Systemair AB

STO:SYSR

Earnings Call Analysis

Systemair Q1 Performance Updates and Future Outlook

Systemair experienced a 2% decline in net sales in Q1, reaching SEK 3.111 billion. Organic growth was marginally negative at -0.3%. Notable regional performance included 10.7% growth in the Middle East, Asia, Australia, and Africa, and a 1.8% uptick in North America, while Nordics and Western Europe saw declines of 4.1%. The gross margin improved to 36.0%, but operating margin fell to 9.8%. The acquisition of PHEM in Malaysia and the streamlined Menerga production are expected to generate future growth and annual savings of SEK 70 million. Despite a challenging market, Systemair sees stabilizing conditions ahead.

Navigating Through Challenging Markets

In the recent earnings call, Systemair reported a slight decline in net sales, amounting to SEK 3.111 billion, representing a 2% decrease compared to the previous year. This decline is attributed to tough market conditions, particularly in the Nordic and Western European markets, which faced organic sales declines of 4.1%. Despite these challenges, markets such as North America posted a modest organic growth of 1.8%, primarily driven by strong performance in Canada, while sales in the U.S. contracted. The Middle East, Asia, and Africa demonstrated a notable growth of 10.7%, fueled by strong performances in Malaysia, India, and Singapore. Overall, the company's organic growth was slightly negative at -0.3%, reflecting ongoing market volatility and the impact of currency fluctuations.

Improving Margins Amidst Operational Efficiency

Despite the revenue challenges, Systemair's gross margin improved to 36.0%, up from 34.6% year-on-year. This improvement is attributed to prior price increases and an enhanced product mix, despite operating profit margin dipping to 9.8% from 10.5% last year, attributed to high comparative figures from the previous year. The company remains committed to improving margins further, anticipating more favorable market conditions. The management expressed confidence in their profit improvement initiatives, which aim to stabilize and enhance gross margins over time.

Cost Management and Strategic Initiatives

Systemair's selling and administrative expenses grew by 3%, amounting to SEK 24.6 million. This increase reflects ongoing wage inflation and the impact of relocating production facilities. Notably, the move of Menerga's production from Germany to Slovenia is expected to yield annual cost savings of at least SEK 70 million, fully realized in the next financial year. This strategic reorganization and expansion are aimed at boosting operational efficiency and profitability.

Investment in Future Growth

The company continues to invest in capacity expansions across various locations, including Lithuania, Italy, Canada, and Germany, which are aimed for completion in the upcoming quarter. This includes the recent acquisition of PHEM, a manufacturer of air handling units in Malaysia, which is projected to complement Systemair's offerings in Southeast Asia and Australia with anticipated synergies and growth opportunities.

Outlook and Future Guidance

Looking forward, Systemair management indicated no immediate need for further price adjustments in the short term but noted that they continuously monitor market conditions. The company is optimistic about stabilizing their sales trends and maintaining market positions, especially in markets they see as strategically significant, despite fluctuations in the Nordic region. The anticipated free cash flow for the quarter was reported at SEK 91.3 million, down from SEK 177 million the prior year. However, net debt decreased to SEK 1.056 billion, reflecting improved financial health and operational cash flow management.

Earnings Call Transcript 2025-Q1

[Operator]

Ladies and gentlemen, welcome to the Systemair Interim Report Q1 conference call. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Anders Ulff, CFO. Please go ahead.

[Anders Ulff, executive]

Thank you very much, and welcome to everybody. Thank you very much for calling in to our Q1 presentation. Me and Roland are sitting here today in Skinnskatteberg in a beautiful weather. We can almost promise that when we are hosting also our Annual General Meeting here today at 3:00. Maybe next year, you will be able to participate. You will find a presentation then on the Investor Relations page under Reports and Presentation of course. So by that, I hand over to Roland.

[Roland Kasper, executive]

Thank you very much, Anders, and hello, and welcome, everyone, to our quarter 1 report. Without further ado, let me just jump into the report by switching to the second page of the report, which you will find on the web page with the agenda. I'll start with a short Systemair in brief, followed by the first quarter summary, followed by Anders with the Q1 financials, and we have, as the fourth point, we have the first quarter acquisitions and project highlights. And we will end with the Q&A.

Switching to next slide, Systemair in brief. As you know, we are operating based on our core values of simplicity, reliability, the manufacturing market, energy-efficient high-quality ventilation products. With our customer focus, our emphasis is on delivery, reliability, availability, sustainability and quality. Systemair as a company was established in Skinnskatteberg here in Sweden in 1974 by our Chairman and Founder, Mr. Gerald Engström.

In our last fiscal year, we achieved a total annual turnover of around EUR 1.1 billion, and Systemair has been listed on the Nasdaq Nordic stock exchange market since October 2007. And today, we proudly operate our own sales companies in 51 countries together with 26 factories in 19 countries. With our about 6,600 employees in Systemair, we are today present and sell to more than 135 countries around the world.

Switching to next slide, slide #4, and looking at the highlights of the first quarter. So the organic growth of sales in quarter 1 was closely in line with the previous year to see this as a sign of strength given that we're still dealing with relatively tough like-for-like figures in an uncertain market. We did also finalize the acquisition of the manufacturer fund in Kuala Lumpur in Malaysia. And we also continued our capacity investments in Lithuania, in Italy, Canada and Germany, where we are building new facilities and invest in model machinery. Those will all be finalized during our second quarter.

At the same time, we started an expansion also of our existing facilities in [indiscernible] Dole in Norway. As you know at Systemair, we like to highlight important product launches. And here, we are following our successful launch of our Geniox AHU and design by side version, but also on our updated integrated and full reversible heat pumps with our next-generation access control systems that we have on our air handling units.

We are also glad to report, as you know, that we have finalized the move and the relocation of the Menerga production from Germany to Slovenia in our first quarter according to the plan. And finally, of course, we want to highlight that this year 2024, actually in October, we celebrated our 50 years anniversary for the company.

Next, switching to the next slide, Slide #5 and looking at the different markets and shares. So let's have a look at the market in the quarter. As you know, we have a global and quite diversified customer base, which provides us with a solid foundation for profitable growth. Looking at the different regions, starting with the Nordic, which represents 14% of our total turnover in the quarter and stable.

Western Europe has a 45% share and is thereby compared to the same quarter last year and a slight decrease from 46% to 45%. Eastern Europe, stable at 13% share and North America has been growing to come at 30% share today. Other markets, which, as you know, in corporates, North Africa, Turkey and Middle East and Asia, is continuing its growth path and increases from 14% to 15% of our total sales in the quarter.

By that, we continue with a closer look at the financial outcome in the quarter and hand over to Anders to next slide.

[Anders Ulff, executive]

Thank you, Roland. I will start off talking about net sales then. Net sales in the quarter amounted to SEK 3.111 billion compared to SEK 3.175 million last year. This is a decrease in sales of minus 2%. However, it should be noted that in the comparison that last year's figures were very strong due to the recovery of the earlier supply chain problems that led to an organic growth last year of 10.7%.

In Q1, we are reporting a smaller negative organic growth of 0.3%. You can currently see that the previous negative change in declining organic growth is starting to flatten out. To give you a bit more flavor on the net sales, we saw organic growth in Eastern Europe, North America, Middle East, Asia and Africa.

The acquisition of PHEM in Malaysia contributed to sales by 0.5%. And then finally, currency effects, negative by minus 2.2% coming from the strengthened Swedish krona during the quarter, where the biggest effect is from the Eeuro-SEK conversion.

Then we come to the geographic breakdown, and I will focus on the organic growth rates for each region. Starting off with the Nordics, where all major markets in the region contracted during the quarter, leading to a negative organic growth of minus 4.1%. This is mainly due then to the reduced activity in the residential sector that we experienced for some while.

In Western Europe, we saw an organic sales decline of the same number of minus 4.1%. Within the region, we can see both positive and negative signs. We had a positive development in Azerbaijan, Serbia and Czech Republic, while markets were slower in Slovakia, Slovenia and Poland. In North America, the organic growth rate was 1.8% plus which was split up in a very positive Canadian market, while the U.S. market contracted in the period.

In Middle East, Asia, Australia and Africa, we had good growth of 10.7% organically driven by -- mainly by the markets in Malaysia, India and Singapore. So all in all, the organic growth in total amounted to minus 0.3%. We are proud of our gross margin for the quarter. It was strong and ended up on 36.0% compared to 34.6% in the previous year. The increase is affected by previous price increases, sales in product mix, but also positive effects from the divested AC business.

Our operating profit margin amounted to 9.8% compared to 10.5% in the previous year. The operating margin is lower than last year as you hear, but however, last year was exceptional and in comparison with the previous years, '21/'22, '22/'23, we can confirm that we are gradually improving the margin with our profit improvement excellence.

It is, of course, possible to improve the margin even further in the better market situation. Selling and admin expenses in comparable units increased by 3% or SEK 24.6 million. Profit after tax amounted to SEK 210 million compared to SEK 242 million last year. We had negative effects from net financial of minus SEK 16.8 million compared to minus SEK 18 million last year where currency effects on loans and bank balances amounted to minus SEK 0.4 million, and the interest expenses amounted to minus SEK 15.6 million. By reducing our net debt significantly, the interest expenses is SEK 5.3 million lower than the same period last year. The tax rate for the period amounted to 27.1% or SEK 78.3 million.

And then finally, the cash flow for the quarter. Our working capital increased leading to a decrease in the cash flow by minus SEK 190.9 million, and this was mainly due to the increased trade receivables, decreased trade payables, but also a smaller effect than from increasing inventories. This led to a free cash flow of SEK 91.3 million compared to SEK 177 million last year.

Our debts stand are significantly lower than last year amounted to SEK 1.056 billion compared to SEK 1.4 billion one year ago. Net debt to adjusted EBITDA amounts to a very low 0.71 compared to 0.9 last year. And by that, I hand back to you, Roland.

[Roland Kasper, executive]

Thank you, Anders. Let's now have a short look at the main events and order highlights in the quarter.

But that's now I'm on Slide 12, and I'll switch to Slide #13. So, in May, Systemair finalized the acquisition of air handling unit manufacturer PHEM in Malaysia. PHEM is the manufacturer of air handling unit and fans for commercial applications with today's sales both in Southeast Asia and Australia and located in Kuala Lumpur, Malaysia.

During the last financial year that ended in March 2024, they had a turnover of roughly SEK 47 million. The acquisition gives us access to expertise and locally manufactured air handling units for the fast-growing market in Southeast Asia and Australia. As some engineering manufacturers and developed products that are -- what we customized to the local market and complement Systemair's offering well with no overlap in the existing product range, we see very good future synergies for Systemair existing sales organization across South of Asia and Australia.

That switching to the next slide, Slide #14. Systemair has discontinued Menerga's production in Germany, following the plan that we announced in November 2023. In July, all production has actually been transferred to Maribor and Slovenia, where production of all units on the new platform is now fully operational. We are very proud for the different -- for the efficient execution of this transfer project and are now looking forward to the improvement this new platform will give us.

This reorganization is expected to generate annual cost savings of at least SEK 70 million, with full effect in our next financial year.

That's switching to the next slide, Slide #15. At the end of our call here, I would like to present to you two projects that are following our strategic focus as presented in our last Capital Market Day. One of them being serviced in retrofit projects, and here is one very nice that we just recently executed.

This is a retrofit project for ASML in Netherlands, which is a leading manufacturer of chip machines that are supplied to the semiconductor industry. To achieve better energy performance and prolong the lifetime of our installed units, our local team upgraded these units to new specs and changed essentially technical functions to new efficient standards.

Total value of this energy upgrade for Systemair has an order value of about EUR 450,000.

Exciting, switching to next slide, Slide #16. Also here, the second project that I would like to present is for pharmaceutical and hospital applications, another focus area for Systemair. And here we supplied for medical research center in Sicily in Italy. The Ri.MED center will be dedicated to research and development of drugs, cell therapy and organ and tissue engineering.

We delivered our ATP products to a total value of roundabout EUR 1 million for this application and showcase our ability to fulfill high standards for any clean room application.

With this, ladies and gentlemen, I'd like to conclude, switch to the last slide, Slide #17, and open up the lines for Q&A. Thank you very much. Operator?

[Anders Ulff, executive]

We have to wait a little bit here, ladies and gentlemen, for the operator to reconnect to be able to open up for the Q&A.

We are still waiting. Sorry for this. Hope to be able to come back here soon. We're not able to open up the line from our position right now.

Yes. I believe now they will open up for a question from Karl Ragnerstam from Nordea. Karl, can you hear us? And see if we can hear you.

Hello. I think many of you have been disconnected from the call, but it should work if you connect via the webcast and post your questions there. Well, we are truly sorry for this. It seems to be still some technical issue. We can't hear you, Douglas. Yes, we'll do so.

[Audio Gap]

[Roland Kasper, executive]

Okay. So for the U.S. market, there is -- we reported a slight contraction of the volumes. This is more related to the distribution business that we have in the U.S. We see that more on the short term, not on the mid or long term. We think that the market development is slightly positive. And this is just in the quarter, a little reaction on the summertime and the distributors' warehouse situations. Nothing big.

[Audio Gap]

[Anders Ulff, executive]

Yes. We tried during the presentation to give a little bit of the background for that. And we pointed out three factors, but of course, there are many factors behind this. I mean we have been communicated in the past about profit improvement programs on the recent Capital Markets Day, and we have step-by-step taking a lot of actions here in order to improve the margins. But also in the last years, we have done price increases that is coming through still and also the divestment of the AC segment, of course, has an effect also here.

[Roland Kasper, executive]

I just want to highlight that, of course, if you look back in the material from our Capital Markets Day, we highlighted five in each of these different events. We highlighted a path to how we want to stabilize on a higher level on the gross margin, and we're following through those activities. So it is something that we really are working on in dedicated projects on the long term.

[Anders Ulff, executive]

Do we have any more questions in the webcast?

[Audio Gap] Okay. So for the pricing, yes, it's right. We didn't do any price adjustments for the last quarter. That is not included. We did one in the beginning of the year, but this was only smaller adoptions where certain components or variants have been, I'll say, right price. For the outlook, we don't see, for the time being, a need to make price adjustments. This is what we see for the next 3 to 5 months ahead at least. So that is the status where we are today.

In regards to the Menerga move, we are very happy to report that everything is done. Now we're in transition phase for the change of the local organizations where the production is now, of course, ramping up in Slovenia. And you will see the full effect of these moves as also reported when we announced that we were closed down in Menerga in Muelheim. We see the full move of the -- full effect of the savings in our next fiscal year and is estimated to be around about an effect of SEK 70 million.

[Operator]

We have another question from Henrik Alveskog. Question is you're right that work is in progress at several units to realign costs to meet any decline in sales. What units does this concern?

[Anders Ulff, executive]

As you know, we are constantly reviewing both footprint and profitability in our units, of course. And this is, I assume that the question is mostly added towards our operations. We have, of course, where we see that volumes are contracting or that other circumstances are leading us to it, we are looking for profit adjustments or adjustment in operations to improve our profit, of course.

In looking back to the last quarter, only minor things that have been done mostly on the efficiency, on the sales side, a little bit on the operations in Canada and smaller effect also in Turkey. But overall, it's been a normal average quarter this year.

[Operator]

Thank you very much. We have a question from Carl Ragnerstam. The gross margin continued to strengthen year-on-year, which is great to see. So firstly, what is the main driver behind that?

Secondly, we see that SG&A level increasing by 140 basis points year-on-year or 3%, while total sales are down 2%. Is that driven by wage inflation or temporary costs related to the production move? And should we expect this to come down when you are set in Slovenia?

[Anders Ulff, executive]

Yes. I think this is the question we already got and tried to explain one time, but I think the connection has been poor, and I suppose that's the reason why we get the question one more time then. But as I said about the gross margin, I mean, this is a long-time commitment that we have had. We have been working with a plan in order to do profit improvements.

And the first time we presented this was on the Capital Markets Day in 2019, and then we did a follow-up in 2023 Capital Markets Day. And also an effect then from price increases, not now, but the previous price increases that are implemented and taking effect now, and it's also a question about the divestment of the AC segment and a little bit more than a year ago.

So those three are the main drivers, but there are also multiple reasons in this, of course, so it's a blended message here. On the SG&A, then of course, we saw here during all the -- when we did all these price increases, 1 year ago, and if you put the selling and admin expenses in relation to sales that decreased quite significantly. And now we're seeing that the costs and the inflation, salary increases, the cost of services within IT, for example, all that is coming back now.

So we saw, especially here in our fourth quarter that SG&A was increasing. And we are, as Roland pointed out here previously, attacking that and trying to work with our cost structure and see, I mean, where we have lower volumes, we are also adopting the cost. So this is a constant work that we are doing.

[Operator]

Thank you very much. We have a question from Adela Dashian at Jefferies. Can you provide some more color on the stabilizing performance in the Nordics? What's the visibility and expectations for the remainder of the year?

[Roland Kasper, executive]

Yes. And that is, of course, this is a [indiscernible] question. It's very hard to actually answer that one. We see in the quarter, as also reported that all of the Nordic markets were a little bit -- not in decline, but a little bit weaker than the previous year. So as it is all of the markets, and we still see that the industrials are performing quite well. We see a good activity level as reported to consultants and installers, not utterly concerned but of course, it's not where it should be -- it's very hard for us to make an outlook. And I would say that it's -- now it's not possible to estimate, but we think it's flattening out in a stable way as we are today.

[Operator]

Thank you. We have three questions through from Anna Wistrom at Carnegie.

First question is Menerga situation. How is it going operationally? And how is the cost situation developing and your expectations for the near term? Secondly, cost development, freight, salaries, materials, et cetera. Third question, profitability in markets outside of Europe has been very good compared to a few years ago. Are there any specific events or strategies that explains this?

[Roland Kasper, executive]

Okay. Let me start with the Menerga situation after the move, the situation in Maribor. We're actually really happy. Let's say that you can see a challenge from different use. When we close down and moved over all the manufacturing from Muelheim to Maribor, as normal, when you close something, the order intake is on a really high level like it's following years.

So we had to start with challenges in Maribor because we had a very nice backlog. And of course, customers needed to have goods in short delivery times. So there has been a tremendous good job done by our colleagues in Maribor, and we're working hard to get down to normal delivery times in the rate for October, November at the latest.

We have a good backlog and good profitability development actually. There is, as always, when you're starting a production from, how to say, from scratch and ramp it up, there will always be some challenges, but we are really, really seeing very nice improvements coming up to nice levels. So a good move and very good results from that part.

On the question on salaries and freight, I assume that you're asking for how the costs have developed. For us, of course, salaries have with inflation, everything, there has been quite an increase throughout Europe. Also, freight rates have gone up, but now lately, they have stabilized. So overall, of course, the surrounding costs are increasing, but that is absolutely like that. But I think it's -- for the time being, it seems to have stabilized.

[Anders Ulff, executive]

Yes. And for outbound freight, we are trying to transfer that towards the customer side also. And we don't have that much rates also from Asia on the income. So that's a very low amount. There was a question also regarding I think the profitability in the other markets [indiscernible] noticed.

[Roland Kasper, executive]

Yes. That is something that we have -- I think there is a misunderstanding from any of the earlier quarter release reports of the other markets. And here, we're talking about North Africa, Turkey, Middle East, Asia and India, then, of course, that the profitability level should deviate from the group's target which is not. It's a rough up to group level. So it's -- for us, it's a good market. And of course, it's very positive for us that, that region for us is on a nice growth path.

[Anders Ulff, executive]

Yes. And also step-by-step as we are getting bigger, in that region, we are growing quite a lot, and we are taking a stronger market position. By that, we can also push the prices in a better way. We're happy with that area of the world.

[Operator]

We have actually a follow-up from Anna Windstrom. Question is in more challenging markets, how do you view the competitive landscape? Are you stable in market shares in Nordics and Western Europe?

[Roland Kasper, executive]

In the Nordics, what we say in those markets where we are present or those applications that were present, from what we can see from statistics, we have a stable market share. In mid-Europe, we even see that in some of the applications where we are more activists today that we are taking some market shares.

This is especially related to mid Europe, Germany, Benelux, U.K. and [indiscernible].

[Operator]

Okay. Thank you very much. We have another question from Carl Ragnerstam. I was a bit surprised over the somewhat lower organic growth pace on rest of the world, still good versus other geographies, but we have perhaps been used to a slightly higher growth rate over the recent years. Is it a bit slower markets or just quarterly volatility?

[Roland Kasper, executive]

Good question. In the quarter, when it came to the organic increase that we see in other markets, it was specifically here to Turkey and Middle East. There was you had, of course, [indiscernible] other things for -- especially for Saudi, but that time of the year is a little bit slower so that is the explanation. But rest of the other markets like North Africa, India and Asia was growing strong still in the quarter.

[Anders Ulff, executive]

Yes. And of course, it's not really sustainable to keep on growing in our industry with 20% to 40% organic growth. I know last year, we did some record big deliveries also in the northern part of Africa also [indiscernible]. So I think we can be happy with the growth rates that we are presenting then about 10% here.

[Operator]

Thank you very much. Apologies once again for the technical difficulties we faced today. [Operator Instructions].

[Anders Ulff, executive]

Me and Roland are available. If you have any questions that you would like to ask us or so. So please feel free to contact us.

[Operator]

It appears we have no further questions. So I will hand back to the management team for closing remarks.

[Roland Kasper, executive]

Okay. Ladies and gentlemen, as I said already, really sorry for technical difficulties in this call. I hope you got the answers that you were looking for. As I also mentioned before, anything else that you would like to ask or [indiscernible] please let us know. We are very happy to serve. By that, I would say that we are closing today. Thank you very much for attending and hope to see you soon again, and that would be on [indiscernible]?

[Anders Ulff, executive]

In the beginning of December for the Q2 report.

[Roland Kasper, executive]

Perfect.

[Anders Ulff, executive]

Thank you very much all. Take care.

[Operator]

Thank you very much. Ladies and gentlemen, you may now disconnect your lines. Thank you for joining.