Systemair AB
STO:SYSR

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STO:SYSR
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Price: 92 SEK 1.1% Market Closed
Market Cap: 19.1B SEK
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Earnings Call Transcript

Earnings Call Transcript
2019-Q2

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Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Systemair Q2 Telephone Conference. [Operator Instructions]Without any further delay, I would like to hand over the conference to your speakers today, Mr. Roland Kasper and Mr. Anders Ulff. Please go ahead.

A
Anders Ulff
CFO & Secretary to the Board

Yes. Good morning, everyone. Anders Ulff and Roland Kasper sitting here together. First of all, we had some comments. It was not that easy to find our presentation on our web page. It's a very nice and new web page, but maybe not that easy to find, so you need to scroll down a little bit on the page to find the presentation and the link to the telephone conference. I guess all of you have managed to call in, of course, but just to find the presentation.

R
Roland Kasper
Group CEO & President

Okay, ladies and gentlemen, let's jump in to the report as such, following the presentation, so in Slide #1. Welcome to our quarter 2 report. And this is Systemair, established in our headquarters in Skinnskatteberg in Sweden in 1974 based around the product invention. Today, we have an annual sales turnover of roundabout EUR 730 million. We are listed on the NASDAQ stock exchange market since October 2007. And today, we have 50 sales companies in different countries all around the world. And as you know, we have more than 1,400 products on stock and then in different sizes and variations, so it's quite a lot of things that we have at immediate supply to our customers. Today, we employ a little bit more than 5,600 employees in our company, and we have more than 20,300 registered customers in our ERP system. So all in all, with this setup, we are delivering our goods and services to more than 100 countries all around the world or, to be a little more precise, in excess of 130 countries all around the world.Going to Slide #3, and they are numbered down at the end. Looking at the breakdown in markets and our shares there. For Eastern Europe and the CIS countries, they're 16% of our turnover. North and South America represents 9%. Then we have Nordic region, which is 22%, whereas before it was 23%. And Western Europe, this has grown up 1%, going from 41% to 42%. Then we have Africa, Middle East and Asia, called here in this slide Other Markets, which represents 11%.Slide #4. Coming to the net sales in our quarter 2 report. The net sales in this quarter represented SEK 2.151 billion compared to SEK 1.86 billion in the quarter 2 in our year '17/'18 before, which contributes to a growth of total 15.4%, whereof 9.1% are organic. Slide #5. Looking at the growth. Organic, here, especially the good growth in North America, Turkey and India contributed with this 9.1%. The acquisitions was mainly contributed by the acquisition of Syneco in Switzerland, Greentek in Canada and the divestment of Reftec in Norway, which is 0.9%. And then the currency strengthened effect, which here is mainly the euro, which is actually an effect of 5.4%. So in total, 15.4%.Slide #6. So the operating profit in quarter 2. And here, we have improved profitability. The gross margin increased to 34% from 33.9%. The noncomparable items was SEK 13.3 million in the quarter, and this including a provision for doubtful receivable in the Middle East and restructuring costs, whereof the restructuring costs here contributes roundabout SEK 9 million.Sales and admin expenses for the quarter increased with 12.3% for comparable units, and the operating profit for second quarter amounts to SEK 188.9 million. All in all, this is then representing 8.8% of margins compared to 7.7% or SEK 144 million in the quarter the year before.Slide #7, profit after tax in our quarter 2. The net financial items ended the second quarter at SEK 11 million. Effect of foreign exchange on long-term receivables, loans and bank balances calculated at SEK 3.5 million; interest expense for the quarter, SEK 8 million; and estimated tax for the quarter amounts to SEK 51.5 million or 29%. So profit after tax is then resulting in SEK 126 million compared to SEK 101 million the quarter the year before.Slide #8, cash flow analysis. Operating profit, as recorded, SEK 188.9 million versus SEK 143 million in the quarter a year before. Change in working capital, SEK 109.5 million. Net investments, which here is mainly the production machinery where we're doing improvements for efficiency measures, is SEK 39.9 million. And then the free cash flow then amounts to SEK 39.6 million negative. So the total net indebtedness then resulting to SEK 1.9 billion compared to SEK 1.58 billion the quarter a year before.Slide #9, looking into the different markets. Nordics. Sales 9% higher than the same period last year. Adjusted for foreign exchange effects and acquisitions, 6%. And here, we have to say this time, the Swedish, Finnish and Norwegian markets reported very good growth in the quarter. And all in all, Norwegian market is today 10% of the group's turnover. And here, we have to look into that it's Systemair. We've got -- we also have here Menerga entities and we also have Frico entities in Norway. So all in all, they represent in the Systemair group 10% of our turnover today.Going to Slide #10. Sales in Western Europe were 16% higher than in the corresponding period last year. And here, adjusted for foreign exchange effects, 5% organic growth. German market share is 15% of the group's turnover. And here again, in Germany, we actually have Systemair Germany, we have Menerga, we have TTL, we have LGB and Frico companies. So all in all, they all together as a sum are representing 15% of the group's turnover today. Several markets in the region performed very well in the period here in Western Europe. Here, especially and gladly to see Greece, Spain and Italy and Portugal.Going to Slide #11, Eastern Europe and CIS. So sales in Eastern Europe and CIS rose by 12% during the quarter. Adjusted for foreign exchange effects and acquisitions, sales rose by 7%. Sales in Russia were more or less unchanged during the quarter compared with same period in preceding year. Russian market accounts for 5% of Systemair total sales. And in previous years, it was actually 6%. So major markets and regions showing good growth during this period. And I have really to highlight here Czech Republic, Slovenia and Slovakia, where really the market is really positive for Systemair Group.Slide #12, North and South America. Sales in North and South America region during the quarter is actually 20% higher than the same period last year. And adjusted for foreign exchange effects, but especially the acquisition of Greentek, the sales increased by 4% in the quarter. Both the Canadian and American market performed well. A little bit troublesome and still under a special surveillance, I would say, is of course the situation in South America in -- especially the Brazilian situation after elections. So here, we stated South America with an unstable forecast.Slide #13, Africa, Middle East and Asia. Sales in this region increased by 28% during the quarter compared with the same period in the preceding year. And adjusted for foreign exchange effects and acquisitions, sales rose by 41%. Sales in Turkey, India, South Africa, China and Morocco increased during the quarter but declined in parts of the Middle East.Slide #14. Coming to -- looking into what we have done in the quarter. As we also announced in the press release, we acquired a company, Koolair, in Spain. The Spanish company Koolair is a leading manufacturer of air distribution products, and the export is contributing with 50% of the total turnover of the company. Production is actually situated in Mostoles outside of Madrid, only 3 kilometers from the -- for the existing Systemair factory. And the turnover of the company amounts to EUR 30 million. Closing of transaction was November 1, 2018.And also to highlight what we do, of course, in other parts of the world, we have taken a specialty here for us, which is an order of 78 pieces of high-induction centrifugal jet fans for car park ventilation for a project in Guadalajara, Mexico. It's an underground parking for a shopping mall, GalerĂ­as Santa Anita. The order value might not be that big. It's USD 134,000. But to highlight that we're pursuing the market development, we entered the market in Mexico with this car park ventilation for private and residential high rises and now exceeding into the more commercial state development. And this is, of course, also following our strategy to focus on mid and small-sized projects with our specialty within ventilation and better margins.And with that, ladies and gentlemen, following to the last slide, this is a thank you, welcome with question, and we're opening up the line for question from your side. Welcome.

Operator

[Operator Instructions] And we have already have a question. The question comes from the line of Douglas Lindahl.

D
Douglas Lindahl
Analyst

So a few questions from my side. First of all, I was wondering if you could give us some sort of indications on the profitability levels on the Koolair acquisition. I note that it's a highly automated business, or you wrote that yourself, at least, so I would assume the margins could potentially be above Systemair's Group EBIT margins. Would that be a fair assumption?

R
Roland Kasper
Group CEO & President

The Koolair margin are -- I would say, today they are at our level where we are reporting here. But of course, we see the synergies in different market where we can cover together and raise volumes together with the existing Koolair organization. So here, it's about catching the synergies and of course, volumes. And I mean, fully automated factories, of course, will have an impact positively.

D
Douglas Lindahl
Analyst

Okay. So -- and on restructuring, more specifically on Menerga, can you give us an update on what's going on there? And how we should expect the cost here going forward?

R
Roland Kasper
Group CEO & President

Yes. The restructuring as such, as mentioned, we had a portion of SEK 9 million here in the restructuring cost that we recently report. SEK 6 million of those are actually contributed to Menerga. So the restructuring is a little bit ongoing in Menerga. But what we are doing now -- just now for Menerga is that we are changing not the staffing at this time. This is what -- the SEK 6 million was according to staffing, but the next steps are actually implementation of new ERP systems and this kind of things. So it's more efficiency-enhancing things that we are doing now. So we are continuing to work with Menerga, to improve Menerga, but now we are changing over to more enhancing efficiency because that's what's needed.

D
Douglas Lindahl
Analyst

Okay. And just one final question from my side. On your order backlog, can you comment anything on the profitability levels maybe compared to what they've been in recent times? Does it differ to any extent?

R
Roland Kasper
Group CEO & President

When it comes especially maybe to -- if we think like for big, big projects with lower margins, I would say we have none of these ahead of us or in the backlog today. As also stated in the report here, what we started with 1 years, 1.5 years ago is to change the strategy and also the understanding and the perception, but also the habit of a lot of our sales companies to really refocus a little bit more on the mid and small-sized projects because traditionally, in the small and midsized projects, you have better margins. So the backlog is quite stable and good comparable to the quarter the same year before, but it's more on midsize projects. Of course, there are some bigger ones, but we are at the end of those. But I don't see in the pipeline that we have any bigger burdens as there have been like, for example, the Menerga case.

Operator

[Operator Instructions] And we have another question. The question comes from the line of Henrik Alveskog.

H
Henrik Alveskog
Equity Analyst

Well, first off, you commented a little bit on steel prices and raw materials in general. Is that a stable situation now? Or what would you say?

R
Roland Kasper
Group CEO & President

It's almost flat. We can see in some of the raw materials even a little bit decreasing for the time being, so not -- no big worries for the time being. Of course, it's something that we are monitoring constantly because you never know. But we have also adopted, of course, and we have negotiated a lot. What might be a concern coming up is a little bit on the motor side because there is a shortage of control equipment, which also are part of the motors, of course, that's what we know of.

A
Anders Ulff
CFO & Secretary to the Board

We have also seen some increases in labor, workers' salaries also in several markets also. So that's increasing maybe instead of raw material at the moment more.

H
Henrik Alveskog
Equity Analyst

Okay. And the price rises that you mentioned here, is there -- have we seen the full effect in this quarter? Or will it still improve margins in the near term?

R
Roland Kasper
Group CEO & President

No. You have not seen the full -- yes. You have not seen the full effect in this quarter, no. I mean, during these price adjustments, you have, of course, to see that we are working a lot with the projects and projects we can quote. And they can come within 2 months. They can come in 6 months. They can come after a year. So you will see it partially coming quarter-by-quarter. And of course, we are working, as I said, also constant with that. So we are adopting and we are acting whenever we see that's needed to. I think a quite interesting point is that Anders mentioned here also that we have to look more and more of our resources. Because in many European but also in American markets, it's harder and harder to get the right resources nowadays and you need to pay for them.

H
Henrik Alveskog
Equity Analyst

Yes, okay. And then just a little detail on the Canadian -- well, the acquisition and -- that you mentioned that you have moved into. Well, you merged the 2 companies, I guess, in one premises. And will that incur some costs in this quarter now -- that we are in now or...

R
Roland Kasper
Group CEO & President

Yes. Very good question, Henrik. We -- from day one, it was very clear that we would move the existing operations immediately to our existing own factory. So that was -- it actually started from day one that we moved existing under full operation, and it's all already done and implemented. So there's no cost coming up in the next quarter for that. And that was actually also the strategy when we acquired Greentek to immediately move over in our own existing facilities.

Operator

The next question comes from the line of Emmi Ă–stlund.

E
Emmi Ă–stlund
Analyst

So my first question is regarding sort of the working capital buildup and the trade receivables, I think. Could you give some more color on that and the reasons and what we should expect going forward?

A
Anders Ulff
CFO & Secretary to the Board

Yes. I mean, first of all, you can see an increase, but it's quite normal this time of year really because it's our peak season. So it's really increasing for the moment. We have been looking into this and also the inventory values as normal. But of course, there are some specific projects going on for the moment. And we see the end of that, and that's also mentioned earlier about this Linde project, which has been invoiced the last bit in quarter 2 also. So that's one reason for the increase for the moment. So I believe we have around EUR 4 million open in that project for the moment. So it's one of the reasons. But other than that, it's quite normal for the seasonality to have high receivables at the moment, yes.

E
Emmi Ă–stlund
Analyst

And you mentioned the Linde project. Could you specify how much that has affected this quarter, I mean?

A
Anders Ulff
CFO & Secretary to the Board

Yes. It's EUR 2 million turnover with no margin.

Operator

[Operator Instructions] And we don't have any further questions on the phone lines. Please continue.

A
Anders Ulff
CFO & Secretary to the Board

All right, okay. Then we say thank you very much for calling in.

R
Roland Kasper
Group CEO & President

Thank you very much.

A
Anders Ulff
CFO & Secretary to the Board

And if you have any more questions, don't hesitate to call either me or Roland.

R
Roland Kasper
Group CEO & President

Yes, you're all always welcome.

A
Anders Ulff
CFO & Secretary to the Board

Okay, thank you very much all.

R
Roland Kasper
Group CEO & President

Thank you, bye-bye.

Operator

Ladies and gentlemen, that does conclude the conference for today. Thank you all for participating. You may now disconnect. Speakers, please standby.