Systemair AB

STO:SYSR

Earnings Call Analysis

Systemair Q2 Earnings: Solid Growth and Margin Uplift

Systemair reported a robust second quarter with revenues climbing to SEK 3.186 billion, marking a 4.9% increase year-over-year, driven by organic growth of 5.1%. Gross margins improved slightly from 33.3% to 33.9%, and operating profit rose from SEK 288 million to SEK 322 million, achieving a margin of 10.1%. The company's profit after tax went up to SEK 246 million versus SEK 208 million in the previous year. Cash flow from operations also strengthened to SEK 317 million, contributing to a significant free cash flow boost to SEK 347.9 million, up from SEK 111 million. Total debt was reduced dramatically to SEK 1.4 billion from SEK 2.79 billion. Performance varied across regions, with a notable 3.2% sales dip in the Nordic region but a remarkable 23.2% organic sales surge in Eastern Europe and the CIS. North America saw a moderate 2.2% increase, whereas the Middle East, Asia, Australia, and Africa together witnessed a solid 12.2% organic growth.

Returning to Growth Within Expectations

The company saw its net sales in the second quarter incrementally climb to SEK 3.186 billion, marking a 4.9% improvement over the same period the previous year, driven by a wholesome organic growth of 5.1%.

Strengthening Profitability

Operating profits edged higher to SEK 322 million from SEK 288 million last year, with operating margins widening to 10.1% from 9.5%, indicative of a more efficient operation.

Post-Tax Earnings on the Rise

The period saw a hike in profits after tax, landing at SEK 246 million, up from SEK 208 million in the prior-year quarter, reflecting a solid bottom-line performance.

Significant Liquidity Improvements

The company's cash flow from operating activities rose to SEK 317 million, compared to SEK 275 million from the previous year, signaling strengthened liquidity. Moreover, working capital changes contributed positively with SEK 115.7 million, a substantial shift from a SEK 72 million detraction in the prior period.

Robust Cash Flow and Debt Reduction

Free cash flow surged significantly to SEK 347.9 million, markedly higher than the SEK 111 million in the same quarter of the previous year.

Graceful Deleveraging

Reduction of net debt to SEK 1.4 billion from nearly SEK 2.8 billion a year earlier underscores the company's effective management of liabilities and financial stability.

Current Boost in Eastern Europe

The company witnessed especially strong performance in Eastern Europe, with organic growth reaching a notable 30.7% in key markets such as Hungary, Slovenia, Poland, and Lithuania.

Consistent Growth in North America

Sales in North America showed a steady increase of 2.2% over the quarter relative to the same span last year.

Surge in Middle East, Asia, Australia, and Africa

Remarkably, the aforementioned regions experienced an organic sales boost of 12.2%, underscoring the company's expanding international reach.

Steady After Market & HVAC Services Segment

The After Market & HVAC Services sector now accounts for about 7% of total sales, contributing to recurring income and promoting sustained sales growth.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, welcome to the Systemair Interim Report Q2 2023 Conference Call. I am [ Sandra ], the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Anders Ulff, CFO; and Roland Kasper, CEO. Please go ahead, gentlemen.

[Anders Ulff, executive]

Thank you very much, and good morning to everyone. We are in a beautiful, but Crisp, Stockholm, here today. And we are here to report on the Q2 figures for today. As usual, you will find the presentation that we will run through here on our website under Investor Relations and Presentations. So I think it's pretty clear by now. And by that, I hand over to Roland to run through the presentation.

[Roland Kasper, executive]

Thank you very much, Anders, and good morning to all of you calling into our webcast here. So by that, let me directly move into our report and Slide #1 and just a little bit on the background of Systemair.

As you know, we are founded in 1974 by our, today, Chairman of the Board, Gerald Engström. Our last fiscal year, we reported an annual turnover of EUR 1.1 billion, and we're listed on the NASDAQ Nordic's stock exchange market since October 2007.

Today, we operate our own sales companies in 51 countries. We have 26 factories in 18 countries and around about 6,600 employees and with their forces selling into 135 countries all over the world.

Moving then into the report and Slide #3. Net sales in this reported second quarter. The net sales in the second quarter amounted to SEK 3.186 billion compared to SEK 3.03 billion the same quarter the year before. This is a growth of 4.9%, whereof organic is 5.1%.

On the right side, you see the graph of the organic sales growth development and having in mind that our historical development of the organic growth is somewhere between 4% and 8%. So we are back to the average continued organic growth.

Moving to the next slide, Slide #4, the growth analyze for the second quarter. Organic growth, we actually had in all regions, except in Nordic region. There is a contribution by acquisitions, but the main impact here is, of course, the divestment of the air conditioning business, which contributes with a negative 3.4%. And then we have the weakened Swedish krona against both euro, U.S. dollar and Canadian dollars, which contributes positively with 3.2%, which brings us in total of 4.9% growth.

Moving to Slide #5, the adjusted operating profit for the second quarter. The gross margin improved to 33.9% compared to 33.3% the same quarter the year before, and the adjusted operating profit for the second quarter amounts to SEK 322 million compared to SEK 288 million the year before.

The operating margin amounted to 10.1% versus 9.5%, having in mind that the previous year's operating profit included write-downs of our Russian operations in the amount of SEK 168 million. The sales and admin expenses in the quarter increased by SEK 74.8 million on comparable units. So as said, the second quarter operating profit amounted to SEK 322 million, which is 10.1% compared to SEK 288 million and 9.5% the same quarter the year before.

Moving to Slide #6, the adjusted profit after tax for the second quarter. The net financial items for the second quarter amounted to SEK 15.4 million, whereof the currency effects on the long-term receivables, the loans and bank balances amounted to a net of SEK 17.9 million positive.

The interest expenses for the quarter amounts to SEK 32.2 million. By that net, the financials -- the profit after tax for the second quarter amounted to SEK 246 million compared to SEK 208 million the same quarter the year before.

Moving to Slide #7, looking into our cash flow analysis for the second quarter. The cash flow from our operating activities amounted to SEK 317 million compared to SEK 275 million the year before. Change in working capital is positively SEK 115.7 million compared to negatively SEK 72 million in the quarter the year before. And this is mainly due to decreased inventories and increased operating payables.

Our net investments, excluding acquisitions, are SEK 84.8 million compared to SEK 91 million the year before, and this is primarily machine investments in Canada and the ongoing building activities for the expansions in our factory in North American and Lithuania.

So at the end then by that, we have a free cash flow in the quarter of SEK 347.9 million compared to SEK 111 million the year before. And also to mention that our net debt today amounts to SEK 1.4 billion compared to SEK 2.79 billion, almost SEK 2.8 billion, the same quarter the year before.

Moving to next slide, Slide #8, just giving you a high-level breakdown of our different markets and their development. Starting from the left, Eastern Europe and the CIS countries. Here, it looks stable, but I'll go a little bit more into depth in later because it's very positive development.

North America with a slight improvement from 11% to 12% of our total shares. Other markets, I'll come back to that, 14% positively. Western Europe with a slight increase to 46% compared to 45%, and the Nordic region as reported with a slight decrease to 16%.

Let's move into the details, and I'll start with next slide, Slide #9, looking at the Nordic region. As stated in the report, sales in the Nordic region decreased during the second quarter by 3.2% compared to the previous year. And here, I have to say that the Danish market showed a positive development during the quarter, while the turnover in the Swedish-Norwegian market decreased mainly due to the impact on the residential.

In Finland, the market was largely unchanged. Adjusted for those currency effects and acquisitions, sales decreased by 4.3% compared to a decrease of 9.3% in the first quarter. So again, growth, 3.2% negatively, whereof organic negatively 4.3%.

Coming to Western Europe on Slide #10. In Western Europe, the sales development continued to be good during the quarter with an increase of 5.9% compared to the corresponding period last year. In particular, we have to say that U.K., Spain and France showed really good growth during the quarter, while the turnover in Germany and Italy decreased slightly. Adjusted for the currency effects and acquisitions, sales increased by 3.4% organic.

Going to next slide, Slide #11, Eastern Europe and CIS. And here, it has to be pointed out that the growth within the region, excluding Russia, amounted to 30.7%. So some of the major markets within the region showed continued good growth, such as especially Hungary, Slovenia, Poland and Lithuania.

Sales in total in Eastern Europe and the CIS increased during the quarter by 22.2%. And here then, adjusted for the currency effect and acquisitions, sales increased by 23.2% organic.

Next slide, Slide #12, North America. Sales in North America increased by 2.2% during the quarter compared to last year. And here, with this, the Canadian market that shows good growth in the quarter, while the American market was more or less unchanged. Here, especially, the commericial ventilation projects and school ventilation projects in North America and, of course, more in Canada, is still going stronger. Adjusted for the currency effect, sales increased by 1.7% organically.

Next slide, which is Slide #13. And here, we have then the Middle East, Asia, Australia and Africa. Sales in this region increased by 2.2% compared to the same period last year. And here is especially India and the Middle East region that shows really good growth during the period. Adjusted here for currency effects and acquisitions, sales increased by 12.2% in this region.

Then looking in some of the projects at closing. As you saw, the Nordic region is declining mainly due to the residential part, but the other parts of our applications, like, for example, in this one, which is a hospital building in Norway that we're supplying to Narvik, it's really growing.

So this new hospital in Narvik will bring together both physical and mental health services and substance abuse treatment in singe building. We have the honor to deliver 33 huge hygienic Geniox air handling units, also the smoke extract fans and additional products for specific demand ventilation for this.

So the air handling units for this application will supply to all the areas of the hospital, including all the surgery rooms, pharmacy, patient wards, kitchen and so on. So just to show that there is a lot of other investments ongoing in the Nordic region.

Also in the Nordic region in Finland, Systemair, we choose to show you this project, which is in Kokkola in Finland. And here, it's a nursery in Kokkola, West Coast of Finland, that will be read in Autumn 2025. The really nice part here is this building complex won the year 2023's Green Forerunner Competition, thanks to its outstanding green solutions and energy efficiency.

And here, we have been selected due to that we -- the selection is based on the area of energy efficiency and quality, which, of course, are the key factors for the decision-making for such a project. We will deliver here our Topvex air handling units together with 15 Geniox units to ventilate this building as efficiently as possible.

And last, but not least, on the next slide, Slide #16. Again, another project in the southern part of Europe, also here a hospital application in Albacete, Spain, where Systemair will supply 63 hygienic Geniox air handling units to this hospital. The units will be installed in surgery rooms and common ward areas, and we will deliver those between December (sic) [ December 2023 ] and May next year.

And once this expansion and renovation of the hospital is done, the hospital will have almost 700 new beds and 29 new operating rooms. Also here to mention that the building will get the new B energy certification, which is the mandatory in compliance with Technical Building Codes regarding energy saving and thermal insulation, which is new in Spain.

By that, I end, and I hand over to the system and we open up for questions. Thank you very much.

[Operator]

[Operator Instructions] Our first question comes from Adela Dashian from Jefferies.

[Adela Dashian, analyst]

My first question relates to, if you're seeing any weakness outside of the Nordics? Especially, you mentioned that in Western Europe, some weaker turnover in Germany and Italy, what's driving this? And if you -- the current trading, is the situation improving or should we expect a worsening sentiment going forward?

[Roland Kasper, executive]

Thank you for the question. Yes, looking into Europe, as also reported in the quarter 2 report here is especially Germany and Italy, we saw a slight weakening, but in Germany, to be honest, the local German market is stable, but the export for certain projects out in the Middle East have been redirected to other factories. So that is the main impact for us in Germany today.

The German market overall is, on the industrial side still, what we can see stable. What we would like to see more is, for example, there was an incentive program for schools in Germany that has slowed down, but expected to come back in January by a governmental decree. I hope this really will come to pace, as they say.

In Italy, the impact for us has been, of course, the divestment of the air conditioning company and the air distribution turnover that we have there is the projects are more or less on a normal level, but the total volume for us is a little bit weaker. The outlook in Europe, still, we see that the industrial and also the investments on industrial and manufacturing side is still rather stable.

[Adela Dashian, analyst]

That makes total sense. And then as we're looking into 2024, is there anything you can tell us about pricing and how discussions are evolving with your customers?

[Roland Kasper, executive]

Yes. Looking back, I would start with -- in '22-'23, of course, there has been much more discussions about pricing and price adjustment upwards. The last one that we did was of a rather modest character, just some smaller adjustments where we saw the components, as I reported also, have come back to more normal levels. So I wouldn't expect that the more price hikes at least -- prices going up, I would not expect them for the next 3 to 6 months as it looks today, at least.

[Adela Dashian, analyst]

And the last one, you complete that was -- was it during this quarter or earlier in the year?

[Anders Ulff, executive]

The last one we did was in September. We have another one scheduled then for first of January, but as Roland tells here, it's really on the modest side at the moment.

[Roland Kasper, executive]

It's more correction. As we -- in the past ones, we had to compensate, for example, on the electronics side, where we were buying some components on the spot market which we, of course, had to compensate out to the customers. But as it has normalized, those are being readjusted now.

[Adela Dashian, analyst]

All right. And then just finally, I saw that you mentioned in the report that the focus in the near term is mainly on organic growth. But with your financial position improving to these levels, would you say that your appetite for M&A has increased? And if you could tell us anything else about the pipeline today versus at the beginning of the year?

[Anders Ulff, executive]

I would say that the pipeline is rather stable. I mean if you compare here over the last year and the appetite is still there. And as we say in the report also, we have a strong balance sheet still. We are happy to do acquisitions that fits ourselves well and that are bolt-on and that we know really how to integrate in a good manner, but we will not do any acquisitions just without any reason for it. So I mean, sometimes a lot of them happen simultaneously and then from time to time, it could be a little bit more empty.

[Roland Kasper, executive]

But just to stabilize this. I mean, we have a really good pipeline and that our ex Vice President M&A, Janni Weber, was building, and we are just now executing this and looking through this and working with specific projects, both Anders and me, in the meantime, until the new Vice President M&A is on board. And these are projects in all geographies from North America to Europe to Asia. So we're quite active, but we have just not finalized any of those in this quarter.

[Adela Dashian, analyst]

Is your expectation that purchase multiples will rationalize given that market conditions have gone a bit more challenging?

[Roland Kasper, executive]

What we see today, no. The expectations are still high.

[Operator]

The next question comes from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

It's Carl here from Nordea. A few questions from my side as well here, looking into Eastern Europe to start off with. I think it surprised me a bit on the organic side. You mentioned a high level of project maybe completions or ongoing projects. Should we see a high number of completions entering Q3 as well or was it sort of a isolated thing in the quarter?

And also another question is Europe. Does the production move of Menerga to Maribor inflate organic growth number [indiscernible] in Eastern Europe. I mean the historical ones, obviously, not the recently announced one, but the one you already completed?

[Roland Kasper, executive]

If I start with the first part of your question here, Carl. It is -- we are finalizing some of the bigger already mentioned in our first quarter report e-mobility project in Eastern Europe, but there are other projects in the pipeline and the factories supplying to Eastern Europe are rather well booked. So we are not concerned about the drop there in near future. When it comes to the impact on our Slovenian factory in Maribor, it's hard to speak just now.

[Anders Ulff, executive]

Yes. But it doesn't really -- I mean this planned factory move has no effect on the sales figures, I mean -- so it's more where the customer is located, it's where we report the sales figures also. So it has really nothing to do with this factory move at the end.

[Roland Kasper, executive]

It is really the production entity is moving, but the customer is still on the same place. And that's where we're invoicing.

[Carl Ragnerstam, analyst]

Okay. Okay. Okay. That's fine. And on the U.S., I mean we saw a clear sequential slowdown there. I mean is it mainly owing to the sort of a weaker resi market in the U.S.? Or do you also see sort of inventory corrections in the channel, I guess, to some extent, at least in North America, U.S., the distributors, right?

[Roland Kasper, executive]

For us, it's more stabilization of the -- I mean, over the last 3 years, we have seen a really, I will not use the word greater in that context, but it has been a really steep increase in volumes on residential for us for the last 2, 3 years in North America. It's stabilizing on high levels, and we see that the next steps are actually following the building codes in North America, especially in U.S. and for us, also the further expansion geographically in Canada.

So we don't see that anything will drop. We do acknowledge what you say also that some of the distributors have higher stocks. They are, as they say, bleeding through their stocks, but we're not really impacted by that because we are delivering in many areas of North America still on project directly from factory also. So it's not a huge impact for us.

[Carl Ragnerstam, analyst]

Okay. That's good. And also, when I read the report here, you mentioned in the outlook sort of that you see the activity among ventilation contractors on the rise again. Could you give us some flavor? Is it on orders? Is it actual orders that you see coming in? Or is it more of a sort of quotation and discussion basis with them?

[Roland Kasper, executive]

No, it's more on existing orders in-house. If you look at -- even in the Nordics, not all of them, but those in the bigger areas where we are interested, where we see like in Mälardalen here in Sweden, we see many of the bigger contractors, they are rather full. They're really well booked, and we see that the consultancies that they also have an increased level of activity, which is always really nice for us. It's a good indication.

[Carl Ragnerstam, analyst]

Okay. Do you believe that the market has maybe troughed out a bit and should start to pick up pace again? Is that how we should interpret it or is it too early to say?

[Roland Kasper, executive]

I would say it's too early to say. Consultants being really active is really good, but then the projects have to start, and that's where we want to see. But already activities being on a high level, it's a really good starting number because someone has ordered them.

[Operator]

The next question comes from Lina Blume from Handelsbanken.

[Lina Blume, analyst]

Also, congrats on another good report. So I would like to ask you if you can give some color on the regions in which you have experienced the most growth. Is there any specific types of projects or markets where you see an increased demand, and what is your outlook for these?

[Roland Kasper, executive]

Yes. For us, the specific highest growth would be for us Eastern Europe and, of course, also Asia. In Eastern Europe, we are delivering rather big projects on e-mobility, hospitals and power plants. So that will, as you can see today, be rather stable going further, also some data center projects that are in our Turkish factory for European market.

Coming to Asia, we still see -- there is no drop in any of the demands on any of the markets in Asia today. It's rather that we need to look into how to build capacity for certain other product areas that we don't have in-house today. So the Asian markets are really a good driver for us for the total company.

[Lina Blume, analyst]

Super. And then also on the discontinuation of the production in Germany. The press release mentioned that the restructuring is expected to generate annual cost savings of at least SEK 70 million with full effect from the financial year 2025-2026. Is it possible to give some more details on how these cost savings will be achieved?

[Roland Kasper, executive]

Yes. It is dual-folded, I would say. It is, of course, that we are changing the location of the manufacturing going from Germany to Maribor, Slovenia, is one part of it. But I think the biggest gain is also that we are bringing the whole units and all the services on a new technical platform.

Out of different several reasons, it wasn't possible to do that in a very efficient way in Germany. But with the move over to Slovenia, they will finally be on a new platform, new controls, and everything would, on a technical level, be much more efficient and easier to handle from an operation point of view for us.

[Anders Ulff, executive]

One important part there is also that we are cleaning up a little bit in the product assortment as well. And of course, then we already have air handling unit production in Slovenia today. So there are, of course, nice synergies to relocate when it comes to overhead and so on and for yielding wise.

[Operator]

The next question comes from Hjalmar Jernström from Carnegie.

[Hjalmar Jernström, analyst]

I guess the first one is on the adjusted operating margin and year-over-year development here. Is this mainly relating then to the AC divestment? Or what contribution do you see from, I guess, in general manufacturing efficiency, pricing and other items in this quarter, please?

[Anders Ulff, executive]

Yes. That's, of course, one quite big part of the improvement, I would say. So yes, but there are other things also and it's really hard to single out how much effect each of them had, really. But of course, the divestment of the AC business has quite the biggest impact.

[Hjalmar Jernström, analyst]

Okay. And then second then, on the CapEx then. Could you just remind us of your full year expectations on the CapEx and whether you feel that you're on track on achieving this?

[Anders Ulff, executive]

The expectations of the forecast is around SEK 380 million, I would say. So somewhere around that. And what we are doing right now is that we are giving it a little bit the second thought also checking really the investment needs. And -- yes.

[Roland Kasper, executive]

I would say on the achievement on the full amount, I think we will be below that. It's because we are having delays in deliveries of, for example, machineries and we have also delayed start of certain building expansions to delay in middle of this to adjust them to local needs and the market demand.

[Operator]

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

[Henrik Alveskog, analyst]

Okay. Well, first off, I have a few odd questions. But if you could maybe give us an idea of the price component in the organic growth number year-over-year?

[Anders Ulff, executive]

Yes, that would be an estimation then because we don't have clear answer of the magnitude there. But I would say, currently, it is not much really of the growth. It's, I would say, around 1%-or-so.

[Roland Kasper, executive]

Yes. We tried to calculate it yesterday and today a little bit in the morning. So we are below 1%, but let's say, up to 1%. It's not more than that because over the last also reported, there is not too much impact of all these components [indiscernible] that one.

[Henrik Alveskog, analyst]

Right. Okay. And then on the restructuring cost, SEK 125 million, how much of that do you think will be cash cost and how much is related to write-offs?

[Anders Ulff, executive]

Yes, I think it's around EUR 9 million that are cash related directly that is from the redundancy payment that is expected. But it's a bit premature also to say that on a very detailed level because it's negotiations that will start now. So the exact amount will come here up until summer.

[Henrik Alveskog, analyst]

Right. Yes, so we get an idea. And then well, regarding the divestment of the AC units. You mentioned before that you will probably -- or you will be sourcing some of these products from Panasonic after the divestment, and could you give us an idea of to what extent you have been doing so?

[Roland Kasper, executive]

Yes. I mean, from our customers' perspective, it's business as usual for them. They have switched over to, I think, since -- actually since the 1st of December, they will get the unit branded Panasonic instead of Systemair. It's coming from the same factories, the same contact persons. For them, it's business as usual. It's just still on those companies where Systemair is selling the air conditioning products themselves, which are not too many, it's business as usual. And the business relationship with Panasonic is stable and good, and we're contributing and developing for future together.

[Henrik Alveskog, analyst]

Okay. So -- and the volumes in this area, I mean, year-over-year, is it basically that now you have been sourcing the same volumes as you did last year, but you're -- yes.

[Roland Kasper, executive]

Yes, it's lower because with the divestment to Panasonic, we also divested some of the sales units to them. So that volume is firstly, of course, then gone. But the sales volume in the remaining Systemair companies that are carrying air conditioning products is almost stable, yes.

[Henrik Alveskog, analyst]

Okay. Great. And then just another question. I heard Lindab talking about recycled steel and also future fossil-free steel and the clients being interested in this. Just interested to hear your view and what you hear from your customers when it comes to these things?

[Roland Kasper, executive]

Yes. That is, of course, something that is coming all over the market as a request, if it's possible. Just to say that the availability is not great yet. We are also doing that. We, for example, have our air handling units coming off our Spanish factory because the proximity to a good supplier. They're also today in the same amount as Lindab, they are fossil-free. So they are also coming from such like supplier. We can do that. But in other regions, the request has not been that strong yet, so we have not done a change that is, how to say, more hassle-through. We are looking more long-term, and we will come there, but with a more organized way for the rest of the operations.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to the management for any closing comments. Please go ahead, gentlemen.

[Anders Ulff, executive]

Yes. Thank you very much, everybody, for calling in this morning, and we are happy to take any call if you have any further questions, but other than that, we are happy to see you again then the 5th of March when we release our Q3 report.

[Roland Kasper, executive]

Yes. Until then, I really hope that you will have a -- might be a little bit early, but I really wish you Merry Christmas, Happy New Year. Hope to see you all well next time, and take care. Thank you very much.