Systemair AB

STO:SYSR

Earnings Call Transcript 2022-Q2

[Operator]

Welcome to the Systemair Interim Reports Q2 2021/'22. [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.

[Anders Ulff, CFO & Secretary to the Board]

Good morning, everyone, Anders Ulff, CFO, here of Systemair. Happy that you have called in this morning. You can find our presentation on our Investor Relations website on the financial report and quarterly report. So I'll start to hand over to Roland here for that presentation.

[Roland Kasper, Group CEO & President]

Thank you, Anders, and good morning, everyone, and welcome to our quarter 2 report. Without any further ado, I'll start the presentation. So by that, Slide #2. So as you all know, Systemair established here in Skinnskatteberg in 1974. We have an annual turnover of round around about SEK 850 million over the last fiscal year. Since October 2007, we are listed on the NASDAQ OMX Nordic Stock Exchange. And today, we have our own sales companies in 54 countries. Our 29 factories operate in 20 countries. And today, we have a little bit more than 6,500 employees and -- making it possible to sell into 135 countries all over the world on an annual basis. By that jumping directly into our quarter 2 report and switching to Slide #3. The net sales in quarter 2 amounted to SEK 2.4 billion, which is a growth of 8.9%; organic, 9.1%. Looking directly into the analyze of this growth and jumping into Slide #4, which then is the growth analyze of the quarter 2. So organic, we had growth in all regions. We have a small contribution by acquisitions, mainly by Divid, Servicebolaget, Burda and Well Technology, amounting to 1%. And then the strengthened Swedish krona and the currency effects contributed to a negative 1.2%, which brings us to the total growth of 8.9%.Slide #5. The operating profit in the quarter. The gross margin decreased to 35.6% slightly from 35.9% due to the higher material prices and some delayed deliveries and inefficiencies in our factories due to that. The sales and admin expenses for the quarter increased to 6.9% for comparable units. The operating profit for the second quarter thereby amounted to SEK 237.5 million compared to SEK 213.5 million the quarter the year before. Though the adjusted operating margin for the quarter amounts to 10.4%. The adjustments here refer to impairments related to divestment of Systemair Traydus in Brazil and the positive revaluation effect linked to acquisition of minority interest in Burda and Germany. So then the operating profit for the quarter amounts to 9.9% or SEK 238 million -- SEK 237.7 million and adjusted 10.4% after the adjustments just mentioned. Slide #6, profit after tax. The net financial items ended the second quarter at SEK 27.9 million versus SEK 23.7 million the year before. The effect of foreign exchange and long-term receivables, loans and bank balances calculated at SEK 24.2 million. Interest expenses for the quarter totaled SEK 5.7 million. Estimated tax for the quarter amounted to SEK 55.8 million versus SEK 48.4 million the year before, which brings us to the total profit after tax in quarter 2 to SEK 154 million. Next slide, Slide #7, cash flow analysis in quarter. The cash flow from the operating activities amounted to SEK 309.2 million versus SEK 245.8 million in the quarter the year before. And then the change in working capital is negatively SEK 227.7 million, which is mainly due to the increased inventory security stocks and trade receivables in this component issued times. This compared to 38.9 million positive change in working capital last year. The net investment, excluding acquisitions, amounted SEK 103.1 million, which is primarily the end of the buildings in Slovenia, Czech Republic and in Sweden. So thereby, the free cash flow is negative SEK 21.6 million and the net indebtedness has arisen from SEK 1.6 billion to SEK 1.74 billion in this quarter. Looking at the next slide and moving into a view on the different markets and starting here with the Nordics on Slide #8. Sales in the Nordic region increased during the second quarter by 4.8% compared to previous year. Adjusted for the foreign exchange effects and acquisitions, the sales increased by 1.9% organic. Here, the markets, Finland, Sweden, Norway should grow during the quarter, while the Danish markets were a little bit more on a negative and fell slightly. In Western Europe on Slide #9, the sales in Western Europe market increased during the quarter by 1.5% compared with the corresponding period last year. And also here, foreign exchange effects and acquisitions had no impact on the sales during the quarter. So growth is 1.5%; and organic, 1.5%. Most countries in the region, including Italy, Portugal, Belgium showed growth in the period while smaller entities like Austria, Switzerland and Netherlands reduced sales. Moving to Slide #10 and Eastern Europe and CIS countries. Sales in these regions in Eastern Europe and CIS increased by 17.6% in the quarter. Adjusted for foreign exchange effects and acquisitions is actually increased by 18.2%. Our special view again here on Russia when the sales in Russia increased by 20.7% compared to previous period and calculated this in Swedish krona. The Russian market accounts now for 31.6% of the sales in this region. Other major markets growing in the region where the Czech Republic, Slovenia and Slovakia. So growth, 17.6%; organic, 18.2% in Eastern Europe and CIS. Moving to Slide #11. North and South America. Sales in North and South America region increased by 27.5% during the quarter compared with the same period last year. Here, adjusted for foreign exchange effects and acquisitions, the sales increased by 25.4%. And here, it's above all the Canadian market that has shown really good growth for -- in this period. Next slide, and next region on Slide #12, the Middle East, Asia, Australia and Africa. Sales in this region increased by 18.3% compared with same period last year. And here, adjusted for foreign exchange effects and acquisitions, the sales increased by 25.1%; to organic, 25.1% growth. Turkey, India, Morocco showed very good growth in the period, while sales in the Middle East declined a little bit. This brings us to the next slide, which is Slide #13, and the press release that also went out to the market day in the morning, where we announced new members of the Systemair group management. As you see that the demand in the world is increasing for our energy system solutions and our products with the search for good and better ventilation and indoor quality. We also see that we -- with our different initiatives that we have launched in several countries in the region in the form of recovery funds, which results in a very favorable market ahead for the group. So to strengthen our future investments, we have done 2 new hires in a more strategically important business area for us. So we present here Anders Gustafsson, who will join us in February as the new Vice President of Global Supply chain; and Janni Weber, who will be the new Vice President M&A. Also starting in February next year. So starting that from February 2022, we have a new component of the Systemair Group management, which will consist of Anders, Janni, Björn-Osvald Skandsen, Olle Glassel, Anders Ulff and me. Going to next slide, Slide #14. Some nice reference here. We've delivered nice ventilation and cooling products to the University in Morocco, in Rabat. Here to do Mohammed VI Polytechnic University, one of the biggest universities in Rabat, Morocco, where we have done very nice projects. This construction started in December 2020 and is planned to end in 2025. It's divided in 4 phases and will, at the end, host a little bit more than 5,000 students. So these different building phases, we'll deliver 40 chillers and heat pumps and more than 50 air-handling units to a total amount of in the edge of EUR 2 million. Next slide, Slide #15. The 10th and 11th of November, we had 2 very nice events in Dubai on the Swedish pavilion on the Expo2020, where we had invited the experts and customers to come and to talk about the HVAC and the indoor air quality community. We had guests from all over the world. And for our keynote event titled "The Future of Sustainable HVAC -- Trends Innovations." It was a very, very nice afternoon and evening where we share knowledge and experience with all the industry. And altogether, with a little bit more than 150 live attendees and 800 virtual SMDs in this event. So this is how we utilize our sponsorship of the Swedish pavilion and EXPO2020 in Dubai. By that, I want to close and thank you for listening to the presentation for our quarter 2 report. And I'll turn silent and switch over and open up the channel for questions. Thank you.

[Operator]

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

[Carl Ragnerstam, Analyst]

It's Carl from Nordea. So just a couple of questions. Firstly, on Systemair Brazil, you divested it, it looks like. Is that sort of a measure to focus the company towards core markets? Or what is actually behind that? And then should we see it as a start of you total exiting South America?

[Roland Kasper, Group CEO & President]

Yes, a good question. It is of 2 reasons. I mean, the long-term prognosis for South America might not be that appealing, not per and not after the pandemic. So we had several plans how to do and the divestment of Systemair Brazil was a move that was -- yes, we had inter-located it and had looked into that for a longer time, and we finalized that now just recently. We will, of course, review, let's say, a little bit more some of our footprint, and that will be something that is in our strategy also for the future, which we also see a little bit with the announcement of the new management, Carl. We are looking at our back end with our footprint and how we can rearrange going further in the future.

[Carl Ragnerstam, Analyst]

Okay. Sounds great. And also, I was a bit surprised. I mean you had component issues, negative geographical mix, raw material headwinds, but yet you managed to keep gross margin fairly flat year-over-year. So if we were to assume that those effects are temporary, what would the -- sort of if you strip out those effects, what would be the gross margin be then in the quarter.

[Anders Ulff, CFO & Secretary to the Board]

Yes, I would say it's quite hard to answer that question because it's so many parameters included now when we have all the inefficiencies in production due to the shortage of components, they have the cost increase also on the material. So I mean what we see, we are continuing our work to improve our margins, really, and we are doing the price increases as we go along, even though it's somehow a little bit delayed to the markets in some cases also. But year-over-year, I mean we are still looking ahead for our target of reaching 10% operating profit, which we think is not as far away for us really. On the normal circumstances, of course.

[Carl Ragnerstam, Analyst]

And do you expect to be fully compensated in Q4 when it comes to price increases? Sorry, next quarter, sorry, for you.

[Anders Ulff, CFO & Secretary to the Board]

Yes, we are doing a new price increase here from 1st of January, which is quite significant also so -- but as being present in so many markets with over 50 markets, it takes time, and it depends a little bit also if it's the project market or if it's the standard products, also the smaller. So it's -- yes, we are doing. And after that, also, we -- as we see it, it's quite likely that some of the prices will continue to increase after that as well.

[Roland Kasper, Group CEO & President]

I just wanted to add here, Carl, the problem that we have just a problem that everyone has just now in the whole building industry is that all sub suppliers are facing that the raw materials prices are adjusted on an almost weekly basis. So we also have now built in a possibility that we can adjust our prices to our customers on a monthly basis because we don't see that the outlook today doesn't give us a stop of when these adjustments stop coming. So by that, we can adjust on a monthly basis, and we will do so. So for us, it's not -- the big issue is not the material price increases. It is more the availability and, of course, also logistic challenges.

[Carl Ragnerstam, Analyst]

But you mentioned that you saw a strong order intake in the quarter. Could you perhaps give us some flavor on this, which markets that are growing quite nicely. And if you could give some indication of how much orders are up. And perhaps on that as well, I mean, in this inflationary environment, how do you ensure that, that orders are taken at the good margin level?

[Roland Kasper, Group CEO & President]

Yes. So when we look at the environmental in the world today, I mean, we still have the 2030, 2050 goals when it comes to Green Deal, we come to renovation way, we talk to energy efficiency. All that is still there. All that is confirmed all the time once that we have the toll gates of 2030, 2050, where we have to fulfill certain measures. So the underlying need of renovation and upgrading energy-efficient HVAC systems is still there, and we still have the stop at 2030. So the renovation and the uplift still had to be done. So it's just the same amount of orders ahead of us, it's just that we have a slight of a challenge when it comes to the components. So the order intake for us on a year-over-year basis is -- we're somewhere in the backlog of -- a plus of 20%. It's -- that is very positive, and it still needs to be done. So we think that the whole market is developing quite well. Plus on the top of that, not only that we have the HVAC energy efficiency, but also the higher awareness and need of good indoor air quality. So for us, it's actually a positive momentum going forward. We really look forward to this.

[Carl Ragnerstam, Analyst]

And the final one from my side, sorry for that. When we're talking these numbers and then as well as your organic growth in the quarter and try to bench with some of your direct peers, it seems like you're gaining market share. Is that your view as well?

[Roland Kasper, Group CEO & President]

Yes, we've seen some of our main markets that we're gaining share, yes, absolutely.

[Operator]

Next question comes from the line of Henrik Alveskog of Redeye.

[Henrik Alveskog, Equity Analyst]

Right. Well, could you maybe comment a little further on your performance here in Canada, which was been quite spectacular. Is there anything specific behind these strong numbers?

[Roland Kasper, Group CEO & President]

Yes. I mean, starting with the pandemic, but already some months before, there was a big switch over and turn in the building codes and also a description of the renovation back in North America, especially Canada, when it comes to residential and schools. This was though through the pandemic, even enforced largely. So we're in a tremendous positive development by almost tripled or more than tripled volumes for residential ventilation in Canada and a lot of investment in whole North America for schools and classroom units, which we have a factory in Toronto and for the residential, we have the factory in Bouctouche, also in Canada. So both those factories are benefiting largely from these trends in the Canadian and North American markets. So it was a very, very good one.

[Henrik Alveskog, Equity Analyst]

But was there some sort of pent-up demand realized in this quarter? Or do you see this trend as a sustainable one?

[Roland Kasper, Group CEO & President]

It's -- what we see just for the outlook that we have today, the visible one is still very positive as the -- I mean, let's call it the renovation wave and upgrades for schools and classrooms. As you can imagine, I mean, North American market is huge. And the need is also huge. Also now, again, mentioning the pandemic and indoor quality air awareness that they have to do a lot more than just open up the windows if they really want to do it well. This also combined with energy efficiencies, of course, then you keep the windows closed and you have a good ventilation and heating system, and that's what is realized now in North America. When it comes to the residential part, it is that we have gained market share. We have done good acquisitions some 2 years ago. Plus that they have changed the building codes in other parts of North America. And building codes, they are then -- given that you have to follow to fulfill and to get the authorization for the whole building. And these building codes, they are now more aware about the importance of balanced ventilation, which prior to that has been that we just can have an exhaust fan. And now it's a balanced ventilation and residential ventilation. So it's a change of building codes and awareness and renovation.

[Henrik Alveskog, Equity Analyst]

Okay. Great. And then also just if you would like to comment on Russia and your new facility, which I guess is almost up and running now. Or could you just update us on that? And if you want -- well, how that will impact maybe sales over the next year, at least, if you could -- if you have some transparency into that.

[Roland Kasper, Group CEO & President]

Yes, the building as such is, of course, finalized. We have moved in our warehouse that we had in the rental parameters before and the factory part is slowly coming up in pace. We had some delays on the factory part because of -- again, in the pandemic, to bring in machines was possible, but not the operations, installment and commissioning people to set up the machine lines in a good way. So this is now done, and we have started in a small scale production, and we'll be up and running by February. What we are aiming at here, Henrik, is mainly that after all the different restrictions put on the Russian market from European-- from Europe, it was a changeover in the Russian market from a lot of imported goods to having goods that should be made in Russia and have this seal of made in Russia. So today, with being a sole importer, you have only access to, let's say, to the top of the iceberg on the market for this really, let's say, financed by European companies building projects. By having a factory in Russia, we have access to the total market, to the total installations, which, of course, opens up for us to be -- on a much brighter scale being a supplier to all these different projects ongoing in Russia, where it's still a high demand and a high investment level. So for us, this opens up to develop the market even further and to utilize the 17 sales offices that we already have and the 15 warehouses. So we see a very positive momentum moving on.

[Henrik Alveskog, Equity Analyst]

Yes, great. and then just finally if Anders could maybe say something about what kind of tax rate you are expecting going forward on -- I thought it was a bit lower this quarter. Is there any change? Or is it temporary?

[Anders Ulff, CFO & Secretary to the Board]

Yes, it's a little bit hard to forecast. But I guess, we can see that it's going down a little bit for different reasons. One is that we have being careful or more prudent in really realizing the losses carried forward in some places. And now that view is changing because we are making profits in places where we haven't done so in the past. So I would say that, hopefully, it can be improved with like 1% or something like that here going forward.

[Operator]

[Operator Instructions] And we have one further question come through. That's from a [indiscernible] of Erik Penser Bank.

[Unknown Analyst]

My question is regarding the current surge in energy prices. Could you elaborate a bit on what effects you currently see from this, maybe in Sweden and the rest of Europe? And also, if there is a prolonged effect from this, could this be something that potentially benefits the construction market perhaps if we see that buildings are being upgraded.

[Roland Kasper, Group CEO & President]

Yes. So the impact on our own production, we -- I mean, we saw it coming. So we have invested in other systems, and we have our own heat pumps and of course, HVAC systems that are highly energy efficient to offset that. When it comes to the impact on the market, which most probably is the more important or interesting question here, what we see is a rising awareness driven by the need by these costs that are increasing to really look into the energy efficient of existing buildings. So on the side of everything that is ongoing on the market with new builds, we see more and more building owners looking for raise efficiency in their own existing ventilation systems and looking for the energy consumption to bring it down. So we have started with our newly started service department to look in what we call energy upgrade systems to really go into existing buildings, existing installations and discuss and offer uplift driven by the aspect of being more energy efficient with the new components in existing ventilation systems.

[Unknown Analyst]

All right. And on the subject of the construction markets, do you see any particular strong contributors in terms of growth looking forward, whether it data centers, distribution centers, what is the main driver of the construction market in Europe?

[Roland Kasper, Group CEO & President]

For the time being, the big, let's call it, high for drivers are those that you mentioned. We have the data centers, but we have a lot of school and public buildings now after the pandemic that need upgrades when it comes to indirect quality and energy efficiencies. That is a big one, especially for schools, it's a lot of discussions and activities. That is really also quite official dosers.

[Unknown Analyst]

All right. And also one final question. I believe you previously mentioned on the -- on speaking of taxonomy that you have a eligibility in terms of 47%. Is this still the latest estimate? Or is there perhaps a more recent estimate that is available?

[Roland Kasper, Group CEO & President]

No, it's still the same, 47%.

[Operator]

[Operator Instructions] Okay, 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, thank you very much for participating in our call for our quarter 2 report. We look forward to our quarter 3 report to welcome you then to answer your questions. And meanwhile, any other questions regarding to the quarter 2, please let us know, and please contact us. And by that, from my side, thanks, again. And I think it's this time of the year, we also have the opportunity to wish you a very, very good next year and very Merry Christmas. Thank you very much.