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Edited Transcript of LIAB.ST earnings conference call or presentation 18-Jul-19 8:00am GMT

Q2 2019 Lindab International AB Earnings Call

BÅSTAD Jul 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Lindab International AB earnings conference call or presentation Thursday, July 18, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Malin Samuelsson

Lindab International AB - Executive VP & CFO

* Ola Ringdahl

Lindab International AB - President & CEO

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Conference Call Participants

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* Carl Ragnerstam

Nordea Markets, Research Division - Analyst

* Douglas Lindahl

Kepler Cheuvreux, Research Division - Analyst

* Kenneth Toll Johansson

Carnegie Investment Bank AB, Research Division - Financial Analyst

* Marcela Klang

Handelsbanken Capital Markets AB, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen welcome to the Lindab Q2 Report 2019. Today, I'm pleased to present CEO, Ola Ringdahl; and CFO, Malin Samuelsson. (Operator Instructions)

Speakers, please begin.

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Ola Ringdahl, Lindab International AB - President & CEO [2]

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Hello, everyone, and welcome to this call. My name is Ola Ringdahl, and I'm the President and CEO of the Lindab Group. I'm sitting here together with our CFO, Malin Samuelsson.

We move to Slide 2 and the agenda. We will follow this agenda during today's meeting. I'll not go through it here but instead, start with the overview on Slide #4. So some key highlights and summary of the second quarter of 2019. Net sales increased by 7%. 5% was the organic growth. Adjusted operating profit increased to SEK 238 million. And the increase in operating profit comes from all 3 business areas, and there were several positive contributing factors. The profit for the period increased to SEK 181 million, which is the highest profit for a second quarter for the Lindab Group since 2008.

We continue our focused work to improve the efficiency throughout the organization, and we are pleased to see that the results start to show. Finally, during April, Lindab acquired all the shares in the company Ductmann Ltd. This business is mainly focused on the production and sale of rectangular ducts and fire-rated ducting for Ventilation Systems in the U.K.

Now we move to the next slide, #5. We have a geographic overview. The second quarter had good sales development in most regions in Europe with the exception of the Nordics. In Western Europe, we had growth of 14%, and the strongest growth in absolute value come from France, Germany and Switzerland. In the Central Europe and CIS region, we continued to see positive sales development with sales growth of 14%. The growth was especially strong in Hungary.

In the Nordic region, we had negative sales development during the quarter, and the decline for the region mainly related to tough comparison versus same period last year, but also fewer industrial building projects since we are now more selective in our project-related business. We try to balance between volume and profitability in all our segments with the clear objective to improve earnings.

Now we move to the financial section, and I hand over to you, Malin.

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Malin Samuelsson, Lindab International AB - Executive VP & CFO [3]

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Thank you, Ola. So we go to Slide #7. We take a look at the group financial highlights, and we see a quarter with continued strong operating leverage. The net sales increased by SEK 177 million or 7%, of which the organic growth amounted to 5%. Net sales were SEK 2.569 million, which is an all-time high for a second quarter. The largest positive currency effect on sales in absolute terms comes from euro, followed by Danish krona, British pound, Swiss franc and Polish zloty. No unit had a negative currency effect.

EBIT increased mainly as a result of sales growth, improved gross margin and improved efficiency. All 3 business areas contributed to the increase in profitability. And as mentioned before, the balance between volume and profitability continues in all 3 segments. This results in an operating leverage of 48% on EBIT, excluding IFRS 16 in comparison to the same period of the previous year. Net profit increased to SEK 181 million compared to SEK 91 million during the same period last year.

So let's have a look at the Ventilation Systems at the next slide, Slide #8. Our business area of Ventilation Systems delivered stable organic growth and improved profitability. Net sales increased by 8%, equal to SEK 111 million. The organic growth amounted to 4%. The largest positive currency effect on sales in absolute terms comes from euro, followed by British pound, Danish krona, Swiss franc and Norwegian krona. The quarter has continued positive sales development in all regions within Europe with particularly strong growth in the CEE/CIS region.

EBIT increased to SEK 163 million, which is the strongest EBIT result ever in absolute terms for Q2 for our ventilation business. The improvement was mainly related to increased volume and increased gross margin. The costs have at the same time been stable, which also contributed to the positive improvement in EBIT. This results in an operating leverage of 45% on EBIT when excluding IFRS 16 compared to the same period the previous year.

We move to the next slide, Slide #9. In Profile Systems, the EBIT improved despite lower volume. Net sales decreased by 6% to SEK 625 million. The organic growth was negative with minus 7%. The sales decline relates to a slowdown in the Swedish market, especially related to industrial building projects and the strong comparison versus last year.

We continue to balance the volume and profitability and especially with regards to our product-related business. The EBIT increased to SEK 60 million compared to previous year's SEK 58 million despite the volume decrease, mainly as the result of improved gross margins and lower operating costs.

Then we move to the next slide, Slide #10, and Building Systems. The business area reported very strong sales while continuing to be on track with the turnaround plan. Net sales increased by 39% and amounted to SEK 384 million, which is an all-time high for a quarter. Organic growth amounted to 34%. The final phase of a few projects with significant deliveries in Central Europe contributed to strong sales development. The largest currency effect on sales in absolute terms comes from euro, followed by Polish zloty, ruble and Czech krona. The EBIT increased to SEK 27 million compared to SEK 5 million last year -- sorry, minus SEK 5 million last year, mainly due to strong volume growth and improved gross margin. The net order intake decreased compared to last year, but the total backlog at the end of Q2 is higher than last year.

And then we move to cash flow on Slide #11. The adjusted free cash flow amounted to SEK 97 million versus SEK 26 million during this same period last year. The improvement in adjusted free cash flow year-to-date is due to higher operating profit, which was largely offset by changes in working capital and higher investments. The net debt, excluding the effects from IFRS 16, decreased to SEK 1.265 billion, and the net debt-to-EBITDA ratio amounted to 1.2 compared to 2 from previous year.

So that concludes the financial section, and I hand back to you, Ola.

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Ola Ringdahl, Lindab International AB - President & CEO [4]

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Thank you, Malin. We move to Slide 13, and some highlights. So some highlights from the second quarter 2019. As I mentioned in April, we acquired the company Ductmann in the U.K., and it is a good and natural step for Lindab to further strengthen our product offering for Ventilation Systems in the U.K. Ductmann is certified for production of fire-rated ductwork systems, which is an important and growing product segment for us. I think the combination of the 2 businesses will provide excellent opportunities to increase the service to our customers in the U.K. The net sales -- annual net sales of Ductmann when we acquired it was SEK 43 million.

Within Profile Systems, we have during the quarter concluded an updated cooperation agreement with the Swedish builder merchant company called Woody, where Lindab will be upgraded to become an A supplier, capital A supplier. This is expected to positively contribute to the sales of Lindab's roof products and rainwater systems. Woody currently have 91 shops nationwide in Sweden.

And for Building Systems, we have during the quarter signed agreements on 3 major orders, each worth more than SEK 10 million. And that's 1 each in Switzerland, Russia and Kazakhstan.

Now we move to Slide 14 and the current focus areas. And those of you who listened to our presentation for quarter 1 will see that the symbols and text are the same this time as well. Our focus areas remain the same, and they will remain the same probably also for the next quarter. We work a lot with decentralization and clarification of accountability. And the P&L responsibility for well-defined business units that's very key for Lindab going forward. We focus on businesses where we can achieve satisfactory profitability over time, and we have increased our emphasis on delivery excellence.

We mentioned last time that we have also increased the pace of investments, and our higher investment level is driving efficiency improvement throughout the organization, and this continues at a high pace.

Now we move to market development on Slide 16. So market development. We analyze the statistics available, as I'm sure many of you do, and we see that there is market growth, but it is forecasted to be at a lower pace. The European economy continues to slow down. Euroconstruct forecasts the annual growth rate in the European construction market to flatten up at around 1% in the coming 2 years. Euroconstruct's updated forecasts from June 2019 only had minor changes relative to the one they released in November 2018, and you can see the difference there in the graph.

The sentiment in the construction market remains good in the CEE region. And -- but we see that it has weakened in markets such as Sweden, Germany and the U.K. We continue to improve our customer offering and our efficiency to remain resilient in a possible future slowdown. So we try to be prepared for all different scenarios.

Now we move to Slide 18. You recognize the summary slide. And to summarize from my side, we are pleased to see that the improvement efforts within the Lindab Group are delivering results on the bottom line. We will continue our efforts to improve our business units at the high pace.

This concludes our Q2 report, and we are now open to receive questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Carl Ragnerstam of Nordea.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [2]

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It's Carl Ragnerstam from Nordea. I have a couple of questions. First of all, in Profile Systems, you reported negative 7% organic growth. How much of that is you phasing out or declining of profitable volumes? And how much is the underlying market? And can you also comment on the calendar effect? And in addition, can you also remind us of the portion of Swedish sales in that segment?

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Ola Ringdahl, Lindab International AB - President & CEO [3]

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We -- when we try to estimate how much is market influence and how much is our own elective actions, we -- our best estimate is that it's half-half of that effect. We are declining orders. We are pushing harder in negotiations, and we are prepared to sacrifice certain volume to be able to lift profitability in the company. That's hopefully an answer to 1 or maybe the 2 first questions you had. Can you repeat the rest please, Carl?

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [4]

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And how much does Sweden represent, I mean, in terms of sales for Profile Systems?

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Ola Ringdahl, Lindab International AB - President & CEO [5]

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We don't supply that detailed number.

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Malin Samuelsson, Lindab International AB - Executive VP & CFO [6]

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But it is an important -- it is the most important market for us.

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Ola Ringdahl, Lindab International AB - President & CEO [7]

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For Profile Systems, the Nordic region is 71% and Sweden is a large part of that. So it’s -- Sweden is a substantial part of the Profile System business.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [8]

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Okay. Perfect. And related to CapEx in the quarter was SEK 80 million. Is that the level we can expect for H2 as well, I mean, given your plans in -- on investing in inefficiency and capacity or should we still expect the ramp-up during H2 and probably into 2020?

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Malin Samuelsson, Lindab International AB - Executive VP & CFO [9]

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I think we can say that we have started some of the investment programs in the factories, and we will see further investments coming through. So in the quarter 2, we have had also an investment in a building, so -- and that was more of a single decision investment. So yes, we can see that -- as we said before that the investment pace is ramping up, so we will see gradually like we described both in the first quarter that, that investment will increase.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [10]

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Okay. But the SEK 80 million level, is it -- is that to expect? I mean as you mentioned that you invested in a building. So if we adjust it for that, what's the CapEx level then, which the building...

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Ola Ringdahl, Lindab International AB - President & CEO [11]

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We don't provide such details. We said last time that we will increase the investment significantly. We talked about it becoming more than 2x the depreciation level and that plan is still valid. And then how much of those investments are actually happening in each and every month, that is more difficult to say. These projects are -- they can have an investment or a time from decision to actual equipment on-site from anywhere between 3 months and 18 months. They are planned over a longer period, and our program is not a 1-quarter program. It is a 3-year program.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [12]

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Okay. And the final one for me, I have probably a broad one, but -- I mean if it's probably no news as the Swedish market is turning more soft. Could you compare Lindab to a few years back, if possible, how resilient you are and what you can do to defend margins in a more soft market?

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Ola Ringdahl, Lindab International AB - President & CEO [13]

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I'm not able to answer that question in a good quality way right now. We will have to make sure that we are resilient. That's the best answer I can give.

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Operator [14]

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Our next question comes from the line of Douglas Lindahl of Kepler Cheuvreux.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [15]

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So a few questions from my side as well. Start off by the Building Systems. If we exclude that exceptional 34% organic growth that we saw in the quarter, which seems to be somewhat of a one-off, judging by your comment by some large projects driving this, what sort of underlying profitability should we sort of look at instead do you think? Or it's this level sort of sustainable level even excluding those large projects? That's my first question.

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Ola Ringdahl, Lindab International AB - President & CEO [16]

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The improvement program, the turnaround program at Building Systems is proceeding according to plan. On top of that, we had very strong invoicing in this period, thanks to a couple of very large projects with significant deliveries in Q2. But the underlying -- there is underlying profitability. Even if you exclude those projects, we are profitable in Building Systems and we follow the plan that we have. So I would say that this gave an extra boost, but it is not the only explanation why we are making positive results in Building Systems now.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [17]

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Okay. So that is a sustainable number, so to say, judging by your answer there, Ola?

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Ola Ringdahl, Lindab International AB - President & CEO [18]

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Yes. If you -- so -- but of course, if -- we cannot expect to have such strong invoicing every quarter going forward. It was an extraordinarily strong invoicing that we want to also make clear.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [19]

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Okay. A comment on -- just a comment on pricing. Did it have any sort of significant impact on profitability levels in the quarter?

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Ola Ringdahl, Lindab International AB - President & CEO [20]

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We are continuing to try to adjust our pricing so that we catch up with what we missed in the last 2, 3 years. So we were not able to compensate for the rising material prices over the past 2 or 3 years, and we have worked very hard during the last 12 months to catch up. We are getting there, and we have on average a higher price level today than we had a year ago. So it is one part of the explanation why our gross margins are increasing, but it is not the only explanation why the gross margins are improving. We also have significant efficiency improvement throughout our production and logistics organization.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [21]

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And would you say that you have fully caught up now in terms of raw materials and pricing?

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Ola Ringdahl, Lindab International AB - President & CEO [22]

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No. I would not say that I think -- but I think the largest steps are probably taken. Now there is more fine-tuning to be done, but there are always things that can be done to make sure that your pricing is on the right level. And we have to be faster in our reaction should there be such raw material price fluctuation in the future.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [23]

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Okay. And just a final question. Thanks for the market development update, which gives a good picture on the longer term, but if we can focus on the very short term for just one second, and specifically maybe for the Swedish market or the Nordics, do you expect that to turn even worse in the second half of 2019 if we look at purely now deliveries?

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Ola Ringdahl, Lindab International AB - President & CEO [24]

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That's very difficult to say, to be honest. We see -- we had a month where strong, good levels in April and May. June, a bit slower. But you also have a calendar effect in June, where there were quite significantly fewer working days in June compared to previous years. So it is a little bit difficult to analyze, to be honest. But we do see some softer signals in the Swedish market at the moment. And I'm not able to say that it's just a short-term blip or if it is something that we can expect to continue in the next 1 or 2 quarters. It's very difficult to say, to be honest.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [25]

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Okay. And just if I can end off with a request. Would still be -- the pro forma figures historically, if you have that it would be excellent. I guess we're getting those as the year ends, but...

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Malin Samuelsson, Lindab International AB - Executive VP & CFO [26]

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The pro forma figures for the quarterly of the 2 new business areas, those are available at the web page now.

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Ola Ringdahl, Lindab International AB - President & CEO [27]

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Both of the numbers on net sales, EBIT and EBIT margin are available from our website from Q3 2017.

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Operator [28]

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And our next question comes from the line of Kenneth Toll of Carnegie.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [29]

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So the new organization that you implemented at year-end, you've had it there for 6 months now. And I saw that there is a change in leadership on the Building Systems side. But other from that, can you talk a little bit how the reception has been and -- yes, the effects of the new organization, please?

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Ola Ringdahl, Lindab International AB - President & CEO [30]

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So it is correct that we have appointed a new head of the Building Systems business area. And that person will start in September. And I'm very pleased. It's a good recruitment. Our existing Director of that business area is retiring from the position now. He's done a really excellent job. And we had to find a successor, and I'm very pleased with the person that we found.

When it comes to how the -- how it has been received, how we have split-up the company, well, I think externally, there are not so many reactions. I don't think that any of our customers really notice how we are divided into business areas. They need Lindab in the local environment, in their local shop, in the -- with the local salespeople, and we have strong national and local organizations country by country. In some places, they represent mainly the ventilation partners, in some, they represent the Building Systems part, et cetera. Some shops have more than one assortment. But I don't think that the customers really will notice much. If anything, there will not just a positive effect in terms of product development, product assortment and so on, but not yet. That will take a bit longer.

I think it's probably right now more on the internal side where we have the positive effect, much clearer responsibility of each key manager, what am I responsible for? What are my tasks? What is the strategy? What's my action plan for the coming months, et cetera? That's right. But I think we see most of the effects right now. Over time, I hope that we will also be able to sharpen the product portfolio and marketing strategies and sales techniques, et cetera. But that takes a bit more time.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [31]

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Okay. And you feel that your -- the -- yes, the organization is in place now to make more acquisitions as you're right going forward?

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Ola Ringdahl, Lindab International AB - President & CEO [32]

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I think so, yes. I think we have spent some time now to get in shape to start several important action areas, including the investment -- necessary investment programs after 10 relatively tough years, where we have not invested as much as we would have liked to. We have some catching up to do there and some very attractive investment opportunities in terms of payback.

So we need to get the fundamentals in place. We need to get the delivery position and internal efficiency in place. We are getting there. So I feel that now we can start to look at growth opportunities that can be organic growth opportunities, but it can also be add-on acquisitions. I'm not looking for any big play or any huge acquisition. We are looking for smaller ones that we can digest and that we can easily integrate without it becoming any huge project, a little bit similar to what we have done lately with Ductmann in the U.K. We did one last year in Ireland. And those have so far been very successful. And that's the concept we can continue to build on.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [33]

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And on the structural side, if we talk about potential divestments and so on if there are areas that you're not happy with the performance and so on, I think now you introduced a new organization, and it's only been there for half a year. But could we expect something like that potentially next year? Or...

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Ola Ringdahl, Lindab International AB - President & CEO [34]

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We have had -- we have many subsidiaries in Lindab today, and we have many activities. Two years ago, we had many more subsidiaries. And after that, I think we have closed more than 10 subsidiaries in the last 12, 18 months to somewhat clean up our structure and to make sure that we are not present in countries or in product areas where we are unprofitable.

There is still work to be done. We have done the most obvious things, but there are still things to be done. Whether that means that certain businesses will be restructured or they will go through a turnaround program or they will be closed or divested, that is too early to say right now. First, we try to get all the units to a sound profitability. In most cases, we are succeeding. In some cases, it's more difficult. And then we have to take the decision should we continue to try or shall we do something else. I will not go into more details now, but we are looking at all of these things definitely.

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Operator [35]

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And our next question comes from Marcela Klang at Handelsbanken.

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Marcela Klang, Handelsbanken Capital Markets AB, Research Division - Analyst [36]

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Could you speak a little bit about the competition situation in the Nordic market and especially in Sweden that you're facing right now?

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Ola Ringdahl, Lindab International AB - President & CEO [37]

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We have -- it depends a little bit on what kind of area we are talking about. And I don't mean geographic, but rather what kind of products and businesses. We have many competitors, but we also have many industry colleagues that we cooperate very well with. I have not seen any major change in how the dynamics is working between us and our competitors. No big changes in the past quarter or the year compared to before. We have -- within our core product areas, we have a strong position in Sweden. This is our home market, and that goes both for Ventilation Systems and Profile Systems. A lot of companies, a lot of producers have had very busy factories with high demand, and that includes Lindab. We have been running at a very high pace in our production units to cope with the demand. And you see from our growth in the past 2 or 3 years that we have grown quite quickly. But I don't see any worrying finance or something or any change in the competition now to get right now.

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Marcela Klang, Handelsbanken Capital Markets AB, Research Division - Analyst [38]

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So basically, no new entrants or competitors getting more aggressive, given the weakening Swedish market in your view?

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Ola Ringdahl, Lindab International AB - President & CEO [39]

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No. We have not seen that. No. Of course, if volumes go down, existing players will at some point become more aggressive to try to keep up their factory utilization. That is a potential scenario, but that's not something that we have felt the effects of now.

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Marcela Klang, Handelsbanken Capital Markets AB, Research Division - Analyst [40]

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Could you also speak a little bit more about your M&A ambitions? Obviously, the net activity level is quite low. It seems that you have already done a lot of work focusing on the efficiency in your current organization. Does that free more resources, even management resources, to look at M&A and where and what?

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Ola Ringdahl, Lindab International AB - President & CEO [41]

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I mean we have the financial capacity to acquire companies and I underline that we are not looking for any huge acquisitions. We are talking smaller ones. My personal preference is to make several smaller acquisitions rather than 1 or 2 big ones. We will -- we have not worked very actively with acquisitions in the past 2 years. That means that we have to restart efforts, refresh connections and build a good pipeline of prospects. That work -- that is what I'm referring to. That work can stop now because now we are in a better shape than we were before. But it takes time. These things take time. Don't expect any major results from it in quarter 3. And this is something I think we would aim to start to realize during the autumn, but -- and I hope there can be acquisitions happening in 2020.

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Marcela Klang, Handelsbanken Capital Markets AB, Research Division - Analyst [42]

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And as you mentioned, the work to build the pipeline starts now. If you don't have any near-term targets, would there be a potential for external dividend as well for 2019? Or are you not even thinking in that direction?

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Ola Ringdahl, Lindab International AB - President & CEO [43]

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That is not something we have discussed.

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Marcela Klang, Handelsbanken Capital Markets AB, Research Division - Analyst [44]

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And the final question regarding input materials. What is your situation there right now? Are you comfortable with the current levels or is that an issue?

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Ola Ringdahl, Lindab International AB - President & CEO [45]

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How do you mean, Marcela, are we comfortable?

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Marcela Klang, Handelsbanken Capital Markets AB, Research Division - Analyst [46]

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Both steel and other input materials.

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Ola Ringdahl, Lindab International AB - President & CEO [47]

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Well, we have a more stable situation today after very rapid increases in raw material prices in 2016, 2017 and partly into 2018. It has not stabilized on -- but on a relatively high level. But we feel that we can cope with it as it is now. There are no major fluctuations in pricing economy. That can, of course, change, so we have to be prepared for that. We buy a lot of the raw material on 3-month contracts, so they don't change from day-to-day, but they do change a few times per year. We are -- we have it in -- on the agenda in every meeting in Lindab. Raw material pricing is -- we are, of course, exposed to that in a significant way.

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Operator [48]

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(Operator Instructions) As there are no further questions at this time, I'll hand back to our speakers for the closing comments.

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Ola Ringdahl, Lindab International AB - President & CEO [49]

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Then we -- from my side and from Malin's side, we thank you very much for showing interest in the presentation and in the reports. We want to wish you a nice summer, and see you in quarter 3.

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Malin Samuelsson, Lindab International AB - Executive VP & CFO [50]

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Thank you so much.