Systemair AB

STO:SYSR

Earnings Call Transcript 2020-Q2

[Operator]

Welcome to the Systemair Q2 report. [Operator Instructions] Just to remind you, this conference is being recorded. Today, I am pleased to present Roland Kasper, CEO; and Anders Ulff, CFO. Gentlemen, please begin.

[Anders Ulff, CFO & Secretary to the Board]

Yes. Good morning, everyone, and welcome…

[Roland Kasper, Group CEO & President]

Good morning.

[Anders Ulff, CFO & Secretary to the Board]

Welcome to the Q2 telephone conference. Due to an update on our webpage, it might be a bit complicated to find our presentation, but you have to go to the web address group.systemair.com/investor. And if you scroll a little bit down there, you will find the presentation and the report. I'd like to -- you're welcome to contact us, and we will forward it to you after this call. So should we get started, Roland?

[Roland Kasper, Group CEO & President]

Yes. Of course. So welcome once again to the Q2 report. [indiscernible] presentation and those of you that have downloaded it and have it in front of you, now switch over to Page #2. So as you all know, our company was established in 1974 in Skinnskatteberg, Sweden. Last year, we reported an annual turnover of EUR 830 million, and we're listed on the stock exchange market, Nasdaq, since October 2007. We, today, actually have more than 50 companies around the world with our own sales entities. And we are a group of over 6,200 employees in the group. And currently, we export to more than 100 countries all around the world.Switching thereby to Page #3. Looking at our markets, this is our actual market share. So Eastern Europe and the CIS countries growing from 16% to 17% in total with each turnover. North and South America increased from 9% to 10%. Other markets, being Turkey, Middle East and Asia [ Pacific ], from 11% to 12%. Nordic region actually declined slightly from 22% to 18%, and Western Europe really increased from 42% to 43%.Next slide, Slide #4. And here [indiscernible] into the report for our quarter 2. In the quarter 2, we achieved SEK 2.483 million of turnover. This contributes to a growth total of 15.4% compared to the quarter 2 of the year before, SEK 2.15 million, with organic 6.0%.Switching to Page #5, a strong quarter. So where does it come from? On the organic part, especially good organic growth in North America and Eastern Europe, which contributes to the 6%. By acquisitions, we have remained affected by the acquisition of Koolair, Pacific Ventilation in Australia and parts of the Systemair Maroc, which contributed 5.2%. And also then this strengthened currency effect of the euro, which contributes, all in all, 4.2%, which gives us a total of 15.4% total growth in the quarter.Page #6, Slide #6, operating profit now in quarter 2. The operating profit amounted to SEK 284 million, contributing to 11.4%, mainly gross margin increased to 35.8% compared to 34.0% last year quarter 2, that's mainly due to high capacity utilization of factories and the result of our profit improvement actions. Our sales and admin expenses for the quarter increased with 8.1% for comparable units, and the operating profits of SEK 283.9 million versus SEK 188.9 million in the quarter the year before, which was 8.8%. And also to say here that we have an operating profit, including a one-off effect of SEK 7 million from the selloff of the Airwell brand. Next slide, Slide #7. Profit after tax in quarter 2 amounted to SEK 194 million. Net financial items ended the second quarter at SEK 20 million compared to SEK 11.1 million. The effects of the foreign exchange on the long-term receivables, loans and bank balances were calculated at SEK 9.9 million, and the interest expense for the quarter totaled SEK 10.5 million compared to SEK 8.1 million the year before. Adjusted for the IFRS 16 effects, the interest expenses totaled SEK 8.3 million. And as a result, the estimated tax for the quarter amounted to SEK 69.6 million versus SEK 51.5 million or 26.4%.Next slide, Slide #8, our cash flow. Cash flow from the operating activities amounted to SEK 294.3 million to be compared with SEK 196.3 million the year before. Change in working capital is at SEK 23.6 million here, mainly consisting of increase in trade accounts receivables of SEK 137 million. The net investment, excluding acquisitions, amounted to SEK 58.5 million versus SEK 39.9 million the year before. And here it's mainly machinery business in Spain, Germany and Sweden. In Spain, it's a machine for -- to increase efficiency; Germany, an increase of capacity for extra time; and here in Sweden, I'll come back to it in a separate slide.As a result of that, our free cash flow amounted to SEK 212.2 million compared to SEK 46.9 million the year before, and our net indebtedness slightly increased to SEK 2.2 billion.Going to Slide #9, and looking into the markets, with the most specific in the regions. Starting with the Nordic region, sales were actually 1% lower than the same period last year, so we have a negative growth of 1%. The Danish, Norwegian and Finnish market declined slightly during the quarter, but the sales in Swedish market showed a good growth. In the Norwegian market, there are some signals of -- indicating that the further slowdown is to be expected here, especially in the residential part of the business. Exchange rate effect and acquisitions did not affect our sales or materially affect during the quarter in the Nordic regions.Next slide, Slide #10. Western Europe. Sales in Western Europe markets were actually 19% higher than the corresponding period last year. And here, a major contributor is the acquisition of the Koolair in Spain had a quite significant impact. Adjusted for the foreign exchange effects and acquisitions, the sales rose still by 7% organic. And the German market is now 15% of the total group's turnover. But also to state that several markets in the region performed really well during the period, especially here in Germany, France, the Netherlands and England.Next slide, Slide #11, Eastern Europe and CIS. Sales in Eastern Europe and CIS countries rose by 20% during the quarter, adjusted here for foreign exchange effects and acquisitions, actually is an organic growth of 13%. Sales, especially in Russia, increased by 21% in the quarter, calculated though in Swedish kronor. Russian market today represents 30% of sales in this region, Eastern Europe and CIS. Major markets in the region that are also showing really good growth in the period is especially Czech Republic, Poland and Slovakia.Next slide, Slide #12, North and South America. Sales in North and South America region during the quarter is actually 22% higher than the same period last year. Adjusted for foreign exchange effects and acquisitions, sales increased still by 13% organic in the quarter, and here's both North or -- in America and Canadian markets have really performed well in the quarter.Next slide, Slide #13, Middle East, Asia, Australia and Africa. Sales in these regions increased by 24% during the quarter. Adjusted here for foreign exchange effects and the acquisition, sales in region increased 3% relative to figures for comparison that were really high in this region, in the quarter the year before. The effect here, of course, also is influenced by the acquisition in Australia. Sales in Turkey, South Africa, Morocco increased during the quarter, declined slightly in India from very high figures. So still a growth of 24%, whereof organic 3%.Slide #14, coming here into something that we already stated here in our Capital Markets Day in September. Systemair has changed the financial goals slightly. And here what we have you informed about is that we are changing our growth conditions. We went from 12% to 10%. The equity asset ratio is still the same, at above 30%. EBIT margin, 10% or higher, of course, that's our financial growth. And we changed our dividend goal from 30% to 40%. So we lower our growth condition, and we raised the dividend goals.Slide #15. Our Slovenia company, Systemair d.o.o. has been given a special prize that we want to communicate, as the "best long-term presence foreign investor," we received the prize last week. And we've won this award in the category of best long-term presence foreign investor in Slovenia, which we're quite proud of. The prize ceremony is organized by the SPIRIT of Slovenia, which is part of public agency who basically is in connection with the Ministry of Economy, promoting Slovenian economy to get or to attract foreign investors in Slovenia. In 2012, Systemair Slovenia received incentives for investment in new machinery and -- so they have us on their radar, and we're very, very proud to get this award.Next slide, Slide #16. Also -- actually also, we're informing about in our Capital Markets Day, we have a long-term strategy for our sustainability measures and that's why we want to make a follow-up here on giving information about our continuous environment, the investments that we're doing, especially in our headquarters. However, some years ago, we have been replacing our heating system in Skinnskatteberg with 6 heat pumps. And these 6 heat pumps, they're replacing oil-based heating system before, which gives us an annual saving of 1.2 gigawatts of effects and more than 500 tons of CO2 annually. Also, with the investment in our multicoil plant which we tested 3 years ago, we are saving up to 12% of our used sheet metal per year, and it also significantly improves our productivity. Currently, we have a machine investment ongoing to increase efficiency with our compact units, and this will also improve the ergonomics and the ease of handling for our employees. These investments are concluded. We will also, then, during the first quarter in 2020, switch completely to climate-neutral electricity based on EPD Vind in our headquarter in Skinnskatteberg. This will meet the requirements of the Nature Conservation Association for a Good Environmental Choice. So this is a long-term strategy to be the -- switch over to be climate neutral in our own headquarters.By that, ladies and gentlemen, thank you for listening to this report, and we hereby want to open up the lines for questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Carl Ragnerstam of Nordea.

[Carl Ragnerstam, Analyst]

So first of all, I mean, you reported a really strong margin on a group level. So could you specify what was the main margin driver in the quarter? I mean could you perhaps split up how much is price increases, maybe churn out of Menerga and there Airwell and so on. Could you give some more information there?

[Anders Ulff, CFO & Secretary to the Board]

Yes. Well, it's quite hard for us to specify what this price increase is separately. But I mean, of course, the basic or the biggest reason here is the organic growth of 6% and the volume increase we have, which is positive, especially for these factors that we have on the restructuring. So both for Menerga and for the AC business, this does really good for them. So it's around SEK 35 million to SEK 40 million improvement that comes from that side really. And other than that, it's -- as we are running separate projects for pricing and also for the factory consolidation and the Geniox rollout and so on. So I mean we have multiple projects ongoing in order to improve the gross margin.

[Carl Ragnerstam, Analyst]

Okay, perfect. And going back to the -- bit more on the Capital Markets Day where you presented the margin breach to reach 10% margin target. Could you comment on what initiatives that you plan to focus on and probably implement in the short term, I mean, in the next few quarters?

[Roland Kasper, Group CEO & President]

You can look [ at it ] like this, Carl. Actually, most of the activities are running entirely in separate groups, and so we are focusing heavily, of course, on what we've had specified at the Menerga. There are continuous projects ongoing with our manufacturing entities and resourcing. And then, of course, also the volume surplus that we are looking for in the corporation with the, for example, Panasonic and others. These are all contributing things but the profit improvement program, and we started already 2 years ago. So -- and there are several things going into parallel. It's not that we are running 1 of the 4 drivers separately, and then we take the next one. We have to run [ it in ] parallel.

[Operator]

And our next question comes from the line of Douglas Lindahl of Kepler Cheuvreux.

[Douglas Lindahl, Analyst]

So I want to come back to the margin improvement again. I know you mentioned higher capacity utilization, but I was wondering if you could be a bit more specific. Is the Russian market, for example, a big explanatory factor? Also, I wanted to understand, going back to pricing, are you seeing a generally better price environment in the market? Start with those 2 questions, please.

[Roland Kasper, Group CEO & President]

Generally, the price increases that we're doing seems like, let's say, our peers in the market, they have the same underlying arguments that we have. I mean we're talking about effects of raw material components. We're talking about the electronics and so on and so on. And the natural price increase that is ongoing underlying because of the need of better components to achieve better energy efficiency in things. So that's an accepted one. Looking at the Russian market as such, we don't see any deterioration of the market prices for the time being. We also think that if the market will continue as it is in Russia, just the possibilities, actually, that we need to look into.

[Douglas Lindahl, Analyst]

And just on Russia there, is it -- but is that the big explanatory factor to these very strong margins, would you say? I mean the Russian market, is it above average profitability in [ the ] Russian market?

[Anders Ulff, CFO & Secretary to the Board]

Yes. The profitability is about average in Russia. But this time, I mean, I mentioned here Menerga and the Airwell, they are main drivers. But it's overall a very positive development in most companies, I mean Western, Eastern Europe and also in North America. So this is a contribution from most of the units, obviously. We don't have a lot of negative input right now.

[Roland Kasper, Group CEO & President]

I think what was stated in the report, is it's actually really a -- the bigger driver, which is the capacity utilization in our factories, and it's really in most of the places. And having good utilization, of course, you have better margins. But the secondary is also that, as we also reported some quarters ago, we have worked heavily to switch over from huge projects that slipped with lower margins to reasonable-sized projects with better margins, and you see effects of all these different efforts that we're having.

[Anders Ulff, CFO & Secretary to the Board]

Yes. We started last year also during this quarter, and we were working with the Geniox rollout, especially in our Danish factory and that caused some problems during that period, which -- a lot of these problems are solved today, and they are showing a much better profitability today. But when you're working with 2 different models parallel, and you have some start-up problems in production and so that's affected us last year also.

[Douglas Lindahl, Analyst]

Okay. And the final one for me. I note here that the Nordic region is still a negative territory, but it's slightly improving compared to previous quarters sequentially, organically. Is this -- and also, I see that you have a, sort of, a comment on Nordic specific. Are you seeing -- is the trend still negative in the Nordic region, would you say? The underlying trends, obviously.

[Anders Ulff, CFO & Secretary to the Board]

We see mixed signals, let's say, we interview our sales force in the sales in the Nordics. So we are keeping it under close observation. Like -- that's what I can tell you. And really looking at environment and so on, and how we can be cautious with the cost in order to be able to quickly adjust the cost level if needed. But I mean it's a little bit mixed signals. But as you know, we are quite resistant towards the market going down with the -- in both renovation, and here, being in commercial and residential. So I mean we can handle this kind of downturn quite well.

[Operator]

And our next question comes from the line of Henrik Alveskog of Redeye.

[Henrik Alveskog, Equity Analyst]

Okay. Yes. Well, you covered most of my questions. But regarding the capacity utilization, do you see any risk of bottlenecks in any of your major products? Could you tell us a little bit about that?

[Roland Kasper, Group CEO & President]

You mean the supply of product to the market as we have a higher [ reach ] in the market?

[Henrik Alveskog, Equity Analyst]

Yes. Do you still have plenty of capacity, so to speak, if the market is favorable, well, and -- or do you -- are you getting closer to bottlenecks in some areas?

[Anders Ulff, CFO & Secretary to the Board]

In general, I would say that we are not stretched when it comes to the utilization. But if we are looking for problems, like now, for example, in Sweden, while doing this investment that Roland mentioned, that creates some disturbance in the Swedish production for a moment. And we are also replacing the powder coating machine right now. So that also creates some disturbances. And that's what we see from a Swedish perspective. Other than that, I mean, the manufactories, it's not right now that we are seeing any bottlenecks for the moment.

[Roland Kasper, Group CEO & President]

We have -- if you look at the trend and follow the trend and predict that it will continue according to our plan then, as already mentioned during our Capital Markets Day, there are 3 plants where we see that we would have the need maybe to extend our footprint. These were the ones that we say are getting closest to having some needs for expansion, due to maybe deemed bottleneck if it continues. But otherwise than that, I think we can still handle this.

[Henrik Alveskog, Equity Analyst]

Yes. All right. And then just regarding the profit improvement program and all those different things that you're implementing. Are there potentially any new countries or divisions or anything that are added to this list? Well, I was thinking of maybe Brazil, maybe one of the, well, fairly newly acquired companies other -- is there anything on the horizon here?

[Roland Kasper, Group CEO & President]

Looking at the ones -- the newly acquired actually are performing really, really well. So absolutely not. Well, of course, we are monitoring, especially what you mentioned, in Brazil, we are monitoring quite close. We have actually compared to, some years before, we have really, really good development of volumes but still not that we would be very satisfied to the full extent or that everything is running quite smoothly at the level where the group wants to have it. But the improvement has been really positive. Should we continue long-term without looking into it? It's a good question, but it's under surveillance and under evaluation actually, especially Brazil, I can say.

[Operator]

[Operator Instructions] Clearly, there seems to be no further questions coming through at this time. So I'll hand back to our speakers for the closing comments.

[Roland Kasper, Group CEO & President]

Okay, ladies and gentlemen, if there are no other questions, then we will, of course, say, thank you for listening in to our quarter 2 report. And other than that, please contact us if any specific questions arise, and looking forward to present quarter 3 in 3 months to you. Thank you very much.

[Anders Ulff, CFO & Secretary to the Board]

Thank you. Have a good day. Bye.