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Systemair AB
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Welcome to the Systemair Interim Report Q2 2020. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present Roland Kasper, CEO; and Anders Ulff, CFO. Please begin your meeting.
Good morning, ladies and gentlemen.
Good morning, everyone, Anders Ulff and Roland Kasper here. I'm happy that you called in. And I hope also that you have found our presentation on our website. It's on the Investor Relations site. So should we get started, Roland?
Absolutely. Let's go for it. So I'll start with the presentation, and I'll start directly to switch into Slide #1. So as you hopefully all know, Systemair was founded in 1974. In our last fiscal year, we had a total turnover of EUR 890 million. And we're listed on the Nasdaq Stock Exchange Market since October 2007. Today, we operate our own sales companies in 52 countries, and we have -- in 19 countries, we have 27 factories. And we have a little bit more than 6,200 employees and exporting into 135 countries all over the world. Switching to Slide #3. So as you know, what we do is covering actually the ventilation and air conditioning market, and we provide energy-saving solutions and products, covering all the aspects, again, for people's health, performance and comfort. Slide #4, going right in our quarter 2 report. In our quarter 2, we reached a total turnover of SEK 2.207 billion, and this represents a growth of 11.1% negative versus the same quarter last year, and organic growth of 3.8% negative. On the right side of the slide, you can see a graph of the organic growth development, which, so far, during this pandemic situation has been negative, I guess. Going to next slide, Slide #5 and going into the growth analysis of our second quarter. So we had a good organic growth in North America, but in total, the organic growth was negative with 3.8% negative. The acquisitions contributed slightly profitable with 0.1% positive, only small effect due to the acquisition of Poly-Rek in Croatia and Frico in Denmark. And then we have the biggest negative contribution which is the currency effect with the strengthened Swedish krona, negative with 7.4%, which brings us to the total amount of negative 11.1% of growth in this quarter. Going to Slide #6, looking into our operating profit for the second quarter. The gross margin in the quarter increased actually to 35.9% versus 35.8% in the quarter the year before. Our sales and admin expenses for the quarter decreased with 8.5% for comparable units. And the operating profit includes also COVID-19-related government subsidies of a total of SEK 5.9 million reported as other operating income. During this quarter, we also made an impairment of goodwill related to our acquisition of Traydus in Brazil which we had to write down of SEK 10.8 million. So all in all, the operating profit for the first quarter amounted to SEK 213.5 million compared to SEK 283.9 million last year, which actually contributes to 9.7% EBIT in the quarter. Adjusted for the goodwill write-down, it's 10.2% for the second quarter year 2021. Going to Slide #7, our cash flow analysis for the second quarter. Our cash flow from the operating activities in the second quarter 2021 amounted to SEK 245.8 million compared to SEK 320.7 million the year before. Changes in working capital is positive with SEK 38.9 million. These changes in working capital mainly due to decreased inventories and increased operating liabilities compared to negatively SEK 23.6 million the year before. The net investment, excluding acquisitions, amounted to negative SEK 77.8 million, which is primarily the investment in the new factory in Russia. This all amounts to a free cash flow of SEK 207.1 million compared to SEK 232 million last year. And also here to look at our net indebtedness, which is 1.7 -- SEK 1.68 billion compared to SEK 2.28 billion last year. Going to Slide #8, here you see the development of our cash flow from the operating activities. And as you can see, the work that we're doing internally with our net working capital have given quite good effect so that we can still improve the cash flow from our activities. Going to Slide #9. Looking into the markets for the last 6 months, our first half year, which we have the COVID-19 situation from 1st of May. So Eastern Europe has developed to 14% of our total turnover; the year before, it's 17%, so a drop of 3%. North and South America actually developed positively from 10% to 11%. Other markets, being Turkey, Middle East, Asia and Africa, is 12%, stable. The Nordic region slightly grew to 19% from 18% the year before. And Western Europe also with a slight positive growth from 43% to 44%. Going to Slide #10 and looking into the different markets, here starting with the Nordics. Sales in the Nordic countries decreased by 8.5% in the second quarter compared to previous year. Adjusted for foreign exchange effects and acquisitions, sales decreased by 3.5% organic. And here, I have to point out the Danish market showed growth during the quarter, while sales in Swedish, Norwegian and Finnish markets decreased even though it decreased only slightly in some of the markets. Next slide, Slide #11, Western Europe. Sales in West European markets were 7.8% below the corresponding period last year. Also here, adjusted for foreign exchange effects and acquisitions, the sales fell by 3.8% organic. Austria, Ireland, Spain and England showed growth during the period, while other markets in the region declined, including, for example, Portugal, Greece, Italy and Belgium. Going to Slide #12, Eastern Europe and CIS. Sales in Eastern Europe and the CIS has decreased by 19.6% during the quarter. Adjusted here for foreign exchange effects and acquisitions, sales fell by 9.3%. As pointed out here, the sales in Russia decreased by 17% compared to previous year, calculated in Swedish krona. For us, the Russian market has always been quite important, so just to give you this figure here, also the Russian market represents 31% of sales in this region, Eastern Europe and CIS. Other major markets in the region that fell during the period are Czech Republic, Estonia and Slovakia. Last year, we had to point out the growth in this region was 20%. So here, the comparative figures can therefore be rather challenging for us. Going to next slide, Slide #13, North and South America. Sales in North and South America region decreased by 7.6% during the quarter compared to the same period last year. And here, adjusted for the currency effects and acquisitions, sales increased by 3%. The Canadian market decreased slightly, calculated in Swedish krona, while the American market is still unchanged and rather strong. Organic growth was 3%. Going to Slide 14, Middle East, Asia, Australia and Africa. Sales in the Middle East, Asia, Australia and Africa decreased by 18.3% compared to the same period last year. Adjusted here for the currency effects and acquisitions, sales decreased by 3.1%. Middle East, Australia and India showed good growth during the period, while other markets such as South Africa, Turkey and Morocco decreased slightly. Going to our Slide #15. In this quarter, we actually released some very interesting products for future growth, one of them being our new generation Topvex with counterflows. Our Topvex is designed to be easy to work with in every step. So our configurator helps you select the best unit for the requirements. Its standardized design and some built-in flexibility ensures fast delivery and easy installation. And also, our unique Systemair Access control system makes it simple to connect, configure and control it. As you can see on the picture to the right down, these units are prepared in such a way that it fits totally into the new upcoming demand for renovation and upgrades. So this is something that we really believe on for future growth. Going to the next slide, Slide #16, to give some feedback also on some nice orders. We have here one order to one of the biggest building projects ongoing in Germany, which is the Kanzlerplatz in Bonn. We have here received the order for pressurization systems, which is the pressurization systems for the stair houses in case of fire that we can pressurize it and keep the entryways for people to leave the building. The new Kanzlerplatz project, it comprises 3 pentagonal buildings with a skyscraper. And there is a breathtaking view of the Rhine, and we have the view of the Siebengebirge. Completion is in 2021. And also a short follow-up of the ongoing activities. We have been able to move in, in our new Systemair factory in South Africa. Since 1st of October, we have opened up also for our customers and for deliveries for the new factory in Johannesburg. It hosts the production today of our air handling units, the rooftops, standard and fire-rated fans as well as our stock of our well-known in-line tube fans. So what we have done here is we have relocated 3 existing facilities into 1 new, enhancing the efficiency. Also, the building of our new factory in Russia is according to plan. You can see the picture to the right. The factory will be able to provide high-quality ventilation products to the local market and especially important for us, Made in Russia, which is when they're locally developed products. By that, I switch over to Slide #18 and say thank you very much and welcome with questions and open up the line. Thank you very much.
[Operator Instructions] Our first question comes from the line of Carl Ragnerstam of Nordea.
It's Carl here from Nordea. I have a few questions. Firstly, we saw that the Nordic region turned into quite significant negative organic growth during the quarter at least in a historical context, I would say. So my question is, if you could give us some more color on the development in the Nordics, I mean,should we see this as an exceptionally high negative organic growth due to sort of lumpiness? Or is this quite a representative level for the underlying market development that you are currently experiencing?
The organic growth, Carl -- the organic growth in the Nordic region was negative with 3.5%. In the beginning of quarter 2, I think it was a little bit more weak but has recovered a bit better at the end. I would see market as Norway improving, Sweden being more stable, and Denmark actually was really good. So I would rather say that we're coming from a summer situation and coming back to the market. It's more the outlook that is more unstable, I would say. I don't think that this is something that you will see more of in the future.
Okay. Perfect. And in the quarter, would you say that Norway performed worse than Sweden in the quarter, you might have said it before, just given it's one of your most profitable markets, I guess?
No, it performed rather okay in the quarter. Below last year but Norway performed better than Sweden in this quarter. But I mean you have to remember that this is an individual quarter in that region. For the first 6 months, I mean it's rather flat, I mean organically.
Okay. Perfect. And on the margin side, as you said, the gross margin held up quite well and, in fact, expanded year-over-year despite the negative organic growth. But on the other hand, you only took down SEK 25 million worth of SG&A year-over-year in the quarter. Yes, I mean did you see that you could do more on the SG&A side? Or did you expect the market to come back and then, as such, that you see it's not necessary to take out costs? Or how do you view that?
We don't go in each individual company when we take decisions about SG&A. So I mean in many markets, I mean -- or countries, I mean the development is quite good or we see that it will be a recovery. So we don't want to scale down on the personnel because, I mean, that's really a long term that we think about that. And also, what Roland told here about the products that we have launched during the periods, I mean we are thinking much more long term here. Of course, in some countries where it's really dark, I mean we have done cuts also in the SG&A for sure.
But also, Carl, the SG&A is related to marketing activities because that's what we hear a lot from markets that people are cutting down on market activities. But we have done some launches of some substantial products but also filling the line of the demands to be decided today in Brussels, for example, for all the investment packages. So especially what we also presented here, Topvex or our new heat pumps, Sysaqua Blue, they are totally in line with what is expected to be the high-in-demand products for the next coming 3, 4 years. So we conducted those marketing campaigns. Nevertheless, we just switched over to digital platforms, which, of course, also takes time, efforts, and we need to have the staff on board.
Okay. Perfect. And I know it's a fairly frequently asked question, but I would do it anyway. I mean could you please update us on the development within Airwell and Menerga during the quarter? I mean how much did they impact the margin, if you could elaborate on the sort of underlying margin development if you exclude them in the quarter? And also given the pandemic with sort of higher degree of uncertainty, would you consider to implement more strict cost-cutting programs or similar measures within these units? Or how do you view on that?
Let us first start from that, Carl, that for the time being, we were -- after the summer break, of course, it's the -- I would say, the high season for air conditioning products. So the air conditioning entities in both France and Italy have performed lower than last year, of course, given the pandemic influence that we have but, nevertheless, on a good development during this year and the interest that we have. Also here, we have to say that over the last 2 years, we have, of course, done some restructuring in this company. But first of all, we have developed new products. So what we have launched now with the new heat pump is also being followed up in quarter 1 and quarter 3 next year with new other products that will be not only in line but frontrunners in technology development on the heat pump market given the European market and the investments coming. So this has been something that we have been following and pushing rather hard, so it's more or less in line there. For Menerga, as such, of course, we're reviewing, as you know, the setup that we have there. But also here, we have the, let's call them, positive problems with really good order backlog and some really significant projects in order that we have to deliver upon. So for us, it has been struggling a little bit because we have some restrictions from German government how to handle operation to create social distancing also on the workshop floor but, nevertheless, being able to deliver on time. So for the next 24 to 30 weeks, actually, the workshop floor is fully booked, and we have rather problems to deliver on time for our customers, which is our main priority, to keep customers satisfied in this situation. But of course, we're reviewing the total setup, as you know.
Okay. So given a high utilization rate or the production in the coming 24 to 30 weeks, I mean should we also expect sort of a better profitability for the group as well then given that? Or...
As I said, the -- for the AC companies, it is lower in total on the top line, but the outlook, of course, with the product that we're launching is positive. Given the total market input that we get, that it looks like that from mid of next year, we can expect a recovery to be better. We are positioning ourselves to be -- how to say, we are geared for what is coming. On the Menerga side, we are very happy about the high order backlog. But at the same time, given that we need to take extra precautions in our factories of distancing and having several shifts because of keeping people apart, we also have to take into account that the output efficiency in the factory is considerably lower than it should be given these extra precautions that we have to take by government. So it's -- how to say, it's a positive problem, but we need to compete. The only thing that we need to take care of is that the customers remain happy, so we can deliver what we expect, but it's to lower efficiency in the Menerga factory just now.
Okay. So it sounds like you have...
Really what we have seen in Germany.
Perfect. Okay. That's all for me.
And our next question comes from the line of Douglas Lindahl of Kepler Cheuvreux.
Just following up on that Menerga situation, I'll also say that you had softening, that's the second quarter in a row. I guess it's continually for the same reasons, meaning social distance needs to be kept at high levels. But with regards to your high order backlog, does that, in that context, mean that you would really -- ideally, right now, would like to have a lower order backlog really because you need to employ so many people in order to deliver on these orders in Menerga specifically and if you'll continue with that rate.
That's a good question, Douglas. The problem here is just that by creating due to this restriction, so to say, we -- of course, we need a little bit more time for every single unit to produce just because people cannot hand over from one shift to another. You have to have time in between, so they need to restart more or less when the second shift is coming and so on. So every delivery time has been prolonged, which is a negative thing for a customer. When you started planning for such an installation, we talk about the time line to final delivery of products and installations of maybe 2 years, so then coming up to 2 years and saying that you have 6 months of delivery is not acceptable. So we need, nevertheless, to keep a shortest possible delivery time, which means that we -- in some cases, for some projects, we need to hire in people to be able to deliver on time, to establish a third shift and these kind of things. So it's actually -- the higher order backlog is given restriction times is actually coming to much higher costs internally. And that's what -- it would be better for us to have a -- I don't say a lower order backlog but a better balance, that would be nice.
Okay. And I guess you gave a bit of color on this, and it can also be seen in your sequential organic trend. But with regards to demand in the quarter, would you say that it has improved month-by-month in general for the group?
Yes, we could say that at the end of the quarter, it looked better than in the beginning. But as mentioned before, then it's -- I mean, you have to be careful looking too much at an individual quarter because, I mean, sometimes it doesn't really give the full picture.
Okay. And switching topics on M&A, I guess it's a difficult year to do acquisitions as you can't really travel and see these companies. But looking into next year, do you expect that M&A has a potential to pick up? What's your view there, please?
Yes. Yes, absolutely. Our pipeline is quite strong. The only restriction just now is, exactly correct what you say, we cannot travel to go there, to visit and to look at these different projects. But just to mention that we did an acquisition just some weeks ago here in Sweden, a small consultancy firm for IT that will contribute to our development of software tools. So there is still the possibility to do M&A, but just those being outside Sweden, of course, you are totally right, we cannot travel, so we cannot look at them, but there is a good pipeline.
I guess another positive thing here also with the small amount of interest in M&A for the moment is that we have focused a lot on building organic growth for the future. Yes, the products develop but also looking into each and every market and to see how we can continue the organic growth in the future, so it can possible.
And just following up on M&A, if I could, where or what would an ideal M&A opportunity would be? Would it be geographic exposure or from a technological standpoint that you would be looking into M&A? Or how do you sort of tackle that right now?
Growth in the pipeline just now or technologic and geographical.
Okay. So both. That's it for me.
Thank you, Douglas.
And our next question comes from the line of Marcela Klang of Handelsbanken.
At our sustainability trends seminar recently, you mentioned some exciting water cooling solutions within Menerga. Is it these new launches that have caused your luxury problem of too high order backlog? Or is it older products and just generally strong demand?
It is actually -- it's a high amount of really exciting projects. Most of them actually are today to high energy efficiency projects. And I would say, for the time being, 30%, 35% are going to very, very special dehumidification projects. The main part today is about the efficiency, so following the energy efficiency situation, this is what we see mostly. When it comes to the water cooling aspect, we have -- in Mid Europe, we have more than 10 different projects ongoing where we have this technology applied.
Exciting and looks also good for the future. The other interesting launch, Topvex, how is the order situation there because that's more for the renovation way, I suppose?
Correct, yes. Here, actually, the -- what you saw here in the pictures in the presentation is the counterflow unit, which is the high-efficient unit, that you also see in the picture, which is a unit that you can bring into normal door openings, which is perfectly situated for renovation and upgrade. We will also complete that line of product in February, March with other versions, with side and top connected, with other heat recovery alternatives. So really coming in to what is discussed today in Brussels is the perfect situation for us time-wise with the launch of these products. So we're really happy about the things going together time-wise this time.
And those are for all European markets?
Yes.
And then the Turkish hospital project, have they been booked this quarter? And what was the positive effect from those?
We invoiced actually in October several of those projects going to the local Turkish market. That was actually quite nice in that region and that month. As you might have read in the newspaper, the last 2, 3 weeks have been rather going in -- how to say, the COVID development in Turkey is now very much going in the wrong direction. But we still have a good occupation of this kind of project in the factory. It's just that last week, it was a total lockdown, people are not allowed to go outdoors, so we just have our workers in the factory. We have delivered, but there is a slower movement on the building sites today. But we still see these projects coming. It's just a bit slower on the installation side.
And can you talk about the net effect of this -- how it affected your second quarter in krona?
For that region, I would say, the region that we define here as Turkey and Middle East, I think that's a good and big contributor to that region. We also saw several of these hospital or hygiene upgrades in Mid Europe coming mostly from our factories in Spain and Germany. But the contribution in krona, we haven't followed that up specifically on that application, to be really honest.
But it's starting to show?
Yes, I think the Turkish lira has dropped 30% during the first 6 months, quite significant. So you can see it in the currency effects.
Yes. And then you mentioned that during the second quarter, demand situation improved towards the end. What can you say about November and starting of December, is it flat or flat but uncertain? Or do you see any trends in demand?
Yes, I mean normally, we don't give any forecast in our presentation. But as said before, by the end of this quarter, we -- it was better than in the beginning, really. And I would say, in general, when we talk around in Europe, North America and so on, it's rather positive outlooks for the moment, I mean, in general.
We normally have it as one of the first temperatures that we take on the market ability for projects in the future. It's normal to consultancy companies. And there just now, they have a lot to do. So there is a quite positive signal, but also taking into account when the consultants make their job, it still needs to have somewhat to start the project. But for us, it's positive to see that there is a lot on their plate just now, so we also hope that the projects will start.
So the demand looks good, and basically, it's up to them, the restrictions, what happens to the margins and the productivity. And then a final question from me, the goodwill write-down in Brazil, is there a risk for more? And is there any risk -- because you previously wrote down in Italy and France, is there any risk for more goodwill write-downs near term in any region?
We are working here together with our auditors, and this is a common topic, I guess, on the agenda for not only us but for a lot of other companies in these days. Regarding Brazil, then it's seen on us, you can't expect any more write-downs there. But, of course, we have other goodwill items that are up for discussion now and then, and we need to look into that quarter-by-quarter when we see some kind of impairment coming up. I mean all in all, I will say goodwill for us is not huge in the balance sheet, really. So...
We have one further question in the queue. [Operator Instructions] That question is from the line of Henrik Alveskog of Redeye.
First, could you just give us a very brief update on the Panasonic partnership? You talked more about this a year ago than you are nowadays. So is everything according to plan, more or less? Or...
Yes, it's a good question, Henrik. So we -- as we have talked about earlier, we have 4 main projects. The first one was the ECOi-W, the heat pump that we launched 1.5 years ago. That started quite well. But then due to the pandemic, it has slowed down because the Panasonic sales entity in Mid Europe has really taken also cautions, and they're focusing more residential just now. Step 2 was the project for just residential where we started in October, actually, and it started according to plan and is developing well. And number three is that they -- we have a project where they use our air handling units. That has not started. It's delayed because of the restrictions given in the European operations. And number four is the co-development of the products for future, which is going to plan, which will be launched next year. What has been happening during the summer, I will say, or during this pandemic is that it hit also actually Japan by quite substantial forces. And it has been rather slow in communication between Japan and the Panasonic's European entity. So we have seen a slowdown on their side, which has now picked up again over the last 6 to 8 weeks. So now we're trying to reinforce and coming up so -- coming back to where we should be time-wise.
Okay. And I was also curious about the Sysaqua Blue. Well, the -- basically, what markets are you targeting near term? And well, if you could talk a little bit about your more long-term plans, if this is something for the broader market or not really.
Absolutely. So there are some specific differences on this Sysaqua Blue, but in terms of -- compared to other of our products in the same capacity range. This is not only the heat itself, GWP factor only 3, which is very, very environmental-friendly. But it's also to a much lower volume of refrigerants to the same effect in this unit. And we have been testing this unit for the last 1.5 years in several conditions. Normally, this kind of heat bump is something for the Mid European market, but we have actually been testing these units to harsh winter conditions in the North of Norway also, so we'll also launch this in the Scandinavian countries. So it broaden our market footprint that we normally have with this kind of products. And this product will also be followed up in the first and third quarter of next year with other products similar in the positioning and similar to the environmental cases but in a broader capacity range. So we actually look quite positive upon this kind of product and the sales organization that we are about to expand on this.
Thank you. And there are no further questions on the phones at this time, so I'll hand back to our speakers for the closing comments.
Yes, ladies and gentlemen, then thank you very much for your interest and participation in this call.
Yes, don't hesitate to contact us if you have any further questions, and happy to see you next quarter again here in the beginning of March.
Merry Christmas and a Happy New Year then.
Okay.
Thanks a lot. Thank you. Bye.