Systemair AB

STO:SYSR

Earnings Call Analysis

Systemair Reports Strong Q1 Results and Growth

Systemair's Q1 sales rose to SEK 3.175 billion, marking an 11.4% increase, with an organic growth of 10.7%. Acquisitions impacted growth by -3.5%, while positive currency effects contributed 4.2%. The operating margin improved from 9.5% to 10.5%, with an operating profit of SEK 334.9 million. Profit after tax reached SEK 242 million. Cash flow from operating activities grew to SEK 388.5 million, leading to a free cash flow of SEK 177.4 million. Net debt decreased to SEK 1.4 billion from SEK 2.6 billion. Notably, sales in Western Europe, North America, and Middle East/Asia/Australia/Africa regions grew strongly, though Nordic sales declined by 8.9%.

Strategic Focus and Margin Improvement

The executives highlighted that a long-term strategic focus over the years has culminated in improving the EBIT margin, surpassing the 10% financial target. This was attributed to thorough actions including revamping the factory footprint and taking advantage of robust sales volumes. The team expressed confidence in maintaining and potentially expanding this margin beyond 10% in the future.

Pricing Strategy and Market Adjustment

The company implemented price adjustments to align with market conditions, reflecting decreases in some commodity costs and increases in others due to factors like energy and transport. These adjustments are not blunt increases across the board but are tailored to specific product groups and result in a slight positive net effect on prices. The company has a review process for prices at least three times a year to ensure they stay competitive and responsive to market fluctuations.

Focus on Core Business Enhances Margins

The divestment of the AC segment has allowed the company to concentrate on its core ventilation business. This strategic move has not only simplified operations but has also better positioned the company to optimize the product mix, leading to improved margins. This focus contributes to the expectation of sustained margin levels without the need for a reset or compression.

Sales Growth Composition

Sales in the quarter were supported by a balanced mix of organic growth and pricing power, with the estimate showing around 50% contribution from each. With ongoing price adjustments expected to be mildly positive and the company's ability to maintain stable development, investors can anticipate consistent sales growth.

Stability in Demand Across Key Segments

The company reported steady demand in its core sectors without significant month-to-month variability within the quarter. Particularly, industrial logistics and hospital sectors are seeing high demand, indicating a stable outlook for the company's sales in these areas. The management foresees this stability as a continuing trend, adding predictability to future revenues.

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, welcome to the Systemair Interim Report Q1 2023/'24 Conference Call. I am Alice, the chorus call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, it's my pleasure to hand over to Anders Ulff, CFO. Please go ahead, sir.

[Anders Ulff, executive]

Thank you very much, Anders Ulff, CFO, here of Systemair. Me and Roland are sitting today in Skinnskatteberg, where we have a lovely summer day and it's also the day of our Annual General Meeting that will start here at 3:00. And of course, [indiscernible] and also to present what we believe is a strong report. You will find the presentation that we will run through on our Investor Relations page. And if you have some problems here, please press on the press release of the report, and you will find the presentation there. I will hand over now to Roland to do the presentation.

[Roland Kasper, executive]

Thank you very much, Anders. So my name is Roland Kasper, I'm the CEO and have the pleasure to present our report to you. Without further ado, I'll just switch to what we have on our Slide #2, which is an introduction to Systemair.

Systemair established here in Skinnskatteberg in Sweden in 1974. Our last year's net turnover amounted to roughly EUR 1 billion, and we're listed on the NASDAQ Nordic stock exchange market since October 2007. Today, Systemair Group, we run our own sales companies in 51 countries. We have 26 factories in 18 countries and they have around about 6,600 employees. And with that setup, we export today and serve 135 countries all over the world.

But directly, switching over to our Slide #3, which brings us directly to the report and our net sales in quarter 1. The net sales in quarter 1 amounted to SEK 3.175 billion compared to SEK 2.8 billion in the first quarter of the year '22, '23. This amounts then to a growth of 11.4% compared to -- which is organic 10.7%. On the right side of those following us on the slide presentation, you see the organic growth development. And the dip in the middle is of course, the only explanation for that is the pandemic circumstances and the recovery afterwards of that.

But let's go in to Slide #4 and looking into the growth analyze on the growth that we had. So organic, all the regions actually showed good organic growth just except our Nordic region. The main contributor after the organic growth of 10.7%. Here is, of course, to be mentioned the acquisitions, which, firstly, contributed negatively, which is the impact of the divestment of our AC businesses, which is then an amount of 3.5%. Then we had a positive impact of 4.2% by currencies just because of this weaker Swedish Krona towards both euro, U.S. dollar and Canadian dollar. So in total, then a growth of 11.4%.

Switching to Slide #5. Looking into the operating profit. As a result, the gross margin was unchanged at 34.6%, the same as the quarter last year. The selling and admin expenses for the quarter increased by 16.7% and the operating profit finally for the first quarter amounted to SEK 334.9 million compared to SEK 269.6 million the year before. That means that the operating margin increased to 10.5% compared to 9.5% the year before.

Switching then directly to Page #6, ladies and gentlemen, the profit after tax. The net financial items for the first quarter amounted to SEK 18 million. The currency effects on the long-term receivables, loans and bank balances amounted to a net of SEK 2.7 million -- SEK 2.6 million -- sorry for that. Interest expense for the quarter amounts to negative SEK 20.9 million. On the right side, in steps, you can then see the result of being then the profit after tax which amounts to SEK 242 million compared to SEK 217 million in the same period the year before.

Switching to Slide #7, the cash flow analysis for the first quarter. Cash flow from the operating activities in the reported quarter amounted to SEK 388.5 million. This compared to SEK 309 million the year before. And then the change in the working capital here is SEK 81.8 million. Last year, we had a change in working capital of SEK 373.8 million. Here, the working capital increase last year was quite sharp as a result of increased inventory and accounts receivable. That is a trend that we have been working with and reversed during this year.

The net investments in this quarter this year, excluding acquisitions, was SEK 129.3 million and net investments primarily are about the finalization of a production in Czech and also investments in our setup in Canada. This all amounts to free cash flow in the period of SEK 177.4 million compared to a negative cash flow of SEK 152.5 million in the year before.

And here, to be mentioned also, of course, as an effect about the results we have lowered our net debt to SEK 1.4 billion compared to SEK 2.6 billion the year before as a result of the divestment of the AC and of bringing down and taking control of inventories subside. This, of course, brings us strength and looking forward to organic investments for our future growth of the company.

Switching over to Slide #8. And here, you see a split in the pie chart of our development in different markets. Eastern Europe here is stable with a share of 13% of our total setup. North America with an increase of 12% to 13% of our total share. Other markets grew from 12% to 14% in the period, and Western Europe is really stable at 46% of the total share and the Nordic region is a slight decline to 14% of the total. By that going into some words about the different markets and how they have performed and switching to Slide #9.

Starting with the Nordic regions. The sales in the Nordic region decreased during the first quarter by 8.9%. And here, adjusted for currency effects, acquisitions such like, the sales decreased by 9.3%. But the Danish market showed a very positive development during the quarter, while the turnover in the Swedish, Finnish and the Norwegian market slightly decreased.

Next region, on Slide #10. Western Europe. Here, the sales development continued to be really strong during the quarter with an increase of 12.4% compared to corresponding period last year. And here also adjusted for currency effects and acquisitions, the sales increased by 9.5%. As all West Europe had a really good development, I do want to mention, in particular, the Belgium, U.K. and France showed good growth in the quarter. So the development of such in Western Europe stable and really positive.

Next slide, Slide #11. As a result of the positive development we have had, for example, in Germany, we also 2 weeks ago, could celebrate the groundbreaking for new production hall in Germany. So this new building where the expansion will be in total area of around about 4,000 square meters, will represent a significant expansion of our production, but also our logistics capacity in our center in Germany. And for the celebration of course, all employees and also certain guests participated in this event.

Next slide, Slide #12. Moving to Eastern Europe and the CIS countries. Sales in Eastern Europe and CIS countries increased in the quarter by 7.1%. Also here, adjusted by currency effects and acquisitions, sales increased by 2.6%. Most markets actually within the region showed really good growth here, especially to be mentioned Czech, Poland and Slovenia. The growth, excluding Russia, would have amounted to 14.1%.

Going to next slide, Slide #13, North America. In North America, sales increased by 26.6% during the quarter, and adjusted for currency effects, sales increased by 23.1%. And here North American, Canadian and the Mexican market showed really good growth in the quarter.

Slide #14. What we call the Other Markets or to be really precise, Middle East, Asia, Australia and Africa. Sales in this region, Middle East, Asia, Australia and Africa increased by 26.7%. Adjusted here for currency effects and acquisitions, the sales increased to 40% and is today the second largest region within Systemair. And here, I have to mention especially the colleagues in Turkey, India, Morocco and Malaysia, which had a really good growth in the period.

Switching to next slide, Slide #15 as a follow-up of the really good development in India. I need to mention a really nice prestigious order that has been delivered by our colleagues in India. And this is to bring really good ventilation solutions to India's new parliament building. This is a really iconic building where we had the possibility to deliver extensive and specialized product range for the best possible air distribution products to ensure a really optimum reliable air quality in these really nice buildings.

Next slide, Slide #16. Also to mention that we throughout '22, '23 and also introduced this that we're reporting, we have been supplying products to several e-Mobility suppliers in Europe. In total, a little bit more than 250 large units with and without heat recovery have been delivered throughout Europe for American and European car manufacturers. This drove a total amount in excess of SEK 140 million in value. E-Mobility production, of course, increases every year, and those leading manufacturers continue to invest in these factors with great need for ventilation, which is highly adaptive to the manufacturing processes. This is a really nice area of growth for Systemair.

And by that, ladies and gentlemen, I'll switch over to the last slide. I say thank you for listening and open the lines for questions. Thank you very much.

[Operator]

[Operator Instructions] This question comes from the line of Carl Ragnerstam with Nordea.

[Carl Ragnerstam, analyst]

It's Carl here from Nordea. A couple of questions. Firstly, I wonder if you could give any flavor on the order intake development during the quarter. I guess it's relevant maybe to give some flavor on both the pace in volume as well as pricing terms. And also finally, on orders, if you could give flavor on the development a little bit per region. Obviously, state that what happened during the quarter, but it would be interesting to hear about the sort of order dynamic.

[Roland Kasper, executive]

Yes. If we start to do the development of the region, as you can see in the presentation, we, of course, have, throughout all regions except Scandinavia, really, really good development. And I think that is a little bit what we have and see in front of us. When you talk about the order intake, which is something that we normally do not report. Of course, there is a mention in the report that the order intake.

[Anders Ulff, executive]

Book-to-bill order intake is above the invoicing for the month in total. Yes, sorry.

[Roland Kasper, executive]

I hope this answers your question here, Carl.

[Carl Ragnerstam, analyst]

Yes. And what would you say is the organic sort of growth in the order intake during the quarter if you exclude sort of pricing as well?

[Roland Kasper, executive]

If you compare this quarter with the year before?

[Carl Ragnerstam, analyst]

Yes, exactly, exactly.

[Roland Kasper, executive]

I mean, last year, we had over the whole year, as you know, we made 5 different price adjustments. This year, so for 2 and 1 is coming. So it's not as much as it was last year. But I would here at least estimate that of the organic growth around about 50% at least would be the pricing part.

[Anders Ulff, executive]

Quarterly development is, I think, 4% down. So it's a small...

[Carl Ragnerstam, analyst]

Sorry. What is 4% down? Sorry.

[Anders Ulff, executive]

You compare the order intake in the quarter compared to the order intake the year before, it's 4% down.

[Carl Ragnerstam, analyst]

Including prices, right?

[Anders Ulff, executive]

Including everything, yes.

[Carl Ragnerstam, analyst]

Okay. Very good. And also a little bit on the Nordics. You said that it is partly due to weakening market. Would you say that we in the quarter, see the full effect of sort of -- I mean, the soft new construction resi market, especially in Norway, I guess? Or will it accelerate due to lagging completions in any way? Or how should we see that development, do you think?

[Roland Kasper, executive]

You're totally right, where we see a little bit of lag on the new build residential is only in Norway and Sweden these days, which is only really a small part of our total turnover. To say it is over-- very hard to say. If you look at those countries where we really rely on predictability, it would normally be Norway which say that the churn is there. But it's hard for me to estimate. I mean we have a very short visibility here because it's a pure distribution business. But the predictions coming from the Norwegian markets are that it will churn out. So -- but it's not knowledge.

[Carl Ragnerstam, analyst]

Okay. That is good. And some of the companies or several other companies in sort of the [indiscernible] AC industry is coupling a little bit about the inventory levels at the distributors that they are lowering the inventory levels. I know that you are not working to a massive extent with distributors, but I guess, to some extent, in part in North America. Could you say what is happening there from a distribution point of view? And where are the inventory levels currently?

[Roland Kasper, executive]

Yes. We have also heard that several of our competitors are claiming that the distributors are bleeding through the inventories. We don't see that as a big impact for us. We see that in some areas, maybe in North America, but as we, of course, not only in the distribution business in North America, where this is applicable for us. We're also with the direct sales for direct project for schools and light commercial, which is a little bit different situation, of course. So yes, we see it, and we have heard it, but we're not that impacted about that.

[Carl Ragnerstam, analyst]

Okay. So a fairly limited extent, you would say.

[Roland Kasper, executive]

Yes. Correct.

[Carl Ragnerstam, analyst]

Okay. That's very good. And also, one finally, I think you took a little bit of a write-down in Menerga in the quarter. Is it due to the production move? Or is it anything else we should note about the development there?

[Anders Ulff, executive]

No, nothing related to Germany. This is for the Polish sales company -- sales entities. It doesn't relate to the German production.

[Operator]

The next question comes from the line of Adela Dashian with Jefferies.

[Adela Dashian, analyst]

Yes. A couple from me. Going back to the Nordics, the development in the Nordics, if you could just give us some more flavor into what -- like what is the dynamic there? What kind of different market exposure do you have in Denmark versus other countries that's driving good performance in Denmark, but weaker sales in Norway and Sweden specifically?

[Roland Kasper, executive]

Yes. Thank you for the question. It's quite easy. It is a different product mix that we have on the different markets. Just as a background, I mean, we have among the widest portfolio of products that we offer to the different markets. But only I think in 3 markets today, we offer everything. So we have a different setup of products depending on the market needs.

So in Norway, we are -- as like as in Sweden, but even more in Norway, we are deeply into the residential ventilation. Of course, new build but also in the renovation part. And in Denmark, we are, I would say, to the majority at all, we are in air hanger units for commercial led commercial industrial buildings. And that part is, as in the rest of Europe, strong and is developing, especially in Denmark very well. So that's the biggest difference.

[Adela Dashian, analyst]

That makes total sense. And then a similar question about Western Europe. What is the driving factor behind the good performance there? Is it more regulatory driven? Or other reasons for you being able to deliver strong organic growth there?

[Roland Kasper, executive]

I think it's a mix of a little bit of everything. Underlying, of course, is still, even if you can read a lot in the newspapers that it's still a rather stable market demand first of all, and I think the switchover such like as they do in Denmark on the commercials, we do in other countries on light commercials but also in residentials. So we see just following statistics, for example, the residential market in Germany is still developing positive. So there are a lot of different drivers that as a total gives us a rather stable and good and positive underlying market.

[Adela Dashian, analyst]

All right. And then finally, could you give us some more color on what's been driving the EBIT margin expansion in this quarter? And also if this is a sustainable level going forward?

[Anders Ulff, executive]

Yes. I think it's multiple factors really that are driving it. I mean, this is a very long strategic work that we have been doing over several years really to work with improving the margin and getting over our financial target of 10%. So I think this is just a result of all these actions altogether and of course, good volumes as it is right now also. That's a contributing factor as well.

But I think if you go back -- if you have a look at our, for example, the last presentation from the Capital Markets Day, I mean, we did a follow-up really on several actions that we have been working with on, for example, in the factory footprint and yes, several areas that we are working with in parallel really.

[Roland Kasper, executive]

And of course, also, as mentioned before, I mean, the AC divestment has given us the opportunity to focus more on our core businesses on the ventilation side, which in this good product mix that we have been able to develop now also has a better margin at them.

[Adela Dashian, analyst]

So in that case, we really shouldn't expect a margin reset or margin compression. If it's more efficiency initiatives, that's not bearing fruit then you should be able to maintain this level? Is that your expectations?

[Roland Kasper, executive]

That's correct.

[Anders Ulff, executive]

Absolutely. We are working on this target since long, really, and we have been confident all the way really that we're able to reach 10% and beyond that as well.

[Operator]

The next question comes from the line of Douglas Lindahl with DNB Markets. Please go ahead.

[Douglas Lindahl, analyst]

Congrats to a strong report. Actually, most of my questions -- both of my questions are on pricing. So first off, I wanted to firstly understand the portion of organic or volume growth and price growth in the organic side for sales. I appreciate the comment on the order intake, but can you give it for sales in this quarter? And also you mentioned that you are raising prices or are planning to raise prices. Can you give some comments on the logic behind that and roughly by how much you're planning to raise prices?

[Roland Kasper, executive]

When I start with the logic behind the price adjustments, we call it price adjustment because it's true price adjustments. We had 2 price increases earlier this year, the adjustment that we are having now is to adjust to some of the commodity raw materials being downwards corrected. Some of the electronics are in better availability and more competitive prices. But of course, some other commodities are also still increasing due to other influencing factors such as energy and logistics and transport. So it's more adjustment.

It's not in one over 3%, 4%, 5% set not at all. It's really to right set the pricing in the market. When it comes to the portion of -- sorry?

[Douglas Lindahl, analyst]

Fairly neutral on the group level then it seems, if you average it out.

[Roland Kasper, executive]

As an average, I would say, there is, of course, depending on what product groups we are, but in some product groups it is a little bit more, in others it's an adjustment downwards. So -- but I wouldn't say that. It's a small price increase at the end and net-net is positive, yes. And then on the portion of pricing on the organic growth it's very hard to come to an exact figure, but we calculate around about 50%.

[Douglas Lindahl, analyst]

Okay. The same as your order intake, basically. And just a clarification, the future price adjustments. Are those being incorporated as we speak? Or is there a certain date to when this will be through the system?

[Roland Kasper, executive]

The next actually is by tomorrow, 1st of September. And then we have an internal process to review 3 times a year at the minimum. It doesn't mean that we adjust 3 times but just that we review as a normal process if there shouldn't be anything that stands out even more urgent than that. So it's an ongoing process all the time in the background.

[Operator]

The next question comes from the line of Anna Widström with Handelsbanken. Please go ahead.

[Anna Lindholm-Widström, analyst]

So firstly, I would maybe like a clarification on the trends that you've seen during the quarter. So if you see -- seen any shift between the first month and the last month in the quarter?

[Roland Kasper, executive]

You mean from our May to July?

[Anna Lindholm-Widström, analyst]

Precisely.

[Roland Kasper, executive]

Not really, no. Sorry, no. I mean, overall, as you know, being in Scandinavia, you know what is happening here, but I would say, overall, we still see that the industrial logistics and hospitals and such like buildings are still in high demand and is developing well. So for us, it's a rather stable development for the time being.

[Anna Lindholm-Widström, analyst]

Okay. Great. And going back a bit to Menerga. What are your expectations for the upcoming quarters? What's happening on the construction there?

[Roland Kasper, executive]

Yes. As we have been informing earlier, this is, of course, an ongoing project, which this year will have the biggest turn. So today, the company as such the restructuring project is absolutely following our plans. And we will have the biggest change visible by next year. So we have a plan for the whole year because it's a lot of different projects involved in that, which is also moving up productions and components from and to other production sites within the group. So it's an ongoing project and I don't know if that's the part of the information that you want, but that is what is ongoing in the background.

[Anna Lindholm-Widström, analyst]

Okay. Great. And going back a bit to the cost dynamics. You mentioned a bit on like component side and material side. But how are you experiencing the personnel costs in different parts of your regions?

[Roland Kasper, executive]

Yes, they are quite interesting these days. Of course, the personnel costs are increasing, and the expectations are most probably higher than the increase in many, many countries. That is, of course, something that is affecting also our slate cost. But so far, we have been able to compensate for that with the internal efficiencies.

[Anders Ulff, executive]

We're still struggling on some sites also to find the right competence also. So a little bit we have to pay in certain places also.

[Anna Lindholm-Widström, analyst]

Yes. Okay. Great. That makes sense. And my last question is on how you are thinking about CapEx currently because obviously, you have very solid investment headroom after you've done the divestment. So is that something that's under review? And how are you thinking about CapEx currently?

[Anders Ulff, executive]

It's really nice to have a lot for me as CFO, very nice to have lots of money in the bank in that way and take the debt down and then to have lower interest expenses. But of course, lots of ongoing projects for future growth also ongoing as Roland informed a little bit about earlier also.

[Roland Kasper, executive]

We see that we currently are, of course, in a very positive and strong position. So to really to invest in our own future organic growth through investments in efficiencies and production sites, but also in markets. Of course, we also, as you know, we are, of course, looking into the M&A pipeline. So we think interesting times ahead. And of course, it's a confident situation where we are just now looking at the finance side.

[Operator]

The next question comes from the line of Henrik Alveskog with Redeye.

[Henrik Alveskog, analyst]

Okay. Yes. You've covered just about everything now, at least my questions. But I'm interested to hear if there were any or more like large project deliveries boosting sales, particularly within the group that you call Middle East, Asia, et cetera.

[Roland Kasper, executive]

Yes. It's also given a little bit of information, of course, in the report, we have had several very nice projects in India first of all, we have some on the industrial side come from Malaysia for the big industrial fans. But we also had some nice projects in the Middle East area. That's correct. I would though say that the biggest portion relatively to the size of our operation is in India but also very interested in...

[Anders Ulff, executive]

South Africa as well.

[Roland Kasper, executive]

South Africa as well, yes.

[Henrik Alveskog, analyst]

A follow-up then on that maybe. I remember you said probably 2 years ago, maybe I'm wrong, but a while ago, you said that you will focus less on these large projects because the profitability is usually lower. Have you changed this attitude, so to speak? Or could you just talk a little bit about that?

[Roland Kasper, executive]

That's a really good question because it's still the same answer, no, absolutely not. So if you look into -- especially these days, where some local markets would feel some kind of pressure looking into the newspapers. And we have really in the pipeline, we are looking on the mid to small size of projects. So of course, we have some really good partners on the customer side that I want to have our technology on board for their dedicated projects and those we are following.

But of course then, for example, as also reported in here the quarter 4, I had 1 slide about the e-Mobility investments. They are all together coming in different steps, they're coming to smaller projects. But first of all, these units and the solution for these kind of applications, they're all standardized for us. And that is one, of course, one of the things that we really like to have standard solutions and then, of course, can also make them replicable in higher demands.

[Operator]

[Operator Instructions] We have a follow-up question from Ms. Dashian from Jefferies. Please go ahead.

[Adela Dashian, analyst]

Yes. Just a quick follow-up. Going back to the question about the different sentiments on the distributor level versus what you're being able to deliver with your direct sales platform, could you please specify what the shares are in the different sales channels. And also in which regions you rely more on distributors versus your own direct sales platform?

[Roland Kasper, executive]

Actually, we don't rely on distributors in that many regions at all. As you can see, all in all, we have in all our countries where we have our own sales organization at 51, we also have our own warehouses and thereby our own distribution channel. For us, we normally said our business setup is more like that, that we have 40%, 50% of our volumes is on the standard product range, BPR, which we produce and distribute. And the other part of the volume is then the project business where we're working directly with the consultants with investors, architects and so on. So that's more the setup that we have.

[Operator]

Gentlemen, there are no more questions at this time. Back to you for any closing remarks.

[Anders Ulff, executive]

All right. Thank you very much, everyone, for calling in. And of course, both me and Roland are available if you have any further questions down the line here. So I wish you all a great day.

[Roland Kasper, executive]

Thank you very much, and thanks for listening in and take care. Bye-bye.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing chorus call. Thank you for participating in the conference. You may now disconnect your lines.