Systemair AB
STO:SYSR
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Systemair AB
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Welcome to the Systemair interim reports Q1 2020. [Operator Instructions] Just to remind you, this conference call is being recorded.Today, I am pleased to present Roland Kasper, CEO; and Anders Ulff, CFO. Gentlemen, please begin.
Hello, ladies and gentlemen.
Hello, Anders Ulff here as well. So you will find the presentation for today on our website under Investor Relations. So let's get started, Roland.
Yes. Thank you, Anders. So welcome to the Systemair quarter 1 report 2021. And let's start directly away, Slide #1 there.So Systemair established here in Skinnskatteberg in Sweden in 1974. Last year -- fiscal year, we had a turnover of EUR 890 million. And since October 2007, we were listed on Nasdaq OMX Nordic Exchange stock market. Today, in 51 countries, we operate our own sales companies. And in 19 countries, we operate our own manufacturing and sales entities. We have today 6,160 employees in the group. And by doing this business, we export to 135 countries all over the world.Next slide, Slide #3. Our business model. Systemair provides products within ventilation and air conditioning for the benefit of health, performance and comfort of human being and, of course, for energy saving reasons. That is the main task and the main target in our product development and in performance measurement. And not to forget that good ventilation reduces spread of infections and virus throughout.Next slide, Slide #4. Jumping directly into our quarter 1. In our quarter 1 2021, we achieved a total turnover of SEK 2.1 billion compared to SEK 2.25 billion the quarter year before. By that, we achieved a growth of negative 6.8%, or up 4.4% organic negative. On the right side of this slide, you will see the chart of the development of the organic growth on a rolling 12 some years back. And of course, last quarter was the fourth quarter of our last year, which includes March and April, we had a negative effect, starting off with a slightly negative this quarter or so.Next slide, Slide #5. If we analyze the growth in quarter 1, organically, we had good organic growth actually in the Nordic region and in North America. West and Eastern Europe with negative growth of 4.4% in total. Through acquisitions, we had an effect of the acquisition of the Pacific Ventilation in Australia, Systemair Maroc, Poly-Rek and Frico in Denmark of positive 1.6%. And then at the end, also an effect of the weakened currency -- sorry, strengthened currency, mainly here the Swedish krona, which contributed with 4%, and total, negatively, 6.8%.Going to next slide, Slide #6. The operating profit for our quarter 1. Our gross margin decreased to actually 33.6% compared to 34% the quarter year before due to the lower capacity utilization in most of our factories. Our selling and administration expenses for the quarter decreased to 5.3% from comparable units. The operating profit includes some COVID-19 related governmental subsidies in several countries, which amounted to SEK 23 million, which is reported on -- as other operating income. Thereby, the operating profit for the first quarter, all in all, amounted to SEK 182.1 million, to be compared with last year's result of SEK 173 million. This is then a result of 8.7% operating profit for the quarter 1.Slide #7, the cash flow analysis. In the first quarter of 2021, we had cash flow from operating activities resulting in SEK 142.3 million compared to SEK 223 million the year before. The change in working capital amounted to SEK 35 million, which is mainly affected by the decreased inventories in the company. The net investments, excluding acquisitions, amounted to negatively SEK 93 million compared to SEK 48.9 million year before, which is investment in buildings and machines, and yet primarily the start-up of our building in Russia and some machine investments in Lithuania. This results in a total free cash flow of SEK 84.3 million compared to SEK 145.3 million last year. But also, on a positive, our net indebtedness has decreased to SEK 1.8 billion versus SEK 2.2 billion the year before.Next slide, Slide #8. Here, you see a chart of the development of our cash flow from the operating activities. And we had a very positive momentum, which is kept, which we will build further on in future. There are several activities that have reached out here, especially control of the operations.We are changing to Slide #9. Looking into our markets for our first quarter 2021, the development has been the following. Eastern Europe and the CIS countries, now 14% of our total turnover from 18% same quarter the year before. North and South America amounted to 12% market shares compared to 11% the year before. Other markets contributed with 13%, were 11% the year before. Nordic region, 17% compared to 16% the year before. And Western Europe, stable at 44%.Next slide, Slide #10. Let's go into our different regions. Let's start with Nordics. Sales in the Nordic countries actually decreased by 1% in the first quarter compared to the previous year. If we adjust for foreign exchange effects and acquisitions, sales increased by 5%. The Swedish and the Finnish market actually showed good growth during the quarter, while sales in Norwegian and Danish markets decreased slightly. So the growth, negatively 1%, organic growth positive 5%.Next slide, Slide #11. Let's have a look in Western Europe. Sales in the West European market were 70% -- 7% below the corresponding period last year. Adjusted for the foreign exchange effects and acquisitions, sales fell by 5%. The German and the Belgian markets showed growth during the period, while other major markets in the region declined as a result of the pandemic, including especially France, Netherlands, U.K. and Spain.Turning to Slide #12, Eastern Europe and CIS. Sales in Eastern Europe and CIS decreased by 26% during the quarter. Though adjusted for foreign exchange effects and acquisitions, sales fell by 21%. Looking at Russia, sales in Russia decreased by 26% compared to previous period, though calculated in Swedish kronor. The Russian market represents 30% of sales in the region in this quarter. Other major markets in the region that fell during the period have been Poland, Czech Republic and Slovenia, though have improved at the end of this quarter. Last year, the growth in this region was 22%. So given that, comparative figures can, therefore, be considered as very challenging.Next slide, Slide #13, North and South America. Sales in North and South America region increased by 3% during the quarter compared to the same period last year. Adjusted for currency effects and acquisitions, sales actually increased by 7%. Especially here, the Canadian market showed very good development in the quarter. The American market is still stable, but to a lower growth.Next slide, Slide #14. Here, the combined Middle East, Asia, Australia and Africa. Sales in this region increased by 5% compared to the same period last year. Adjusted for currency effects and acquisitions, sales increased by 1%. Especially Middle East and Morocco showed growth during the period, while other major markets such as Turkey and India decreased slightly.Here, we can [ gladly ] present -- we had in the last quarter report, we presented our first deliveries to Serum. And we're now very happy to be able to present that Serum continues to choose Systemair for the second part of the extension for the COVID-19, 16 facilities. Serum is thereby expanding the vaccine manufacturing facility to increase the production capacity for the human trials -- when the human trials are successful for the vaccine developers.The delivery from Systemair contains 42 hygiene air handling units that needs to be delivered with very short notice, which is critical in these projects. The total order value in the second phase for us is approximately SEK 7 million, which is just now under production and shall be finally delivered and installed before end October at the site.Slide #16. Special trends that are global and affecting our markets. Here, needs to be mentioned the announced recovery investment packages by European Union, which will put focus on sustainability and infrastructure. The EU ministers, as you know, have agreed on the 21st of July on a budget for EUR 1.8 billion, composed of the multi-annual financial framework. The Green Deal hereof relies on EUR 503 billion from this kind of multi-financial framework. The renovation wave is part of the Green Deal actions and announced at the end of 2019 as a major initiative towards energy and climate goals, which is a big part of the ventilation and energy saving activities of Systemair AB.By that, I switch to our last slide. Thank you for your attention and open up for questions.
[Operator Instructions] Our first question comes from the line of Carl Ragnerstam of Nordea.
It's Carl here from Nordea. I have a few questions. First of all, if you could. I mean for -- you reported mid-single digit, if I remember it correctly, in the Nordics, organic growth, that is. I mean that is seemingly better than some of your competitors, I think. So first of all, I wonder whether you believe that you have gained market shares during Q1, and secondly, whether you have seen any changes in the demand after the Q1.
Carl, first of all. When it comes to the development in Q1, I would say, in the beginning of Q1, it was seemingly a little bit more negative. It has -- after that, it has improved in the second and third months of our first quarter. If you look at the different markets, I would say that Sweden is somewhat stable in demand. In Norway, we were a little bit more concerned, but it has proven to be more stable and still better developing than expected. Denmark also outperformed in the second and third month versus our expectations. So I would say it's more an effort for the whole Nordic region. It's not a single country that has developed better or worse different -- versus others.
Yes. And do you still see a quite healthy demand in the market? Or have you seen any major changes?
I would say, Carl, that the biggest problem that we would have to mention this is that there is, of course, a very dynamic development on the consultancy basis and also out in -- on building sites. We don't have visibility today what will happen at the end of our second quarter or even in the middle of the second quarter. It is still very hard to predict how it will continue. What we do have in -- just now in demand is, I would say, it's good.
And I believe also that our Swedish sales organization has been through a period of restructuring over the last 2 years. And I think it's also starting to pay off somehow. So I believe in Sweden that we are gaining market shares.
Okay. Very interesting. And as you said, you reported also strong organic growth in Americas. What's the driver behind that? You mentioned Canadian market. But if you could give us some -- on a product basis, some flavor at least. And also, if you expect the COVID-19 effect to hit you maybe later on.
Yes. The interesting part and the really strong development that we have seen in North America, Carl, has especially been within residential ventilation. As you might remember, we made an acquisition here 1.5 years ago, which was the company, Greentek, in Canada. That has developed very well for us. And especially in Canada, the increase of residential application, but now also what we can see in Americas, or let's say, in U.S., has also -- during this quarter has been surprisingly positive.How this will continue, especially within residential, I can't predict today. But what we also see from the competitors that the market level is quite satisfying at the moment for just residential. We see some hiccups when it comes to the commercial and industrial applications. But this is a very, very minor part of our North American business. We're not that affected at all.
Perfect. And you also reported a fairly strong EBIT margin, I must say, given the circumstances. Could you please help us to sort of understand the dynamics in it? I mean could you explain, for instance, the development within the AC business, Menerga? A little bit on the pricing as well, if you could help out with that.
Of course, yes. I would say, at this time, it has been that we had a quite good momentum even prior to COVID. We have done a lot of activities, as you know, already implemented over last year on the proactive pricing, more market-based pricing, looking really for customer's best expectancy and levels, but also looking at improvements of cost and activities internally in the Systemair group. I think you have to bring all that together to really understand the development.Then, of course, also when -- as you asked specifically for air conditioning and Menerga. The air conditioning for us is, of course, Italy and France, which has been or was quite hit by the pandemic, as you know, of the closedowns. So there is not a major part in this development that is contributable to especially air conditioning.
Or Menerga.
Or Menerga.
So there's more potential there.
Absolutely.
And do you expect the pent-up demand in the AC units is because people couldn't buy an air conditioning unit during the COVID-19 period or in the lockdown?
As you know, Carl, I think the main part of our business in -- within AC is still for the bigger units. We are not that big into private housing, I would say, here, like split units. It's not the main part of what we're doing. So for the light commercial and commercial applications, buildings that were closed down, especially in those countries for some weeks. But we see it coming back. But we do see huge potential with the developments that we have ahead of us with new products and new refrigerants. So we would have, on the midterm, a very positive outlook on this.
Okay. Perfect. And the final one from my side, if I may. It is whether you still believe that you are on track to reach your 10% margin target. And -- I mean you communicated that you expect to reach it in 2 to 3 years. But I wonder given the current pace, at least the past 2 quarters, do you expect that you could possibly reach it even quicker than in 2 to 3 years? Or would we more see a flat development or a slower margin development ahead? How should we look at it?
As we announced this in September 2019, that would -- it would be 2 to 3 years ahead. It was, of course, without having any pandemic in mind, of course. But as I already said before, I mean all these measures that we have been doing, not only pricing but also the cost base and all that, that was already done before. So we see the effect of that. Will we reach it earlier? I don't think so. Will it flatten out? We'll reach the target. I'm a little bit -- I'd like to leave it open on the time line. 2 to 3 years still seems doable, but I won't promise more than that.
Our next question comes from the line of Henrik Alveskog of Redeye.
Okay. Gentlemen, do you hear me?
Yes.
Yes, Henrik.
Great. You mentioned a couple of your better markets, but which -- could you mention which ones are of major concern to you at the moment? Which markets are not picking up at all?
I would say those that are clearly not picking up, maybe the wrong words, but still have troubles due to pandemic, for instance, would clearly be Brazil, South Africa.
[indiscernible].
That is given due to external circumstances. I mean they are still in partial lockdowns. You still have some kind of uncontrolled development. So the -- our manufacturing entities are open. They are working. But the market is, of course, going up and down.
Okay. But Turkey and India is less of a concern than the ones you mentioned?
Clearly, yes. Less of a concern. Absolutely.
Okay. Great. Also, are you still receiving some government support or subsidies today in any country?
Yes, we are, but a lot less than before. I mean the major part of the subsidized we received was regarding Sweden, I would say, so -- and here in Sweden, right at the moment, we are running 100%. So we are not receiving any grants from the state at the moment.
Okay. And then you mentioned here that, well, good ventilation reduces the spread of the virus, which is good for, well, demand. Could you be a bit more specific and let us know how you see this?
I mean there are certain drivers on the market, of course. Long term, Henrik, I mean you have like the urbanization, you have the ecodesign and this energy directives. And on the top of that, nowadays, of course, with the Green Deal and all these investments, they will, mid and long term, certainly be drivers. We don't think that with this pandemic that has hit us, the awareness amongst even private people about how important it is to have clean, healthy indoor air quality is something that will give us a positive effect also as a certain driver to our business. So we absolutely see this as an additional driver for future.
Okay. Right. And then could you maybe give us a little more information on your investment in Russia? What's the plant size of this in terms of CapEx? And then also the size of the production facility when it's up and running and also what they will produce there?
Yes, of course. I mean this is -- following our announcement that we have actually made on the Capital Markets Day where we have been looking over the last couple of years of having some kind of acquisition or establishment in Russia. The main reason being that, in Russia, it is establishing more and more as a rule that you -- in governmental and other private lead projects, you need to have a part of products that are actually made in Russia. And for that, it's not possible that you relabel things and entry into Russia, but you really have a stringent, strict rule of how much of the product and what product and what kind of manufacturing needs to be on a certain product to be brought to market with made in Russia. So we identified we needed to have a factory, and that's been now started. Actually, the building is started. It is thought to being the first shop warehouse than a manufacturing entity and to be manufacturing products that actually are more capital-intensive and needs, let's say, to be more adopt the technical version for the local market. The first product to be produced here will be air handling units and airborne heating products. It is expected that the factory will be accessible for us somewhere at the end of this fiscal year.
Okay. Well, during this fiscal year, but by the end?
Yes, absolutely, by the end.
Yes. Okay. And also, you mentioned Menerga briefly earlier. And I just noticed in the report that you have hired 20 new staff in Menerga. Should we see that as a sign of good order booking? Or ...
No. It was more a sign, Henrik, of precautions in manufacturing, especially in Germany, they are rather, again, strict rules on how to handle health aspects during the pandemic, so we needed to establish a certain, how to say, distance between workers, which slows down the processes and doesn't make them very effective. And you also have to install several shifts. Having several shifts and having a cooling factory to operate due to good order intake means that you need to have more part-time workers, and that is the increase. The plan that we have of the restructuring and everything is going on according to plan. We're just filling up to be able to deliver according to customers' expectations, but it's only over a certain time.
At least compared to 1 year ago, not compared to 3 months ago.
[Operator Instructions] And our next question comes from the line of Hjalmar Jernström of Erik Penser Bank.
I was wondering if you could elaborate on the current environment for acquisitions and how it has developed during the pandemic?
Yes. I would say, to be very clear, a lot of things are on hold. A big part of acquiring companies and organization manufacturing and product producers -- distributors is, of course, to be able to visit and to get your own understanding of business complexities and challenges and possibilities. And this has not been very possible during the last couple of weeks and months. So a little bit paused, but you do as much as you can in the background.Looking at the amount of M&A objects available, it's also decreased. I think it's -- people are quite hesitant to await, okay, what will the outlook be? What can you provide as a kind of guidance for future? I mean if you don't have visibility on the future of a certain company, it's very hard to be in a selling space.
Also, one additional question regarding the CapEx investments in Russia. Are they completely carried out during this quarter? Or will there be additional CapEx spending for the coming quarters?
We have started with some prepayment here. So it will come more as we go along. It's a payment plan, yes, that will follow.
And we have one further question in the queue so far. [Operator Instructions] The next question comes from the line of Marcela Klang at Handelsbanken.
I'm especially impressed by the margin development. It is actually up from last year despite organic decrease in sales. You already spoke a little bit about it, but I'm still wondering, could it be a similar situation as one of your competitors? I mean whether they prepared for much worse drop in sales with heavy cost savings and then the quarter actually turned up better than expected?
I think we write in the report that the sales figures are over our expectations to start with. So we were really cautious when this came in. And we have seen very good actions from our organization, and each and every country [indiscernible] have taken a lot of actions really. And we are prepared to cut costs even further. So I think it's -- and also, all the actions we have done that we presented also before how to reach the 10% is also paying off, of course. And then as mentioned a bit earlier also, we believe there is more potential, of course, also within our Menerga and the AC business also. But -- I mean to be a little bit cautious here also, we don't know really what to expect here moving forward. Of course, we are a bit afraid that the planning with the architects and so on has dropped under that, but we would see -- a little bit drop, but we will see. It's very hard to predict at the moment.
I mean everything that you see out there just now, Marcela, when it comes to Green Deal, the investment packages from different European units -- European states, they all agreed of it, but it's not decided in European Parliament. And they are not implemented in different countries. So we think midterm, this will be very beneficial for us. And the outlook is truly positive, but it's not what we see for the next coming months ahead. So the outlook is very hard to predict for the time being.
So you basically expect to keep most of the cost savings. Are you also looking at further potential for cutting costs? And do you have potential to do that?
Yes, as Anders already indicated, I mean when this started in mid-March, we already implemented certain activities to adjust our cost base, which proved to be very efficient. And as Anders said, we were quite impressed how fast we could move. But of course, as we are looking constantly on the developments, as we move along, we are prepared to do more if it's needed.
Yes. Then a question about Russia and this heavy drop there. This is against a strong growth a year ago. But was this mostly due to lockdown or any other issues in Russia? Because you then did mention it about -- among the countries that you are worried about.
It was mainly due to -- what we can see at least now is it was mainly due to this lockdown. I mean people are really forced to stay at home, everyone. So that was a little bit of a constraint to the manufacturing sites during some weeks, but then partly offset by selling from warehouse directly from stock as it also got hot and we are also distributor of cooling appliances in Russia. So a little bit plus and negative, but of course, the lockdown affected a lot.
And that is now, yes, fully open in Russia?
No. I think today, they are working, I think, 3 or 4 days a week. That's what is allowed.
And then a final -- then one more question. The Serum projects, when will they be booked, the first one especially? Is it already in your books?
One will be in September and the other one November.
Yes. And then a final question, the net financial items that were negative this quarter. Which currencies affect you there mostly? Is it euro or anything else?
It's euros and dollars, 50-50, say. A little bit more, let's say 60% for euros.
[Operator Instructions] Okay. As there are no further questions coming through at this time, I'll hand back to our speakers for the closing comments.
Okay. Ladies and gentlemen, then thank you very much for attending our call. Looking forward to hear and to discuss with you next quarter. We will move on then to conducting the AGM here in Skinnskatteberg. Unfortunately this year, not as many participants. I hope to welcome you here next year in a bigger group also. Hope that is really possible. So thank you very much for your attention here today.
Thank you, and goodbye.
Bye-bye.
Take care.