Systemair AB

STO:SYSR

Earnings Call Transcript 2023-Q2

[Operator]

Good morning or good afternoon, and welcome to today's Systemair Interim Report for Q2 2022. My name is Adam, and I'll be your operator today. [Operator Instructions]

I would now hand over to Anders Ulff to begin. So Anders, please go ahead when you're ready.

[Anders Ulff, executive]

Thank you very much. Good morning, everyone, and thank you very much for calling into our Q2 presentation. I'll start with just giving you a short description of where to find the presentation of today. So if you go into our web page, Investor Relations, Financial Reports. And on the Quarterly Report, you'll find the presentation.

And by that, I hand over to Roland for the presentation.

[Roland Kasper, executive]

Thank you, Anders. Good morning, ladies and gentlemen, and welcome to our Q2 report. The Q2 report that I'll present is, of course, following the presentation that you will find as Anders described. And by that, I think we'll jump directly into it, starting with shifting to the first slide, which is then Page #2.

Just as an introduction, Systemair is a company established in Skinnskatteberg in Sweden in 1974. We have a rough annual turnover of EUR 960 million last year, depending on the currency. And then we are listed on the NASDAQ OMX Nordic Stock Exchange market since October 2007.

Systemair Group today, we have our own sales companies in 52 countries all over the world. We are having 29 factories in 21 countries. And we are around about 6,800 employees in the group. And we are currently exporting to 135 countries all over the world.

By that shifting to what you will see in the presentation, that's Slide #3, which brings us directly to our report for the quarter Q2. In the quarter 2, we amounted a total net sales of EUR 3.037 billion versus EUR 2.4 billion in the same quarter the year before. That totals a growth of 26.3%, whereof organic 14.8%. Those of you that have downloaded our presentation would then now on the right side of the Slide #3 also see a graph of that development of our organic growth development rolling 12.

Going just further into it and looking and to analyze of the growth in quarter 2, where you would see an organic growth, as already said, of 14.8%, which is good organic growth represented in the Nordic region, Western Europe, Middle East and Asia. Then we have a contribution by acquisitions of 4.7%, which is mainly the impact from the acquisition of Sagicofim in Italy early in the year. And then, of course, also a portion of the currency of 6.8%, which has mainly strengthened currencies euro versus U.S. dollars and also the Canadian dollars. And then all together amounts to a total growth of 26.3%.

From there, we're running into the next slide, which will be Slide #5 and looking at the operating profit for the quarter where, of course, in this quarter, there are quite a lot of ingredients to this. So the adjusted gross margin decreased to 34.8% from the quarter the year before of 35.6%. And the first year is the hyperinflation calculation in Turkey that has affected the gross margin negatively by 1.5 percentage points or SEK 38.9 million.

Also during the quarter, we made a write on the Russian operations partially by SEK 168.2 million. And also did mention that the operating result has been affected by adjustments after this hyperinflation calculation in Turkey totaling SEK 9.1 million.

Selling and admin expenses for the quarter increased by 18.2%, and the adjusted operating profit amounted to SEK 297.1 million compared to SEK 250.2 million in the quarter the year before and also the adjusted operating margin thereby amounts to 9.9%. So as you can see, when you're following the presentation, on the right side of this slide, you'll see the SEK 297 million as adjusted profit, representing 9.9% for the quarter 2 '22/'23.

Going into the next slide looking at profit after tax for the second quarter. The net financial items for the second quarter amounted to negative SEK 10.3 million compared to SEK 27.9 million the year before. The currency effects on long-term receivables, loans and bank balances amounted to a net of SEK 8 million. And the interest expenses for the quarter amounted to negative SEK 17.1 million. That altogether amounts to profit after tax of SEK 218 million compared to SEK 167 million the year before in the same quarter.

Going over to the cash flow analysis on Slide #7. Our cash flow from the operating activities in the quarter 2 '22/'23 amounted to SEK 275.1 million compared to SEK 309 million the quarter year before. And the change in working capital amounted to negatively SEK 72 million compared to SEK 227 million the year before. And here, the changes in the working capital are mainly due to the increased inventories and the trade receivables.

The net investment in the quarter, excluding acquisitions, amounted to SEK 91.9 million versus SEK 103 million the year before, which is primarily final investments in Czech Republic, Turkey and Slovenia. Thereby, the total amount in free cash flow is positively SEK 111 million compared to negative SEK 21.6 million the year before. And our total net debt at the moment after quarter 2 amounts to SEK 2.7 billion compared to SEK 1.7 billion the year before.

Switching over and looking into the markets. And here, you can see then, following the presentation, a pie chart of the total breakdown of our markets, starting in Eastern Europe and the CIS countries where we can see a drop from 15% to 12% of our total sales, which is primarily, of course, then related to Russia, the drop, I mean. Then North America stable at 11%. Other markets growing from 12% to 14%. Western Europe also grew 43% to 45%. And the Nordic regions, a slight decrease to 18% in the total picture.

Looking into the different market, as described here a little bit deeper, switching over and have a look into the Nordic. Sales in the Nordic region increased by 23% during the second quarter compared with the same period previous year. And adjusted here for effects of foreign exchange and acquisitions, the sales increased by still 17.4%. And actually, all markets showed good growth during the quarter, Norway and Sweden with stable volumes within residential especially, and the projects with data centers and dehumidification. So again, SEK 585 million of the total is Nordics, growth 23%, whereas organic 17.4%.

Switching to Western Europe. Sales in Western European market increased during the quarter by 38.2% compared to the year before. And adjusted here for foreign exchange effects and acquisitions, sales increased by 20.5%. And also here, all the major markets within the region showed good growth, but especially Germany, France, Italy and Great Britain. Projects with high energy efficiency focus, upgrades and school ventilations are growing strongest in these regions. And the total Western Europe amounts for us to SEK 1.3 billion in sales in the quarter, again a growth of 38.2%, whereof organic 20.5%.

Switching to Eastern Europe and CIS. Sales in Eastern Europe and CIS decreased by 16.4% during the quarter. And here, adjusted for foreign exchange effects and acquisitions, sales decreased by 28.3%. Sales in Russia continues to decline, of course, and is now at around 1.4%. And other markets within the region showed very good growth, especially to mention Czech Republic, Poland and Slovenia. All in all, this region's sales SEK 318 million in the quarter, a growth of negatively 16.4%, whereof organic negatively 28.3%.

Looking at our North American market. Sales in North America increased by 20.5% during the quarter. Adjusted here for foreign exchange effects and acquisitions, sales decreased by 0.1%. Here, the American market showed very good growth in the quarter, while the Canadian market declined a little bit as a result of continued supply disruptions due to component shortages. And here, it's especially residential and school ventilation which is developing very well. In the quarter, in this region, SEK 326 million of sales, growth 20.5%; organic negatively 0.1%.

Then looking into Middle East, Asia, Australia and Africa. Sales in this region increased by 52.2% compared to the same period last year. And here, adjusted for currency effects and acquisitions, sales increased by 60.4%. Turkey, India and Australia showed very good growth during the period. Both India and Australia have increased project sales, India especially pharmaceutical applications and Australia in general slowly recovering here from multiple lockdowns in the past. And that, of course, in total, very positively. So in this region in the quarter 2, SEK 452 million, a growth of 52.2%, organic 60.4%.

To mention at the end, I want to highlight 2 projects. One is the large order we got for Shepperton Studios in the U.K. The Shepperton Studios, which is part of the Pinewood Group, is home to some of the world's most known films and TV shows. And here, we'll have the opportunity to deliver 80 of our Geniox air handing units for fresh air for all the facilities. So this is, to us, a very nice project, and the units will be delivered in batches, and delivery has already begun. And the delivery is planned to be finished during the first quarter of 2023. All these units are going to be delivered from our Danish factory together with other ventilation equipment from Systemair Group.

The other project that I want to mention here is a more internal project, it's our new data center laboratory in Turkey. We opened this data center testing laboratory at our production plant in Dilovasi in Turkey. And for us, the mentionable here is that the laboratory has the highest capacity for data center testing facilities in Europe. The main task here is to perform factory acceptance tests in-house of all the equipment needed in the data centers. This means then to be able to measure the overall performance of systems and, of course, also to see possible problems that can occur under specified conditions to help the customer to find the best solution. The test laboratory can actually simulate climate conditions from 45 degrees summer and minus 5 degrees winter conditions, regardless of any seasonal conditions outside. Very nice investment and for future.

By that, I would thank you for listening to our short presentation and be more than happy to open up the lines and welcome any questions. Thank you.

[Operator]

[Operator Instructions] Our first question today comes from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

It's Carl here from Nordea. So firstly, quite impressive organic growth, of course, in many regions. Could you firstly maybe start off with helping us with the price/volume split here, will be super. And also secondly, would you say that you are gaining market shares in the Nordics and Western Europe? I mean, it's a quite high-growth pace. So I guess the market is not growing at a similar way.

[Roland Kasper, executive]

Carl, for the first question part, for the growth of around about 15% organic, we see that around about 9%, 10% is pricing power. And the rest is organic growth. When it comes to, if we're taking market share or how it is situated just now, our estimate is that we -- in the Nordics, but mainly in the mid Europeans that we are gaining market shares, yes.

[Carl Ragnerstam, analyst]

Okay, very good. And also you mentioned that data centers is growing quite well in the Nordics. And I mean, in some of your regions, data center market is less profitable. Is it the same in the Nordics, giving you a negative margin mix? Or is it more profitable for any reason in the Nordic region compared to Africa, for instance?

[Roland Kasper, executive]

Interesting question. But just to say that for us, I think I explained in some other quarterly reports, we have absolutely, in all of the years, always focused on a part of the data center business where we can utilize our strength and standardization. So we're only looking for this kind of data center applications where you can see these co-locations, and we can utilize standardized products. So we're not specifically in these, I would say, customized apps, so we don't see that it's a low-margin business. If it's a low margin, then we will stay away from that kind of project. So that to say it.

But we have seen over the last 3 to 4 quarters that the development of just that application on the data centers is actually growing and the interest also from our customers is growing. And coincidently, of course, then with our investment in this new laboratory in Turkey, we're gaining quite nice momentum just in that section.

[Carl Ragnerstam, analyst]

Okay. Very good. And then looking at the year-over-year margin drop, would you say that the main reason behind it is raw material headwinds? Maybe slight component shortages as well? Or what's the main driver behind it?

[Anders Ulff, executive]

Well, we gave some short explanations in the report, actually. I mean, there are several reasons behind this also. One is, I mean, losing sales in Russia or completely no sales in Russia. It was a good margin market, first of all. We have also continued with the restructuring in America, in Germany. And also, we have supply problems in North America. So -- and also, as you saw, the organic growth was extremely good, especially in Asia and other markets, and that is a little bit with lower margins in those regions.

[Carl Ragnerstam, analyst]

Okay. Very good. And the final one from my side is a bit on the order intake. You defined it as buoyant. Could you give some more flavor what that means? Is it double-digit organic growth, for instance? And could you also give some more granularity on the order side, which markets that is mainly driving the order growth?

[Roland Kasper, executive]

Yes. Looking at the market ahead, it's, of course, where we still see that the markets are, how to say, very positively affected by everything underlying would still be North America and parts of Europe. But then looking at the sector as such, of course, there is -- for the next 6 to 9 months, at least I would estimate that there are a little bit, how to say, plus and minuses in the market development as we are in the middle of a switchover from new construction to renovations and there is always a kind of transition period.

On the mid and long term, I, of course, see that we are on a very positive track in the total market and the ventilation business as such because we're in the middle of, how to say, we're being part of the solution not the problem when it comes on energy efficiency and upgrade of existing buildings in Europe. But it's a transition period that is ahead of us, saying the order intake on hand is, of course, very positive. So we are quite confident on the next coming months.

[Operator]

The next question comes from Douglas Lindahl from DNB Markets.

[Douglas Lindahl, analyst]

I wanted to come back a bit on pricing. Now that raw materials has come down, how should you or -- how are you thinking about that going forward? How will that impact pricing, would you say, going forward? That's my first question.

[Roland Kasper, executive]

Yes, of course, raw materials, some of them are on the way down. Our problem though is, of course, that we are not working with the real raw material, we're working with processed raw material and the energy costs are considerably up. So what we see is not a direct decline in costs. On the opposite, there are still some components like, for example, the power supply to almost all the motors and applications is scarcity still. We are sharing this component issue with automotive and all the motor manufacturers. So there is still a little bit of trouble on that side. So I would not say that the pricing will go down or will lose its power for the time being.

[Anders Ulff, executive]

We have actually changed the -- increased them from 1st of January also. So we are continuing to increase prices still.

[Douglas Lindahl, analyst]

Okay. So you continue to raise prices and will do so the 1st of January as well, in sort of the similar magnitude that you've done now? Or I guess maybe...

[Roland Kasper, executive]

It will be similar to what has been done also in September, yes.

[Douglas Lindahl, analyst]

Okay. Interesting. And on working capital, are you able to comment a bit on how we should think about that going forward?

[Anders Ulff, executive]

Yes. I mean it has increased quite significantly during the last year, and we have been putting more and more efforts into this. But of course, during this period, we have been keen really to be able to deliver. So I mean, we have increased, I mean, safety stocks on components really that has been hard to find, like the motors and so on that Roland mentioned. And so I mean it has been a deliberate decision, of course.

But now we have put quite a lot of actions into this. We are a little bit more afraid going forward really to keep these high stock levels really. And some of these supply problems have also improved. So we are -- right now, we can see the trend is that the inventory has not continued to increase in the same way it has been during the last year. Part of what this period...

[Douglas Lindahl, analyst]

Interesting. And on the...

[Anders Ulff, executive]

Go ahead, Douglas. Go Ahead.

[Douglas Lindahl, analyst]

Sorry to interrupt you. But just your comment there on some components easing, are you able to maybe give more color to that?

[Anders Ulff, executive]

It has been shifting problems from different components to other components. So we're still mentioning we're having problems in North America. So it's a little bit with geography as well then. But we had a meeting with the biggest motor supplier here just a couple of weeks ago and they are still saying that it's going to be a problem during 2023 still. And as Roland mentioned then, we are sharing components with the automotive industry. So it's not over yet, unfortunately.

[Operator]

[Operator Instructions] The next question comes from Henrik Alveskog from Redeye.

[Henrik Alveskog, analyst]

Can you hear me?

[Roland Kasper, executive]

Yes, we hear you clear.

[Henrik Alveskog, analyst]

Great. So just first regarding the Russia, well, impairment that you did now. Is that a very conservative impairment that you have done, given all the circumstances in the country going forward? Or is it possible that you will need to make further write-downs?

[Anders Ulff, executive]

Yes, it's a hard question to answer, really. Of course, we have done -- we brought down quite a significant amount of the total really. We have kept 50% of the value of the building and the land for the time being really, so that's what's left and also some of the inventory values still. The way forward here, really, I mean what we are really doing then, that is really to exit Russia in some way. We don't know exactly how because we are looking into different scenarios here. And the way forward is not really that straight really. So we are a little bit conservative with saying any exact details there, but we have done our best estimate for the time being.

[Henrik Alveskog, analyst]

Okay. And well, regarding Turkey and all the hyperinflation adjustments or what you should call it, could you help us just understand, was there a one-off impact that you mentioned in the gross margin in this report? And I realize that there could be further negative impact, but is it more -- could you give us some guidance on what to expect here going forward?

[Anders Ulff, executive]

All right. Yes. Well, there's a one-off effect there because this is the effect for the first 6 months. And we took the whole effect now in this quarter. So you can divide it by half and get more of a quarterly effect then. So this was implemented end of June is standard really, and we applied it for us now. We are one of the first companies really accounting for the standard also. So it's really quite a new area for us and for many others as well then.

But I think we can expect this to continue like this going forward now for some time, of course, as long as the inflation rate stays on the same level in Turkey then. So we're going to have this as an extraordinary item then moving forward. But I think we have made a quite good presentation also on the Note 1 in the report. You can find more information there about it and how we treat it.

[Henrik Alveskog, analyst]

Yes, I'll try to understand that.

[Anders Ulff, executive]

Yes, please give me a call if you want some assistance there also.

[Henrik Alveskog, analyst]

Yes. And then just finally, regarding the upcoming divestment of the AC business to Panasonic. I understand that you will be sourcing these products from Panasonic in the future. And will you make any major changes in your offering? Or will you basically try -- well, continue to offer this product and -- which would then, I guess, means that sales will not be impacted that heavily if you succeed well since you -- I think you understand what I'm going for here.

[Roland Kasper, executive]

Yes, absolutely. I can take it from there, Henrik. I mean what we have agreed with Panasonic if a deal comes to here is then that they are basically buying our 2 operations, but also buying the sales organization, both in Italy, in France and also the export department, but also the sales in Germany, sales organization related to those factories. So the rest of the true, let's say, Systemair value, depending on the sales top line coming from AC operations is not the total sum, it's a part of that. And that will be maintained where we have signed a long-term supply agreement with Panasonic.

So as you said aggressively there, we will continue to sell the same as before, it's just manufactured by someone else, to really put it simply. Because, of course, we really need to have both heat-pump technology and heat pumps in our offering also moving forward. We just see a huge benefit in having a new owner in that factory because the FCAS directive and its development on the technologies is on a really high pace. And of course, here, we can not only contribute but also gain quite a lot of momentum, of course, having a strong owner with big muscles to develop this in a good way.

[Operator]

The next question comes from Hjal Jernström from Eric Penser Bank.

[Hjalmar Jernström, analyst]

Just one question on my end on price increases. Have you carried out additional price hikes in Europe in Q3? And could you maybe give some flavor on the general magnitude and maybe the perception of these, please?

[Roland Kasper, executive]

If I did get the question right, if we have done any price adjustment in the quarter?

[Hjalmar Jernström, analyst]

Yes. But then carried out additional price hikes after the quarter and if you could elaborate a bit on -- if so is the case on the magnitude and maybe the perception of these?

[Roland Kasper, executive]

Yes. If you look at the total year of 2022, we have so far done 3 price revisions. And we, as Anders here also said earlier in the call, we are planning for the next toward the 1st of January. This is to adjust where we see it's needed due, as also mentioned earlier, to compensate for still the energy cost impact on material cost, but also to reflect that here and there need to be able to take in additional other suppliers, of course, and other pricing points to be able to control the amount of components available to be able to supply the products in time to our customers. So it's a little bit of that, that we're compensating for. I think it's a given because I also said that before that as now delivery beats price. So we need to be able to deliver.

[Operator]

Nothing further in the queue. [Operator Instructions] As we have no further questions, I'll hand back to the management team for concluding remarks.

[Anders Ulff, executive]

All right. Thank you very much, everyone, for calling in, taking the time and hope to see you on the Capital Markets Day we have in Skinnskatteberg on 17th of January. That would be great if you could come there. So anything from you?

[Roland Kasper, executive]

Yes. And from my side also, I would really look forward to be able to present our strategy and our way forward on this Capital Markets Day. And if we don't get any other call, any other questions from you, then I would say thank you for today, but also take the opportunity to wish you all a very Merry Christmas and a happy New Year. I think it's that time of the year. And thanks a lot, and hope to see you soon. Take care. Thank you. Goodbye.

[Operator]

This concludes today's call. Thank you all very much for your attendance. You may now disconnect your lines.