Thanks to the strong cash flow, the Board of Directors proposes to increase the dividend to SEK 5.46 per share. Overall, 2023 was a satisfactory year for Lindab, given the very challenging market conditions. We managed to defend our gross margins and our market shares despite the lower market demand. Lindab is in good shape.We move on to a little long-term view on the revenue development. Lindab's total revenue has been growing every year with the exception of the COVID year in 2020. And the main growth driver is Ventilation Systems, where sales has more than doubled since 2015.In 2023, sales for Ventilation Systems increased by 15%, and acquisitions contributed positively by 13%. Organic growth was negative by 4%, and currency was positive by 6%.Pricing effects, we've had that during the years, but for 2023, there were no positive price effects versus previous year. The European construction activity has slowed down as a result of high inflation, increased interest rates, and continued turbulent global conditions. The market in Western Europe, which is Lindab's largest Ventilation market, was relatively stable with growth in important markets such as France and Italy, but we did notice a weaker market in Germany during the second half of 2023.If we look at Profile Systems, roughly half of the business is in Sweden, where the market has contracted significantly. For 2023, the organic sales growth for Profile Systems was 19%, but it would be fair to point out that the comparison numbers in 2022 were on a historically high level. Our assessment is that the demand has somewhat stabilized for Profile Systems on this lower level.Now, let's look at the operating profit development. The operating margin follows a seasonal pattern over the quarters and Q4 is normally our weakest quarter from an EBIT and EBIT margin perspective, due to the fewer business days.For Profile Systems, we can add that the months with winter weather also leads to a natural decline in sales during the period February to March. I recognize that the seasonal patterns have become a bit blurred in the past year, since the COVID pandemic in 2020 and the following turbulence macroeconomic situations since then. But it would be fair to point out that, especially for Profile Systems, Q4 and Q1 are low season months with lower sales and consequently lower profitability.Since the third quarter of 2022, fluctuating raw material prices have put pressure on our gross margin and consequently on our operating margin, especially so for Profile Systems. We have previously communicated that we would have these adverse effects during several quarters.From the third quarter of 2023, we can see that the negative raw material effects have been near 0 for Ventilation Systems. In Profile Systems, some adverse effects were noticeable also in Q3 and Q4 of 2023, but should from now on be near 0 from Q1 2024.Despite weaker market conditions in Europe, Ventilation Systems have had a healthy development of both EBIT and operating margins in 2023, reaching the 10% operating margin targets of the full year. The demand for energy efficient Ventilation Systems has partly offset the downturn in construction activity.Business area Profile Systems was affected by significantly lower demand in addition to the mentioned raw material effects. Profile Systems has now stabilized its margins during 2023 and we are very pleased to see that. We are not satisfied with the profitability level, though, and we will continue our efforts to increase profitability for Profile Systems.During the second quarter of 2023, Lindab have initiated a cost savings program in all parts of the group to strengthen earnings. The actions had full effect from October of [ 2020 ], and the annual cost saving rate is SEK 150 million.In addition to the cost saving activities, we are reviewing if there is a need for further structural changes to improve Lindab's profitability margin and to reduce the cyclicality of sales and earnings.I now hand over to our CFO, Lars Ynner, to guide us through our financial position.
Thank you, Ola. Lindab had continuous strong cash flow during the fourth quarter as cash flow from operating activities increased to SEK 589 million compared to SEK 527 million in the same quarter last year. Lindab has delivered a strong operating cash flow for all quarters of the year, which has resulted in a record high cash flow for 2023. As cash flow from operating activities increased to SEK 1,711 million stake for the full year, compared to SEK 691 million in 2022. The strengthened cash flow from operating activities was primarily related to changes in working capital, due to less capital tied in stock.Our free cash adjusted for M&A activities increased in the quarter to SEK 570 million versus SEK 446 million in Q4 last year, and for the full year an increase to SEK 1,424 million versus SEK 346 million in 2022.If you now look into our net debt situation, net debt has decreased compared to previous year and amounted to SEK 3,264 million of which SEK 1,370 million is relating to leasing liabilities. The net debt EBITDA ratio was at the end of the year 1.9 versus 1.6 end of 2022. The increase is a result of a lower EBITDA in the last 12 months.Last quarter, we introduced a new supplementary definition in KPI, financial net debt and financial net debt EBITDA, to clarify our financial position and our net debt. Financial net debt, EBITDA, is the average financial net debt in relation to EBITDA, excluding IFRS 16, excluding leasing liabilities and pension-related items. This ratio is at 1.4 end of December, and give us the possibility to active and focus our continued growth, acquired growth. We also continue to focus on activities to strengthen our cash flow from operating activities with a special attention to our stock management.I'm now giving back to Ola to take us through the next presentation.
Thank you Lars. We are reviewing the financial targets that we have for the Group. We had renewed and updated the targets set by the Board of Directors in September of 2021. And the financial targets were the ambition level was raised. Increased focus on the core business, better efficiency and higher margins have improved the conditions for profitable growth. And Lindab and Lindab's Board of Directors wanted to aim higher.In 2021, the new growth target was set to exceed 10% sales growth annually and about 1/3 of the growth is expected to come from organic growth and 2/3s from acquisitions. Now, as you can see in 2023, we did not fully meet that financial target. We did add 10% sales growth through acquisitions, but the organic growth was negative during the year, which led to that we missed that target. In 2021 and 2022, however, we see very strong numbers.Further acquisitions going forward in combination with the market that will improve over time will bring us back to higher than 10% annual growth again. The operating margin target was also raised during the autumn of 2021. The adjusted operating margin should now exceed 10% every year as a floor and not a target.We believe that Lindab should be able to reach this 10% operating margin also in a weaker market, and we were quite close to achieving the target in 2023, despite very tough market circumstances. The outcome of 9%, we are still proud to have achieved it, and the main reason that we did not reach the whole way is that the market declined for Profile Systems, especially in the Swedish market, was larger than we could compensate for in time.Several improvements have been made during the year to strengthen Lindab and our possibilities to reach the target, and I'm convinced that this is a possibility to reach the target in 2024. The net debt to EBITDA has already been covered by Lars, and as you can see on the slide, we are on the right side of the target of not exceeding 3x EBITDA.Then, we'll switch over to dividend and dividend development. It is facing management and the Board and I believe also for our shareholders to see the development of the dividend from Lindab over the past years. And in light of the strong cash flow in 2023 and considering Lindab's financial position, the Board of Directors proposes a dividend of SEK 5.4 per share. This is an increase by 4% versus last year.The dividend will be split and paid out on 2 occasions, in May and November, just like in previous years. The dividend represents 49% of net profit and this exceeds the dividend policy of at least 40% of Lindab's net profit. Lindab is and should be a shareholder-friendly company that both invests in the future development of Lindab as well as rewarding its owners.Now, let's shift focus from the numbers to how we continue to build a stronger Lindab. We take a little long-term perspective first, how Lindab has developed through different phases and where we are heading now.Looking back at the period starting 2008, we can see that after the financial crisis in 2008, Lindab had to focus on reducing debt. It was a tough period for the company. Few investments were made in the business and the generated profits were used to get Lindab's balance sheet back on track. Revenue around SEK 7 billion, EBIT margin around 6%. And slightly more than half of our revenue came from the Ventilation business.I joined the CEO of Lindab Group in 2018, and the company was in better shape and the balance sheet as well, but still suffered from under investments and had several loss-making units that had not found their way yet. We managed to increase profitability by focusing on fewer markets and product areas. Our presence in 32 countries was reduced to a stronger presence in 20 countries.One business area was divested and we grew the share of the Ventilation business to around 70% or today 74%. The increased profitability allowed us to launch the largest investment program in Lindab's history with the objective to strengthen Lindab's efficiency, capacity and possibilities for profitable growth.In 2020, we started to acquire high quality companies to strengthen our offering and market share in the core markets in Europe focused on Ventilation. Now, we're at the end of the investment program and the company has grown to SEK 13 billion in sales. With a continued focus on profitability we can redirect or generate the profits and cash flow to increase the growth speed.The target for 2027 is to reach SEK 20 billion in revenue, with at least 10% operating margin, and this will be achieved through a combination of organic and acquired growth with M&A as the main driver. We are building the leading Ventilation company in Europe.In the short term, we have a number of areas that we will focus on to drive Lindab's profitable growth. We will continue to implement actions to reduce our sensitivity to market fluctuations, and build an even more robust campaign. Product areas and geographies that do not meet our high standards of organic growth possibilities and stable profitability will be evaluated.We will also continue with cost control and continuous improvement to strengthen our profitability. We see that in markets where we have a strong market position, we managed to find synergies and increase our profitability. That is why it's important to continue to develop our product offering, as many markets have local preferences and building standards. We also see the potential of improving our current product offering, sharpening the functionality and production efficiency.In early 2024, we added a new product area for decentralized Ventilation to Lindab, which is yet another way of increasing our product competitiveness. I will talk more about that a little bit later.The investment program has been ongoing since 2019, and it's essential to follow-up that the initial plan is followed and that necessary actions are taken to get the full potential, in terms of efficiency improvements from each investment.And sustainability, a focus area for Lindab, where we are at the forefront. Both legislation and customer demands are developing very quickly, and we are making sure through a multitude of actions that we stay at the forefront. And some examples, including products made out of recycled steel and even out of fossil free steel are proving that Lindab is the leader in this green development.Finally, the first acquisitions have now been part of Lindab Group for more than 3 years, and we are fine tuning our support to the acquired companies to ensure that we capture the attractive synergies that we identified.Now, let's take a closer look at some of the areas of this slide starting with the investments. Lindab's investment program has been at the top of our agenda since 2019. It is very rewarding to see, how the benefits become more and more visible. We see results in higher production efficiency, higher capacity and the safer working environment.We are approaching the end of the accelerated investment program now, and the investment level is gradually declining and is expected to be around SEK 250 million annually as from 2025.From 2019, until now we have invested around SEK 1.7 billion. This is an impressive number, and it's really future-proofing Lindab for many years to come. And on the picture on the slide here, you can see one of the latest activities where we are making sure that we will have enough capacity to supply Northern Europe with ventilation -- ducts and ventilation fittings for the next 20 to 30 years, when we are building what we call press hall #2. It's a major expansion of our facility in Grevie where Lindab was founded in 1959. In 2023, the investments amounted to SEK 294 million compared to the year before when it was SEK 359 million. So this is a reduction of approximately 20%.Another important focus area is acquisitions. Lindab's strategy is to acquire well-managed companies that complement our offering in selected regions and product areas. The acquired companies continue to operate independently under their own brands, while at the same time benefiting from Lindab's expertise, sales network, sourcing agreements, et cetera.In 2023, we did 5 acquisitions and in the beginning of 2024, we have signed 2 more acquisitions. If we look at these latest 3 ones, in October 2023, we acquired the British ventilation company HAS-Vent, one of the leading manufacturers and distributors of ventilation products in the U.K. The company has its own production of ventilation ducts, and they're also a distributor of a wide range of ventilation products. They operate through 10 branches in the U.K. and have around 105 employees and an annual turnover of approximately SEK 280 million. The operating margin is higher than Lindab's average operating margin.In January, we took a step across the Atlantic Ocean and signed an agreement to acquire Vicon in the U.S. We already today manufacture and sell different types of solutions to automate ventilation production. As a ventilation installer, you can buy certain products from Lindab, but many installers would like the option to manufacture ducts, ventilation ducts on their own, close to the customer, as ducts are bulky and expensive to transport.Vicon has approximately SEK 280 million in revenue, and with that, we are doubling the global sales from these types of automation solutions. With the acquisition, we are also establishing a stronger position in the U.S. where we can explore and learn about the market for future growth.And in January, a hectic month for our M&A team, we also signed an agreement to acquire Airmaster. This is Europe's leading manufacturer of decentralized ventilation for non-residential buildings. With the increased focus on energy efficiency and renovation of buildings, there is a need for solutions causing minimal impact on the building. Airmaster offers decentralized ventilation, which is especially suitable for renovation projects.By installing fresh air ventilation in each room, there is no need for ventilation ducts or a central system. The technology is particularly suitable in properties where ducting can be difficult, such as in older buildings or where only parts of the building is being renovated.Airmaster's newest product, the AMX, is also equipped with an integrated heat pump that enables both cooling and heating for optimal indoor comfort, a very exciting product innovation. Airmaster had a revenue of approximately SEK 540 million in 2022 and has an impressive track record of growth. They've grown more than 10% annually since 2015. Their operating margin is higher than Lindab's average operating margin.With Airmaster, we are laying the foundation for a new product area and additional acquisitions are likely to follow. The aim within this new product area in Lindab Group, the aim is to reach SEK 2 billion in sales from decentralized ventilation by 2027.In total, we have added approximately SEK 3.5 billion in revenue through acquisitions since 2020, including the latest ones that are still yet to be closed. More than 90% of this SEK 3.5 billion is coming from the ventilation business. We have also divested business with a turnover of SEK 1.3 billion since 2020. The largest divestment was the business area, passed from Building Systems. So an active M&A agenda and an interesting pipeline ahead of us as well.Let's conclude this presentation with some comments about the market situation. Not an easy topic, but I will try to make some comments. So during 2023, we estimate that the European ventilation market has declined by approximately 5%, different in different regions. The Nordic region, particularly Sweden, has contracted by more than 5% but we've seen better stability in Western Europe and in the Southern parts of Europe we've actually seen continued growth in 2023. So the landscape looks a bit different depending on where you are.And the ventilation market overall, I think, has shown relative stability due to the increased renovation activities and demand for energy efficient Ventilation Systems. Our assessment is that the European installation market will remain weak at least during the first half year of 2024. More difficult to judge what will happen after the summer.If interest rates are lowered early this could trigger increased demand during the second half of 2024, but it is still unknown. We are prepared in Lindab for a continued weak market and we have adapted our resources to the current demand level.If we look at the total reduction of personnel within Lindab and measure that against October of 2022, we have reduced the workforce by approximately 8%. So we have taken quite many steps when adjusting to the new market demand situation. Profile Systems have a high exposure to the Swedish market, and the construction activity really slowed down, starting in the autumn of 2022, and the decline accelerated during the month of March and onwards in 2023.Year-to-date 2023, that was, say in the full year, we estimate that the market for Lindab's Profile System products have declined by around 20%. But now we see that the situation is beginning to stabilize on this new lower level. We have adjusted our capacities to the current market situation, and the increased cost reduction program is showing the desired results.And finally, maybe a repetition of our near-term priorities. Naturally, in this economic environment, we are working very actively with proactive measures, cost measures, pricing, et cetera, especially within Profile Systems, but also in Ventilation. We are continuing to reduce our working capital. We have released a lot of cash flow from our working capital, but there's still more to be done to fine-tune the inventory, et cetera.We expect continued good cash flows during the coming quarters. And on the acquisition topic, we continue to pursue attractive acquisition opportunities within Ventilation. It is still a fragmented industry in Europe, and there are plenty of very attractive opportunities to pursue for Lindab when we have a very interesting pipeline.So all-in-all, we have a clear plan for how Lindab will continue to develop in a positive direction. And after the transformation of the business in recent years, we believe that Lindab is in good shape, and we are now ready to enter the next phase of growth towards our targets for 2027.We now conclude the presentation, and we open-up for questions. Thank you.
[Operator Instructions] The next question comes from Sofia Sörling from Carnegie.
Sofia Sörling here from Carnegie. Can you hear me?
Yes, we can hear you.
Great. And thank you for your presentation. So my first question is about price increases expectations for 2024. In general, how easy or difficult would you say it will be to increase prices towards customers? And if you can give some -- give your view on competitors' behavior within this space?
Well, thank you, Sophia, for the question. Pricing is always important, and you can always do more in fine-tuning your pricing. However, in a low-volume market where we have many competitors fighting for the lower volumes, it is of course more difficult to implement more general price increases.Lindab's position right now is that we aim to have stability in the market, give our customers and the contractors, et cetera, stable conditions. So we are trying to leave prices unchanged as much as we can. And we believe that we do -- improve internal efficiency can improve our profitability with, say, constant prices. However, of course, if external factors like raw material prices, transports, et cetera, start to increase again, we will, of course, have to compensate by increasing the prices.
And I noticed the declining demand of Ventilation in Germany. Could you give us some more details on the main reason for this decline, particularly in Germany, since you have quite strong sales in Germany in the previous quarters?
Absolutely, we have had a very good development in Germany in the past years and we are comparing to high sales numbers when we say that we see somewhat of a decline. I think there are 2 main reasons for less market confidence in Germany. The first 1 is that many of the subsidy programs that were implemented in Germany after the COVID pandemic to make sure that people had cleaner air indoors, they have ended. The politicians cannot agree on the way forward. So, there are some types of the programs that have ended and that have been funded totally. This is volume in general.And the second reason is that, just like in Sweden, the higher interest rates have led to a lower activity in residential construction. Now, Lindab is not so exposed to the residential segment, it's not hurting us so much, but of course higher interest rates they are affecting the general construction industry also in Germany.
All right. Okay. And some questions on your most recent acquisition. So first, maybe if you can give us some more details on why decentralized ventilation is a good fit to Lindab Group.
I mean, if you ask people who have been in Lindab for a long time, it's always better to have a duct system in the building. There are many advantages to a central system in a large building, but if we look at the number of buildings in Europe from the 1960s, '70s, '80s, schools, hospitals, office buildings, elderly care homes and so on. It can sometimes be impossible or very expensive to evacuate those places really refurbished and put in central ventilation. Sometimes you need a product that is more tailor-made for renovation purposes and you can also you don't have to evacuate the building, you can actually install and keep the tenants or the people in the building.So, Airmaster, they have come up with a very smart product range addressing acceptivites. You can take 1 room at a time or 1 floor at a time and install these very smart and energy efficient ventilation products. They bring in fresh air, they make sure that we don't release hot air and save energy for you, and you really get a good indoor climate at the fair cost and short installation time.So, sometimes 1 system is the optimal solution, sometimes the other system is better. I think the credibility for Lindab Group when we say that we can actually offer the total range of suitable solutions. It's great.
All right. Okay. But it seems like the R&D spend is higher at Airmaster than in, yes, given this product segment. How do you compare to Lindab's traditional ventilation offering and how often you need to re-innovate products in order to be competitive within this decentralization ventilation and how would you describe the competitive landscape within decentralized ventilation compared to the traditional product offering by Lindab Ventilation?
I think the centralized ventilation has been around for a longer time. It's a market with more permanently established technologies, and that means that the R&D spend is on a lower level versus sales than in these younger and fast developing, fast growing technologies like Airmaster is representing. It is very true that they have a relatively high R&D spend. The 2 owners and founders have been and are extremely passionate about technical development and technology in the market. This is not something that we will stop doing. We encourage Airmaster to continue to build and improve advanced R&D and on new products. We have shown impressive profitability despite quite heavy R&D costs. We aim to continue in their spirit and one of the Founders/Owners will remain as CEO of Airmaster and continue to lead that as he has successfully done up until now.So, I'm quite excited to bring in this technology in Lindab Group, and I'm sure we can also have very interesting R&D exchange between the different R&D centers we have throughout the Lindab Group.
All right. And perhaps my final question then it's on divestment actually, and if you can give us some more details on how this process is going in evaluating potential divestments within Lindab Group, and if you see any potential buyers?
There is no formal process, if you're referring to any discussion with somebody, but it's still in the evaluation stage. Right now, the market conditions are not perhaps the absolute best to try to divest assets. But we are -- we are looking at reducing the difficulty both in sales and earnings, and what we have seen now in the past 18 months is that, we have in some parts of our businesses, we have vacations and results in sales that are too big, and we would like to bring down the volatility now and to reduce the volatility. So, yes, we are reviewing some with -- whether we should keep them or not, but I don't have anything to communicate at this moment.
[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Thank you very much on behalf of Lars Ynnerand myself we would like to thank you for listening into this call. I wish you a nice day. Thank you.
Thank you.