Systemair AB

STO:SYSR

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by and welcome to today's Systemair Reporting Quarter 3 Report. [Operator Instructions] I would now like to hand the conference over to your speaker today, Roland Kasper. Please go ahead, sir.

[Roland Kasper, President & CEO]

Good morning, ladies and gentlemen. Here's Roland Kasper and Anders Ulff reporting our Systemair quarter report for the quarter 3. Good morning. Let's jump directly into the report and Slide #2, Systemair. Systemair, as you all know, established 1974 in Skinnskatteberg in Sweden and we have an annual turnover of EUR 720 million for last year. We are listed on the stock exchange market since October 2007. We have our own sales companies in 50 countries. And, all in all, we are a little more than 5,200 employees. We sell consequently to more than 100 countries per year and last year actually was 136 countries.Jumping directly into the figures on next slide. Net sales in quarter 3. The total net sales amounted to SEK 1.773 billion, which is a growth of 3.4%, and organic 4.0%. What we try to point out here and to make clear is, if you would go back 2 or 3 years -- let's say we go back 2 years, from quarter 3 2015-'16 to quarter 3 2016-'17, last year, we had a tremendously good growth of 21%, which went from SEK 1.4 billion to SEK 1.7 billion. So this year versus last year, we had a growth of 3.4%. So taking into consideration the big jump last year, in all, for this quarter, of course, the comparable figures are rather tough for us.Going to the next slide, Slide #4, sales growth in quarter 3. If you break it down for the total growth, we see that the organic part, we have a rather strong growth in Western Europe still. Also Eastern Europe, it is continuing quite well and North America showed good growth. That's considering the tough comparables. As we said, we had 12.2% organic growth last year. Of course, it's hard to compare those. And we had contributions via the acquisitions, mainly here Viking in South Africa and Frivent in Austria. And we had some impact from both the weakened Turkish lira, the British pound and the U.S. dollar, which contributed to minus 1.5%, amounting to a total sales growth of 3.4% in total.Moving to next slide, operating profit for quarter 3. The gross margin in the quarter fell to 33.0%. Last year the same time we had 33.7%. The reason why here, we had big number of large projects that were delivered during the quarter and normally, at the market situation, by bigger projects we have quite lower margins and that of course affected the quarter. And we have then some other factors with lower volumes, of course, and still with the same cost level, we get an impact on the gross margin.In the quarter, we also had restructuring costs of all-in-all SEK 20.6 million, mainly referring to Belgium, Sweden and Germany, and also related to the move of the acquired Frivent factory from Austria to an existing facility in Maribor, Slovenia. The adjusted operating profit here would be, taking into consideration this SEK 20.6 million, would be SEK 88.6 million or 5% of the profit, instead of 3.8%. What we [ here ] are saying that the year before, going from 2.1% to 6.1%, this was a good jump and a good part. We of course -- we're continuing restructuring actions and we are also looking into the future, what can be done to adjust to existing market conditions. And as already mentioned here, tough comparable. The S&A expenses, though, increased with 4.5% or 3.0% in comparable units to the year before.Next slide. Profit after tax for quarter 3. For the third quarter, the net financial items amounted to minus SEK 14.9 million versus -- compared to the quarter the year before, SEK 29.9 million. Currency effects on long-term receivables and loans amounted to SEK 8.1 million, compared to minus SEK 25 million the year before. Interest expenses amounted to SEK 7 million, compared to SEK 6.2 million the year before. Then the tax for the quarter amounted to SEK 11.2 million or 21.2%, affected by some write-downs and also acquired losses of SEK 25.7 million in total. So the total effect here in profit after tax amounted to SEK 42 million for quarter 3.Slide #7, cash flow analysis. As you can see from the chart here, the operating profit SEK 67.7 million for the quarter 3. Changes in working capital posted SEK 16.8 million. Here we had a positive impact of the working capital due to -- mainly the decreased trade receivables. Then the investments here are mainly the acquisitions of property, plant and equipment, which amounted to SEK 116 million. And this is related to the machinery and buildings in Turkey and Germany. And then results from the financing activities here are positive SEK 35.4 million, which all amounted to in cash and cash equivalents at the closing of the period of SEK 194.9 million. We increased the net debt compared to last year, it's gone from SEK 1.3 billion to SEK 1.6 billion.Next slide. Now, let's look into the markets and the market developments here. In the Nordic, during the third quarter, the sales in Nordic region decreased 2% from the same period in preceding year. Adjusted, though, for foreign exchange effects and acquisitions, the sales fell by 1%. To look into the main [ 4 ] markets here, the Swedish and Finnish markets showed still good growth during the quarter, while we some differences in Norway and Denmark. In Denmark, we are a little bit under pressure as being the market leader and we have a change in the product there, phasing-in, phasing-out. And in Norway, we see a change from our main product, residential, is moving over to a lot of bigger projects in summer ventilation where there is a different margin setup. All in all, amounted to SEK 435 million.Next slide, Western Europe. Sales in Western Europe grew 13% during the quarter, compared with corresponding period in the preceding year. Adjusted for foreign exchange effects, sales rose by 10%. And here we see that several markets performed quite well. Here -- especially Germany, U.K. and Italy, but the sales fell in the Netherlands. We had also continuous deliveries to the Linde project out of the Menerga factory and we also had some good growth in the orders in Belgium. In U.K., though, we see that the market conditions are getting a little bit harsher for future.Moving to next slide, Slide #10. Eastern Europe and CIS. Sales in Eastern Europe and the CIS increased by 8% during the quarter. Adjusted for foreign exchange effects and acquisitions, it was 7%. The sales in Russia continued to develop quite well for us and has now risen for 5 consecutive quarters. Over this quarter, the Russian market actually accounted for 6% of total Systemair's sales. This compared to 5% in the previous year. All in all, Eastern Europe and CIS for us SEK 274 million.Slide #11, North and South America. Sales in North and South America region largely unchanged, compared with the sales in the same period last year. Though, adjusted for foreign exchange effects, the sales rose by 9%. And here we see that the Canadian market continued to perform well during the quarter. U.S. market is also well, especially the new applications within car park ventilation and [ action plans ] that we're implementing on the market, and also the new products that have been developed over the last year are contributing quite positive for us. The South American market, low activities, but we foresee and hope to see the improvement during 2018, due to elections coming up, and also some positive plans from the market development. All in all, here in the quarter SEK 124 million. Organic growth, 9%.Moving to the next slide, Other markets. Sales in Other markets declined 16% during the quarter compared to the same period the preceding year. Adjusted here for the foreign exchange and acquisitions, sales down 9%. Here we have to mention that the sales in India and Middle East were rather flat during the quarter, but fell in Malaysia and Turkey. Especially, Turkey and Middle East, of course we have to keep in mind that there is a large portion of the project sales that can vary a lot up and down from quarter-to-quarter. This is typically for just project sales. And all in all, we see here a sales decrease in South Africa, due to uncertain market conditions and you see -- and you have certainly all heard about the political development, but here we also see that actions have been taken from our side. All in all, Other markets, SEK 205 million, organic minus 9%.Some highlights, what we are producing -- what we are doing to the market, to enhance also our own future. We are, together with already reported new product of our energy-efficient Geniox platform, we're of course also finalizing the customer experience, and here of course then -- it's always how the customer can optimize the handling and the commissioning of the unit. So we're introducing our new product user interface, dedicated for all our air handling units and it's all with the same menu for whatever unit you have in front of you, keeping everything as simple as possible for the customer, to making things relevant and optimize the best possible. And here this will be launched within the next coming weeks, starting here in Sweden on the Swiss Exhibition. And from start, it will be available for all air handling units and in 13 full languages at release, a very good step forward for all our customers. Next slide, you see how it would be attached on the unit. Also, of course, available wireless, absolutely.Next slide, also as I mentioned, we have some very nice BPRs, we call it, our standard product sales in the quarter. Especially, as I mentioned, our Topvex range produced in our Swedish factory in Skinnskatteberg at very nice conditions here. We had 2 bigger orders of standard units, purely standard units, one to Minsk for Futuris Business Center and one going to Glasgow, each 28 units. Very nice standard product to be sold.Next slide, coming to the summary. So what we see for this quarter is continued organic growth. We see a lot of technical directives increasing the demand on a number of markets, where they are applied and followed up. The sales and admin costs are reduced in relation to sales and even lower. We, though, see the need for doing further restructuring activities. And therefore, we evaluate and constantly review what we can do. We continued with our profit improvement program for all functions and departments. This is established and it's running and we are supervising it. And of course, we're preparing and handling our product development for being ahead of the regulations and competition within both the products, but also which is more and more the driver, the digitalization. Therefore, also the new user interface for all our units. And all in all, we see still positive outlook on several markets for the future.Thereby I would close this presentation and hand over and open up the lines for questions. Thank you.

[Operator]

[Operator Instructions]

[Henrik Alveskog, Equity Analyst]

This is Henrik from Redeye. I have a few. And -- well maybe, first off, if we could just recap -- if you could recap a lit bit regarding the profit improvement plan that you initiated it like 2 years ago, when you kind of detailed what you were going to do. And could you just give us a brief update on what you saw -- what necessary steps you saw 2 years ago and if this improvement plan is pretty much going according to plan or if there are any deviations?

[Roland Kasper, President & CEO]

Yes, of course. The profit improvement program when we started, we thought there was too less of a structure and a drive behind 3 major things that [ we were restoring ]. That was the sourcing, it was the logistic setup in total and it was improvement programs in the manufacturing. So these were the 3 main parts where we directed those activities. What we mainly did was to, first of all, set up target and goals, established structures and resources and giving them the authorities and strength to act according to the target that we gave them and then we follow up this and let them, I'll say, handle the daily operations and improvements. I think what they have achieved is that we have -- for the whole group we have set up a new logistic setup. We are using new strategies to not only having the internal logistics optimized, but also what we put in our distribution centers and how we handle the internal logistics between our entities' stocks and distribution centers. Also in the sourcing, I would say that they have achieved a lot, because if we would have not had the improvements on the sourcing side, it would have not been as, I would say, easy, but it would have been much harder for us to offset the rather drastic price increases on the raw materials that we have seen over the last couple of months and also seeing for the future coming up. So we have seen a lot [ in ] what we're driving in the manufacturing part, but the profit improvement is a little bit what you see -- what you mentioned there with the restructuring program. In the restructuring, of course, also to allocate resources, but also allocate production to where it makes sense. So for example, for us to -- what we did with Frivent, acquiring an entity and directly move, we would not have done that before. But nowadays we look differently on activities and we also allocate production and we centralize production. We don't see a need to have it everywhere. This is a little bit the effect of this profit improvement and I think that is something that has stabilized and it's something that we will move on further on in the future. Does this answer your question Henrik?

[Henrik Alveskog, Equity Analyst]

Well yes, partly. But -- and then what you mentioned here in this today's report is that you're evaluating some further internal initiatives. Could you give us an idea of the magnitude and where this is necessary?

[Roland Kasper, President & CEO]

The magnitude, I think I cannot give just now here at the quarterly, but I can tell you where we are looking at it and it is still also in the report, it was partly mentioned here that we still have some [ products ], especially the German entity of Menerga, where we, of course, have a benefit of having this big order to Linde. But if you take away that then it is less of order intake and we see a smaller demand for this kind of application on the main market for that. We need to take some measures to set up and act accordingly. So we will, for sure, see something that we will do with Menerga. And then it's still the 2 factors that we also had in our restructuring program that are still not satisfactory, which is the air conditioning [ entities ] in Italy and in France. And then we do [indiscernible] we, of course, constantly review all our entities, as you saw in the -- also in the report we had some adjustments where we took in some costs and that was related to restructuring also, for example, in Belgium and also some personnel already in Menerga, but also some personnel in Sweden. So we are reviewing that constantly and we will move on with that.

[Unknown Executive]

We also have a factory in Brazil where we are evaluating restructuring measures also, due to low volumes.

[Henrik Alveskog, Equity Analyst]

Okay. And then something complete different. But you mentioned that you had a large portion of big project orders here and I guess this is something that you referred to quite often and I'm sure it's true. But isn't this the direction where you're going, or is it like the nature of your business, suddenly when you're expanding in new markets this will be a bigger portion of your sales going forward?

[Unknown Executive]

You're true I guess, but it also -- that's why we tried to explain it also that we're going more into that kind of business. But on the other hand, we're also looking how we can do that more effective with still a nice operating margin at the end. So we need to use less resources in sales and admin also for this kind of business.

[Roland Kasper, President & CEO]

But I also need to mention Henrik, if I may, here it's in the DNA of Systemair that we try to balance what we call our standard sales and also the project sales. So our standard products that are naturally coming with better margins, could normally always be the base for our business. Moving into some of the markets, for this part let's say, for example, Turkey, where there is some change in the market and the normal business of this low but frequently occurring low orders, they are not there, because the market just now, under political circumstances that we have there, there are huge orders or no orders. And you need to adapt to those circumstances on different markets. If we would have normal operating stable markets without those, let's say, extraordinary things happening, then what we're looking for and that's what, for example, why we are also here highlighting the standard sales of Topvex, we prefer to sell our standard products in a standard configuration. But in some markets to keep the volumes, we need also to be part of the bigger project that we normally don't like that much, because in those projects the margin is not the same.

[Henrik Alveskog, Equity Analyst]

Okay. Just finally then, raw material costs. How does that impact you? Well, in this quarter have you been able to adjust -- make prices adjustments like you were talking about last time we talked?

[Roland Kasper, President & CEO]

Yes. The price adjustment has been made. We also made one in beginning of this year. So, actually what we see here in the deteriorating gross margin, it is not related to raw material price increases. This we have actually offset with our sourcing and this was also with the price increases. There is actually more the change of product mix and the nature of the project that we took during the quarter that are related to these changes. It's not the raw material in this case.

[Johan Dahl, Analyst]

It's Johan here with SEB. I was just wondering, you talked about Roland, needing to take further actions which you laid out, what that could possibly be that you said in response to a sort of changing market environment. What exactly were you referring to there in terms of the market environment changes? I mean the market seems fairly okay in terms of growth. Also could you expand a bit how your competitive set might have changed due to recent consolidation in [ Israel ] and how that impacts you?

[Roland Kasper, President & CEO]

Yes, in all, we see a change in the market condition, because we see a higher pressure on the prices. If you just take a snapshot, all over Europe, we see higher pressure in U.K. We see a rather stabilized and good market situation in mid-Europe with some exceptions, but all in all, yes you're right, but higher pressure on the prices that we see. The reason is that after the last 2, 3 years of this new Ecodesign Directive almost all producers have now, they adopted to those and [indiscernible] new and for higher priced certified products. So we see a certain pressure coming up there, we see it on the price levels that are on the market. When it comes on the normal outlook on the market, yes, we see that things are happening a little bit faster nowadays than it was before. But that's why we adopt in our R&D, but also in the organization to be there. When it comes to the things that we look for that could be, I'll say, on the revelation for the future, I already mentioned the main parts I think. It just takes a little bit longer in some countries due to changed habits and perceptions of customers and our own staff, like for example in France.

[Johan Dahl, Analyst]

Got you Roland. When we talked about this new regulation, how that would have impacted you, looking back 1 or 2 years, did you make a misjudgment there? I guess the argument back then was that smaller -- it's smaller, fragmented producers would have problems living up to this standard. So do you still stick by that view?

[Roland Kasper, President & CEO]

I still stand by that view. But just to explain, we have, like for example -- let's take Menerga as an example here. Menerga is a high-end producer of these kind of solutions and they have always had a very nice technical gap to the main part of the competitors. With this new Ecodesign Directives, for example, those that want to maintain on the market, they all had to step up technical. So now the gap is smaller and it's harder to justify the price difference. But this puts us a little bit under pressure in certain markets, especially in mid-Europe for this kind of product, for example. So we still see it as a market driver, and we still see it good, because the small ones that came in, let's say, from Eastern Europe or Southern Europe, there is a strong consolidation ongoing and they are disappearing, or they are aligning with others, so that is good for us. It's just -- it happens on the high-end parts that the air to move is getting, I'll say, for the space is less.

[Emmi Östlund, Lead Analyst]

This is Emmi Ostlund from ABG. I have just a question on the sort of the restructuring costs in the quarter. Could you specify more on a detailed level, what kind of restructuring measures you've taken?

[Unknown Executive]

Yes, we mentioned some countries here. Belgium is one, where we have changed the management over there. And also we have reduced the headcount in that same company. Sweden is another example --

[Emmi Östlund, Lead Analyst]

Could you sort of specify in terms of numbers, like how much comes from what? Maybe you did -- did you do that in the report or...

[Unknown Executive]

We haven't specified it for company really like that. We have mentioned where we have put the sources, I mean, they are on a more or less equal level, these countries that we have mentioned also. So except for Belgium, we also talked about Sweden, and there we have replaced a couple of persons. And in Menerga, Germany, it's relating to the service organization where we have that downside, that's a bit more in relation to the demand situations. And also we've done the move of the production from Frivent in Austria to Slovenia. That I can mention is [ SEK 2.5 million ].

[Emmi Östlund, Lead Analyst]

So other than that, the split is fairly equal between Belgium, Sweden and Germany?

[Unknown Executive]

Yes, exactly. Sorry, one final remark there on Emmi's question also. This SEK 21 million is divided into a smaller part into cost of goods sold, which is SEK 3.4 million and then the remaining part is in selling and admin then, SEK 17.2 million. So that's affected our SG&A. And excluding that, [ 1% ] for the quarter.

[Unknown Analyst]

[indiscernible] Kepler Cheuvreux. Just coming back to the orders there and the backlog going forward, could you say -- could you continue to expect somewhat negative mix or [indiscernible].

[Roland Kasper, President & CEO]

I hear you very, very bad, [ Henrik ], could you repeat -- speak up a little bit?

[Unknown Analyst]

Yes. Just if you could give some indication about the order backlog mix there, if it's still going to be sort of diluted by large projects?

[Roland Kasper, President & CEO]

if you take there where we have the biggest just now will be Turkey, and of course, as we already have been talking about Menerga. Menerga is to be delivered all, the rest of this Linde project in quarter 4. And Turkey, due to political circumstances, what happens in that region for time being, I assume that Turkey will have the same circumstances for at least the next year, that I assume. We see some light at the end of the tunnel for Turkish deliveries, because we have some nice projects and sales coming up in Middle East, I assume. But other than that, I would say that we try, as I already explained earlier, we try to being back to selling more of the standard and do not have this really high risk or I would say, high volume projects, because they naturally are coming with a lower margin, which is not what we really want to.

[Unknown Executive]

We also mentioned about Norway as a specific market, where we have a change in product mix from residential products into this more infrastructural products with lower margins also. So that's also the reason behind the creation of the gross margin.

[Roland Kasper, President & CEO]

And Norway is a big market for us.

[Unknown Executive]

Yes. Second biggest market.

[Roland Kasper, President & CEO]

It makes an impact.

[Unknown Executive]

And it will continue into the final -- the fourth quarter and so [indiscernible].

[Roland Kasper, President & CEO]

Yes, this is I guess related to the pricing on the housing market.

[Unknown Analyst]

Okay, great. And then just, I mean, sales growing quite nicely in the Eastern Europe and Russia, I guess, but margins, are they sort of improving due to higher capacity utilization or is it going to sort of -- it is a difficult market, I guess.

[Roland Kasper, President & CEO]

Russia is an entity for us is developing well and the margins actually achieved by the operation is also nice. What we see it is contributing mostly is of course in the day-to-day business from -- mainly from the factory in Sweden, we see good contribution in volume. And then on the project side, there is contribution to our factories in Lithuania, Denmark, and parts of Germany. So, yes, there is some positive signs from that business coming in.

[Unknown Executive]

And these are all factories that are doing really well for the moment.

[Unknown Analyst]

Should we expect sales then to improve going forward or...

[Unknown Executive]

Had a nice increase for here quite a number of quarters in Russia. Now it's a little bit slowing down, and the increase, which is [indiscernible]. So it's not the same effect moving forward, and we have to -- I mean it's 6% of the quarter sales. Of course, it's nice volumes, but I don't see it having a huge effect going forward.

[Roland Kasper, President & CEO]

So do we have any more questions? It doesn't seem to be the case. Okay then, ladies and gentlemen, thank you very much for your attention and looking forward to the next quarter report. Thank you very much, have a good day. Thank you. Bye-bye.

[Operator]

Thank you. That does conclude our conference for today. Thank you for participating, you may now disconnect. Speakers, please stand by.