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Edited Transcript of LIAB.ST earnings conference call or presentation 6-Feb-20 12:00pm GMT

Q4 2019 Lindab International AB Earnings Call

BÅSTAD Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Lindab International AB earnings conference call or presentation Thursday, February 6, 2020 at 12:00:00pm 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

* Henrik Alveskog

Redeye AB, Research Division - Equity Analyst

* Kenneth Toll Johansson

Carnegie Investment Bank AB, Research Division - Financial Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Lindab Q4 2019 Report. (Operator Instructions) Today, I'm pleased to present Ola Ringdahl, CEO. Please go ahead with your meeting.

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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, I'm the President and CEO for Lindab Group. I'm sitting here together with our CFO, Malin Samuelsson.

We go to the agenda page, Slide 2. So in today's presentation, the agenda is as follows: we can read there on the screen. At the end, we will open up for questions.

I will start with an overview on Slide #4. To summarize the fourth quarter of 2019, we saw net sales increasing by 6%. The organic growth was 3%. The adjusted operating profit increased by 23% to SEK 212 million. And we saw an increase in operating profit in all 3 business areas.

The profit for the period increased by 36% to SEK 143 million. And we are pleased to see that our cash flow was strong, our investment activity was high, and we strengthened our balance sheet during the quarter.

During the fourth quarter, the Board of Directors have decided on an updated dividend policy, increasing the dividend from 30% to 40% of earnings per share. And the Board of Directors proposed a dividend of SEK 3.6 per share, which is an increase by 106% compared to previous year.

We move to the next slide, and there we can see the sales growth per geographic region.

Western Europe showed organic growth of 2%, with the strongest growth in absolute values coming from France and Luxembourg. In the Eastern region, we continued to see strong sales development with an increase of 12% for the quarter. Main growth drivers were in Hungary, Romania and Russia.

In the Nordic region, we also saw organic growth in the quarter. And that is mainly related to the increase of industrial building projects in Sweden.

Now we'll go 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. And we now move to Slide #7. And we look first at the group financial highlights. And the net sales amounted to SEK 2,526 million and the organic growth was 3%, the currencies contributed positively also by 3%.

The largest positive currency effects on sales in absolute terms comes from Europe. The EBIT increased mainly as a result of a volume increase and strengthened gross margins, and all 3 business areas contributed to this increase in profitability.

Net profit increased to SEK 143 million when compared to SEK 106 million during the same period previous year. The higher effective tax is mainly related to withholding tax on increased dividends from Astron, Russia. The dividend distribution is part of our ongoing focus on the capital structure in the group.

So now let's have a look at the Ventilation Systems at the next slide. And we can see that the net sales amounted to SEK 1,478 million, which is in line with the same period previous year. The organic growth amounted to negative 4%, while currency was positive with 3%. Structure also had a little positive effect of 1%.

Sales volumes are impacted by our continued priority to increase profitability, and we also see a general lower demand in Europe.

EBIT amounted to SEK 129 million compared to SEK 127 million a year ago. 2018 was an all-time high fourth quarter. The improvement was mainly related to improved gross margins and stable underlying costs.

So we move to the next slide. Net sales in Profile Systems amounted to SEK 707 million, the organic growth was positive and amounted to 11%.

Sales increased due to large delivery of industrial projects in Sweden and CEE compared to last year.

EBIT increased to SEK 85 million compared to previous year of SEK 56 million due to significant higher sales volumes and slightly strengthened gross margins.

We move to the next slide, Slide #10, and we take a look at the Building Systems financial highlights. And the business area reports strong sales. Net sales increased by 31% and amounted to SEK 341 million, organic growth amounted to 24%, and currency contributed positively by 7%.

The largest positive currency effect on sales in absolute terms comes from ruble. The EBIT increased to SEK 15 million compared to 0 last year, mainly explained by the strong sales volume growth.

The backlog was lower at the end of Q4 compared to the same period previous year as a result of large shipments, mainly to Western Europe, but also due to a lower order intake during the second half of the year compared to last year.

Now we move over to the cash flow on Slide 11. Adjusted free cash flow amounted to SEK 274 million compared to SEK 198 million during the same period last year. The improvement in free cash flow is due to higher operating profit and favorable change in working capital. The net debt, excluding the effect from IFRS 16 decreased to SEK 732 million compared to SEK 1,052 million last year.

Next slide, and this is a summary of the financial highlights for the full year.

So when we summarize 2019, we look back on a year with continued sales growth but also above all significant improvements in profitability.

For the group as a whole, net sales increased by 6% and amounted to SEK 9.9 billion. EBIT increased by SEK 281 million to SEK 915 million, and no one-off items have been reported in 2019 compared to SEK 87 million in 2018.

The net profit increased to SEK 678 million, resulting in an EPS increase of 72% and amounting to SEK 8.89 compared to SEK 5.16.

The Board of Directors proposes an increased dividend, which amounts to SEK 3.6 per share and approximately 40% of the reported profit. This is in line with the updated dividend policy of at least 50% of the company's profit after tax. The improved net debt-to-EBITDA ratio will lower net debt in Swedish krona, supports the dividend proposal.

So this concludes the financials. And I turn back over to you, Ola.

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

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Thank you, Malin. Let me move over to Slide #14. And we have published a press release about this last year, and last year updated financial targets and dividend policy. So the Board of Directors decided in December to keep some of the financial targets and to update some and to adjust the dividend policy according to the content on this slide. So growth rates, those targets are -- they remain unchanged. Operating margin also remains unchanged, 10% target.

However, the net debt-to-EBITDA ratio that has been adjusted from 2.5 to the ratio of 3.0, measured over a 12-month average. And that is to reflect the changes coming from the IFRS 16. There's no real change in policy regarding this. It's mainly to reflect the update of IFRS 16.

Dividend, however, the dividend policy was adjusted and went from 30% to minimum 40% of the company's net profit. So this has contributed to the proposed increase in the dividend for 2019.

We move over to Slide 16 and look at the current focus areas. Some of you will recognize this slide. We have worked hard during 2019 to decentralize and simplify how the Lindab Group works. And the key word for us is accountability.

We have also put extra emphasis on delivery excellence. I'm pleased to say that we have managed to reduce our delivery returns substantially. We have also cut the number of delayed deliveries by a very high -- so we are quite pleased about these operational improvements during the year.

It's a substantial step forward for the Lindab Group and I think our customers are noticing a substantially better service from us.

Our investment program is continuing at a high pace. And we are gradually increasing both our capacity and our efficiencies, both in production and logistics.

We move to Slide 18 and the outlook. So this slide describes a bit about the market development and the Euroconstruct data. The Euroconstruct construct data indicates slow or practically no market growth ahead of us, at least, low, kind of 1%. Lindab Group aims for sales growth, but we are also making all the preparations needed for a no-growth scenario, should that occur.

We move to the summary on Slide 20. So a few words to summarize the fourth quarter and the year of 2019. In the quarter, we managed to grow our sales despite a softer market demand. We are pleased with the development from our side. We saw a good profitability development in the quarter. And as Malin said, we want to make you observe that we did not register any onetime costs during the year 2019.

We reached a full year operating margin of 9.3%, and we consider the EBIT target of 10% to be within reach.

Our strong cash flow enables Lindab to invest in the future in ways that I have described a little about before.

It has also meant that we have updated certain targets, and we have updated our dividend policy. The fact that we can more than double the dividend, while we are implementing substantial investment programs, is a sign of strength.

Now we are also able to look at acquisition possibilities going forward. I thank all our colleagues for a job well done in 2019, and we are looking forward to continued improvement efforts in 2020. This was the last slide in the presentation. Let's open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Douglas Lindahl from Kepler Cheuvreux.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [2]

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A few questions from my side. You have talked now for a few quarters in a row here that the order backlog in Building Systems is down year-over-year, while we're seeing continued strong growth from this business area. Can you just remind us what the average execution time is on your backlog? Meaning when should we start to see the sort of negative growth effects come through unless you turn the order intake trend around? And on that, what can you say about the low order intake activity? Is this the weaker margin -- markets purely? Or -- and if so, is that sustainable going forward? Those would be my first questions.

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

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That's quite a lot, we'll say. I think if we go back to the second half of 2018, we received substantial orders for large projects. And those projects, the majority of that work has been executed in 2019. While executing these large projects, we did a very good job. So we've got also follow-up orders on the existing large orders. And I think that this has been part of the explanation why we have continued to have strong invoicing late into the -- say, towards the end of 2019. The normal turnaround time on a project from order to delivery, it can vary quite a lot, it can be from 2 months up to 12 months normally, depending on the size of the project and if the design is known or not beforehand. So it is possible that we can receive orders in a quarter and actually execute them inversely, during the quarter. But I would say that the normal scenario is that we invoice 1 or 2 quarters after we have received the order. We are -- we did not expect to see as strong invoicing in Q4 for Building Systems as we saw. They did a very good job to finalize projects ahead of New Year's. So we are quite pleased with our performance. But of course, now when we compare the backlog to a year ago, it is lower than it was because of all the high invoicing done in 2019.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [4]

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Okay. Coming back to your 10% EBIT margin target there, it's looking increasingly attainable. Does this mean you now are starting to shift more and more into growth once you hit potentially the 10% margin target? Or how should we view sort of the balance between margin and growth in a scenario that you actually hit the 10% margin target?

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

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I think it's natural that you can shift a bit of your focus over to growth when you have reached your profitability targets. But we are not there yet. There's still some way to go. And I think for every decimal point now, we need to fight really hard to make sure we get above the 10%. So to find the right balance here between continued operational improvements, being very cost aware and selectively finding this interesting pockets of growth, that is how we are trying to address this year, 2020, with the background that we have seen -- some have seen a softer market. So we also have to be aware that there's no -- has no tailwind, but we have to try to grow in a stable market.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [6]

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Okay. And final question for me, then I'll get -- let someone else ask a few questions. On CapEx, I remember that you previously talked about increasing CapEx and you've done so. And I think, Ola, you talked about it should move closer to 1x depreciation. And you haven't really hit that number in 2019. How should we view CapEx for 2020, specifically?

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

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Well, some CapEx will come quickly after you have made up your mind to invest in something and other types of CapEx that takes a while to actually implement and get done. We are working with a wide portfolio of investments now, everything from machine investments that can be implemented in 2 or 3 months, but also including major expansions of facilities where it can take 1.5 years. So I think you should look at our investment program as a -- at minimum a 3-year program, where we are significantly raising the ambition level. And it is, to some extent, ramped up over time because you cannot start to execute these divestments and get impact from day 1. It takes preparation, takes building permits, takes construction of automation lines, et cetera. I would think that 2020 will see significant investments, and I think part of 2019 was a start-up period.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [8]

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So there's no sort of indication on what you're talking about, EUR 400 million? Or you don't want to be specific?

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Ola Ringdahl, Lindab International AB - President & CEO [9]

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You're looking for numbers.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [10]

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Yes.

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

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Yes, the indication is we have no -- don't share about the numbers. My answer to that is I expect our investment, our CapEx to be quite some bit higher than the depreciation rate.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [12]

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Over time, yes.

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

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Over the next few -- I mean the next few years.

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Operator [14]

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And the next question comes from the line of Carl Ragnerstam from Nordea.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [15]

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It's Carl here from Nordea. First of all, can you help us try to split out how much of the growth in Profile System was due to project deliveries? And can you also give us an idea of the gross margin in those projects, if you sort of back out the underlying margins?

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

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No, we can't answer those questions exactly, Carl, but there were industrial projects for Profile Systems in Q4, maybe a little bit more than usual. So there is some effect, and we are also commenting on that at the strong growth that we saw in Q4 was helped by some larger projects. I would add that in addition to that, we saw a favorable weather conditions with a mild winter weather, which is good for our business in Profile Systems because that means people can be outdoors and work on the (inaudible) and the roofs of the buildings. So there is -- the growth is a combination of favorable weather and industrial projects at a higher rate than before.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [17]

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Okay, perfect. And regarding M&A, and so I mean you have a financial target of the top line growth of 5% to 8%. Can you give us a sort of a split how we should look at the contribution from organic growth and from M&A? And can you also talk a little bit about your M&A pipeline? What multiples you see in the market and if you're staffed in order to increase M&A pace?

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

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I think the proportions of organic versus acquired growth will change over time. And over the business cycle, if we are looking at a little bit softer market now, then the acquisitions would have to make up a bigger part of your growth. And if we have very, very strong organic growth, then perhaps we don't have the same time and the prices of the cost of acquisitions might also be higher. So I think that will fluctuate over time. We are looking for a healthy combination of acquired and organic growth. And I cannot give you exact how many of the 5 to 8 percentage points will come from either one of them. But we are working on both net debts to grow. When it comes to multiples, we are not commenting on that, but we are not going -- I mean it's not in our DNA to pay significantly different from what other people in the industry would pay. We are not going to address this in a significantly different way than any other company will do.

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Carl Ragnerstam, Nordea Markets, Research Division - Analyst [19]

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Okay, perfect. And the final one, perhaps. And I mean we talked about CapEx before. Can you mention some of the projects that you will work on in 2020?

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

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There are many, but we can mention a few. We are putting a lot of effort into our central and our regional ventilation factories. We have a large set of factories in Czech Republic and we have also in Sweden. We are investing significantly in those. At the same time, we are also investing in the second-tier factories, which are -- they are smaller, but they are -- play a very important role as regional hubs for our distribution. And then we are talking about major investments in our infrastructure in U.K., France, Germany, Denmark, Estonia, Hungary and I'm probably forgetting some, but we are talking about quite significant enlargements and automation projects in these factories. Why are we doing that? Well, it's partly to offload the central factories and now allow them to become more specialized and better. But it is also to give much quicker and better service to the local or regional customers and to cut transport costs by huge amounts. Transport is becoming more and more expensive in Europe. Expected delivery times are shorter and shorter, and Lindab has a quite a vast logistics network and operation that we have to fine-tune according to the way Europe looks today and all the associated costs. Attractive paybacks and were very good projects and we have plan to...

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Operator [21]

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

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [22]

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Ex plants there, you say that you're investing a lot in many plants on the ventilation side. So does that mean that we should not expect any sort of structural changes that you might sort of close a plant and move production somewhere else or outsource production and close some plants and so on? Have you rather decided to invest in what you have instead?

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Ola Ringdahl, Lindab International AB - President & CEO [23]

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Well, I mean there's always the possibility that you will rearrange where you produce what, that can also be a situation where you close the plant. But I will not say that, that is the main challenge for Lindab today. I think if anything, we have insufficient capacity. We don't have overcapacity. We have insufficient capacity to meet the growing demand from our customers. And we have been working at very, very high capacity utilization in many factories. This can be nice, but it can also be quite expensive to do -- to run many shifts at expensive hours. I think we are trying to now invest in both capacity and automation to find a better balance going forward and higher efficiency, but also room for growth. But what we're also doing is that we are trying to find where is the optimal place to produce a certain product. So -- and demand patterns are changing. So it might very well be that we are moving production of certain products from one factory to the other. But I don't think that we will see any major restructuring of -- within our plant closings and so on. But that is not what I expect.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [24]

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Okay. And then I was wondering your EBIT margin have come up now and it's getting closer to your target. And when you started the Lindab, there was a lot of discussion about underperforming units and changes needed to be done. And now you communicate more that you have to fight much more for any additional margin increases. But do you still have underperforming assets out there that you need to take care of? Or is it more that you need to reduce a little bit of cost here and there? If you understand where I'm going for?

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Ola Ringdahl, Lindab International AB - President & CEO [25]

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Yes, I understand. The life would be terribly boring if we didn't have some really difficult things to improve. Of course, we still have units that we are struggling with, but they are much, much fewer than a year ago. We had -- quite a substantial part of our turnover was actually not contributing much to our bottom line a year ago. But today, I would say that the units are not contributing in a good way to our bottom line. They are very, very few and a very small percentage of our turnover. So we are still working on improving some units. I believe that -- actually all units in Lindab can do better. But it -- it is not necessarily so that they will automatically do better next month just because I tell them to. So it's a combination of how we work, what we are investing in, how we are addressing our customers and a thousand things that need to work, a little bit better every day that will continue to drive the improvements. But I think we've taken quite a big step in 2019 and reached a different level than before. So it's a good starting point for further improvement.

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Kenneth Toll Johansson, Carnegie Investment Bank AB, Research Division - Financial Analyst [26]

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Do you also -- when do you think that you should start seeing some positive effects from the automation projects?

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

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We are gradually seeing the positive effects. I cannot isolate and say exactly how much it is, but we are -- by investing in improved efficiency in our factory, we are increasing our competitiveness every day. It will be seen both in our revenues and in our operational KPIs and gross margins going forward. That is something that I am expecting will help us over the next years as they gradually kick in. But most of the initiatives, most of the investments that have not yet been commissioned, so to say. So the -- those rewards lie mostly ahead of us.

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Malin Samuelsson, Lindab International AB - Executive VP & CFO [28]

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We have previously communicated as well that we see a lot of these investments with an implementation time of something over a year up to 18 months. And so maybe that could be one indication.

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

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Yes, for larger projects, it's not much benefits until 2021, then probably?

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

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It can be like that. I mean we are -- we still continue to keep a very high pace in all the investment decisions. The investment decisions have been at a very high -- intense pace since Q4 2018.

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

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Okay. And then in terms of acquisitions, you said before that you were looking rather to make several smaller acquisitions than one big one, so to say. But what are you looking for in terms of product range? Is ventilation more interested -- interesting than the other parts? And from a regional perspective, if it's Western or Eastern Europe more?

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

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We are primarily looking at Ventilation Systems. But that does not exclude the possibility that we'll -- we will -- if we find something very appetizing, but we will do it in another of our business areas. But the primary focus is Ventilation Systems. And we are looking at the major European countries, say, the top 15 to maximum 20 countries in Europe, where we have -- already today have a strong position. We are not looking at remote places. We are not looking at U.S. or Middle East or Asia. We stay in Europe and focus on that.

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Operator [33]

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And the last question comes from the line of

Henrik Alveskog from Redeye.

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Henrik Alveskog, Redeye AB, Research Division - Equity Analyst [34]

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You covered almost everything, but maybe if you could comment on your margins in the Ventilation System segment in this last quarter? It's a little lower than previously in 2019. And I understand there are seasonal variations. But is it -- could you give an easy answer to this? Is it a product mix question or do they maybe have higher cost for some reason in this quarter?

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Ola Ringdahl, Lindab International AB - President & CEO [35]

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Yes, there are many good questions here. The Ventilation Systems will -- if you compare only to last year, it will look like this, result is approximately the same. So there's not much of an improvement. But if you look back in time, you will see that 2018, Q4, the result was unusually strong for Ventilation Systems. So we are actually very happy with the results that we managed to stay on that record high level also this year despite a softer market. December is a difficult month, and it was a difficult month in 2019, quite a short month. So it's not so strange that we have a lower EBIT margin in Q4 compared to Q3 or Q2, but that is normal for us. We should maybe also point out that we have not taken any onetime cost OTC in 2019, which also means a small effect on Ventilation Systems, where we had a SEK 3 million OTC in Q4 2018. So as you know, we don't see the same improvement pace compared to last year Ventilation Systems in Q4. But we are actually quite happy with the results delivered by that organization during last quarter.

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Operator [36]

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We have no further questions, so I'll hand it back to the speakers.

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Malin Samuelsson, Lindab International AB - Executive VP & CFO [37]

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So thank you so much for participating in this call.

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Ola Ringdahl, Lindab International AB - President & CEO [38]

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Thank you very much from us. We hope to see you next time, and we close the meeting. Thank you.

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Malin Samuelsson, Lindab International AB - Executive VP & CFO [39]

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Thank you. Bye-bye.

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Operator [40]

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This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.