Systemair AB

STO:SYSR

Earnings Call Transcript 2019-Q3

[Operator]

Hello, and welcome to the Systemair Q3 2018-2019 Interim Report. [Operator Instructions] Just to remind you, this is being recorded.For today, I am pleased to present Roland Kasper, CEO; and Anders Ulff, CFO. Please begin.

[Roland Kasper, Group CEO & President]

Good morning, ladies and gentlemen, and welcome to the quarter 3 report.

[Anders Ulff, CFO & Secretary to the Board]

Good morning. Anders Ulff here also. First of all, can I say that you will find the presentation on our web page under Investor Relations, and you have to scroll down a bit on the page, though, and you will find the presentation for this.

[Roland Kasper, Group CEO & President]

Okay. So in assumption that you have found this, I'll start our presentation and switch immediately into this presentation. So Systemair, as you all know, founded in 1974. We have, in our running fiscal year, we had a turnover of EUR 800 million. We are listed on the stock exchange market since October 2007. Today, we maintain our own sales companies in a little bit over 50 countries. And we have today a little bit in excess of 5,800 employees within Systemair. We [ enlisted ] more than 20,000 customers in our ERP system. We export products and goods to more than 100 countries all around the world. Jumping directly into the report in quarter 3 on the next slide, Slide #3. What you find is that we achieved a total net sales of SEK 2,018 million, which represents a growth of 13.8%, whereas organic 6.2% versus the quarter the year before. Next slide, Slide #4, the breakdown of the sales growth here to see. The organic part, which is 6.2%, is especially good organic growth coming in from North America and Eastern Europe but also some of the countries in Western Europe. Acquisitions here contributing 5.4%, mainly led by the acquisition of Syneco Switzerland, Greentek in Canada and Koolair in Spain. And then you have an add-on surplus here in currency effects, mainly by the effect in euro, which all in all gives a growth of 13.8%.Next slide, Slide #5, operating profit in Q3. We had a decrease in the gross margin to 31.9% compared to 33.0% the year before. We have also some extra costs for restructuring of SEK 7.1 million in this quarter, which is mostly related to the final cost of the movement of TTL in Windischbuch, Germany to our LGB facilities in Langenfeld in Germany and of some restructuring in Menerga ongoing. Sales and admin expenses for the quarter increased to 6.4%, and the operating profit in the third quarter amounted to SEK 80.1 million, which represents 4%.Next slide, Slide #6, profit after tax. The net financial items ended this quarter at SEK 5.8 million compared to SEK 14.9 million in the quarter before. Effects of foreign exchange on long-term receivables, loans and bank balances calculated at SEK 1.5 million versus minus SEK 8.1 million. The interest expenses for the quarter, all in all, SEK 8.5 million negative versus SEK 7.2 million in the quarter the year before. And estimated tax for the quarter amounted to minus SEK 29.5 million or 39.7%. All in all, the net profit after tax is SEK 45 million.Next slide, Slide #7. Looking at the cash flow analysis for the quarter 3, the operating profit being SEK 80.1 million. Change in working capital is a positive SEK 111.7 million. Net investments this quarter is SEK 47.7 million versus SEK 107 million the quarter a year before, which gives us a free cash flow of SEK 144.1 million versus a negative SEK 22.5 million a quarter the year before. The net indebtedness is a little bit over SEK 2 billion. The change in working capital is mainly due to the decrease in trade accounts receivables, and the net investments consist mainly of investments on the sites in Germany, Sweden and Denmark.Next slide, Slide #8. Let's look into the different regions that we have here. Starting with the Nordics, we had a growth of 4% higher than the same period last year. And even here, if you take away the foreign exchange effects, acquisitions and divestments, organic growth is actually 4% because the affected sales is really only marginal. Swedish and Norwegian markets reported very good growth in the quarter, and Denmark and Finland still are stable.Next slide, Slide #9, Western Europe. Sales in the Western European market 15% higher than in the corresponding period last year. Organic here is 0%, but here we had some of the tougher comparables with a 10% organic growth reported the year before due to big project in Menerga, as you all know about. So the underlying organic growth is okay. Several markets in the region performed well during the period, here, especially the smaller ones like Portugal, Greece, Spain and Italy; and the sales fell slightly in Belgium, Austria and U.K.Next slide, Slide #10, Eastern Europe and CIS countries. Sales in Eastern Europe and CIS rose by 17% during the quarter. Adjusted here for foreign exchange effects and acquisitions actually is an organic growth of 15%. Just looking at Russia, it was a sales of 12% higher than the corresponding period last year. But other major markets in the region showing good growth during the period includes Bulgaria, Lithuania, Estonia and Poland, and especially nice to see that all the operations in Czech Republic had really good growth.Next slide, Slide #11, North and South America. Sales in both North and South America region during the quarter were 30% (sic) [ 40% ] higher than in the same period last year. Both the American and Canadian market performed well. And adjusted for foreign exchange effects and acquisitions, the sales increased actually by 18% in the quarter.Looking at Asia, Middle East and Africa. Sales in this region increased by 9% during the quarter, on this slide. And adjusted for foreign exchange effects and acquisitions, it's an organic growth actually of 16%. And here especially to mention is that the sales in Morocco, China and Turkey increased during the quarter, but declined somewhat in parts of Middle East.Next slide, Slide #13. And here, I want to switch over directly to the next slide as we want to highlight some of the projects and things that are ongoing within Systemair. We already announced here that we took a major order for a cruise line for these ships. It's Systemair entity in Netherlands that has received an order for production of air handling units for 2 new ships, and here the value is around about EUR 5 million. For us, the very nice is that they are really with a focus on environmental-friendly ships, and they are built on the yard of Chantiers de l'Atlantique in France, which is for us a new customer. And these ships, as you can see in this presentation on the slide, are really futuristic in both aspects of environmental but also design. And here, the air handling units will be produced and delivered during 2020 and 2022. Next slide. Also here to announce that Systemair, we will be the sponsor of the Swedish pavilion on the Expo 2020 in Dubai. In October 2020, Dubai will host the World Expo. The theme here is Connecting Minds, Creating the Future, and the ambitions of the organizer are really great. And the main focus here will be innovation and sustainability. So as it looks today, in excess of actually 170 countries are expected to attend the exhibition, and they will have more than 20 million visitors. So nice and exciting for us to be the sponsor here of all ventilation and cooling equipments for the Swedish pavilion, as the Swedish pavilion, historically, for the last times they were attending these expos, always got an extra award for design and execution of the pavilion. So we're really looking forward to this.Also here, as also announced in the press release before, on the next slide, Systemair and Panasonic. We partner to develop integrated HVAC&R solutions. The focus on this partnership is to together develop sustainable HVAC solutions for both commercial and residential sector. We have here actually 4 steps coming in. First step to be that we will launch a new heat pump and chiller series produced by Systemair for Panasonic. And together we will then combine solutions that will benefit from both parties' existing technologies. And of course, here, we're talking about our AC competencies and Panasonic coming in with a lot of control and cloud, but also of specialty compressor technologies. So this we're really looking forward to. Going to next slide, which is the summary. So as a major takeaway, continued good growth, no major sign of decrease in our main countries -- decrease in demand. Then we have a decreased gross margin due to low occupation in one factory, which is mentioned here which is Menerga, but also due to the acquisition of Koolair. They are operating with a lower gross margin but with a net result coming into the area where Systemair should operate. So thereby, the EBIT margin has improved slightly.And we have a highly improved cash flow due to the improved working capital and lower investment rates. And the cooperation with Panasonic will enable Systemair to increase the number of energy efficient and smart products produced in the existing AC factories within Systemair. And as you also have seen in the press release, we have strengthened our management team to achieve these goals for future. By that, ladies and gentlemen, I'll thank you and ask the operator to open up the lines for questions. Thank you.

[Operator]

[Operator Instructions] And our first question is over the line of Carl Ragnerstam of Nordea.

[Carl Ragnerstam, Analyst]

It's Carl Ragnerstam here from Nordea. Could you first, well, spend a minute to talking about the general demand in the Nordics? Have you seen any slowdown from any of your end markets yet?

[Roland Kasper, Group CEO & President]

Carl, no, in general, we don't see a slowdown in demand in the Nordics especially, absolutely not, no. Actually, we had a little bit of -- as we announced, I think, roughly 1 year ago, we had a change of demand in Norway, going more from residential to more mixed with residential and tunnel, for example. But we also see here a slight revival of the residential market. So no decrease of demand just now. No.

[Carl Ragnerstam, Analyst]

And in Western Europe, can you say anything there?

[Roland Kasper, Group CEO & President]

In Western Europe, I see no general. There are some hot spots when it comes to all Europe where we see a little bit hesitancy on the markets. And here to mention would be Turkey and U.K. due to the political circumstances.

[Carl Ragnerstam, Analyst]

Okay, perfect...

[Anders Ulff, CFO & Secretary to the Board]

And then we wrote in the report that we had rather tough comparables last year there where we had 10% organic growth last year in Western Europe. That's why we have 0 this quarter. So we made a larger project delivery last year also.

[Roland Kasper, Group CEO & President]

In the quarter, then?

[Anders Ulff, CFO & Secretary to the Board]

Yes.

[Carl Ragnerstam, Analyst]

Okay, got it. And you're also talking about low utilization rate in Menerga. What measures will it take then in order to turn profitability to decent levels? And then what can you do also in terms of taking out SG&A costs?

[Roland Kasper, Group CEO & President]

This is actually heart of the things that we are running just now, so it's a very good question, Carl. In Menerga, first of all, they are running very low utilization at the factory now as a result actually of having had this big order because the big order occupied the volumes in the factory. They couldn't take in the more healthy small orders, which is an effect of that before. But what we're doing today in Menerga, as you have seen also in the report here, we have some restructuring costs, but these are the low ones. What we do in general is that for the time being just now, we are changing all ERP system in Menerga to bring in all the processes straight. We also are finalizing the -- or rolling out the new casing from the Geniox platform into Menerga at these coming months. And with that, we also bring in all the product selection tools that we have, and the rest of the Systemair group also applying them on the Menerga casings to have full efficiency there. And all these activities are ongoing in parallel just now. And we're looking forward to finalize them in different steps between May and July this year, but they're highly ongoing just for now for the moment.

[Carl Ragnerstam, Analyst]

Okay, great. And the final one for me, in terms of manufacturing footprint, are there any measures to be taken there to consolidate it, I mean, closing down plants in order to increase overall utilization rates?

[Roland Kasper, Group CEO & President]

We are always looking into that, yes. We have some plans, but I can't disclose them just now. But of course, we're looking into that constantly and evaluate the current situation versus the demand. Yes, absolutely.

[Operator]

We're now over the line of Douglas Lindahl at Kepler Cheuvreux.

[Douglas Lindahl, Analyst]

Douglas Lindahl, Kepler Cheuvreux. A few questions from my side. So you mentioned there that Germany grew, and you touched upon the low utilization in your Menerga factory in Germany. Can you maybe elaborate a bit further on that, given that you actually had growing sales in Germany?

[Roland Kasper, Group CEO & President]

Yes, you have to see, Germany for us is, of course, a mix when we talk about Germany now. In Germany, we have Systemair Germany, we have the aircraft new businesses in Germany, and then we also have Menerga in Germany together then also with service entities. The low utilization rate and the, let's say, the biggest impact on the negative side here has been the Menerga operations. By having this big project that we finalized, as mentioned also in the report here for this Russian customer, they of course occupied also the [ all ] factory to be able to produce for other projects. As an effect of that, you have a delay of order intake, and we see a smaller utilization in the factory thereby in these months that have passed in the quarter. Also something that I need to point out is, of course, also that you need to compare with that, especially December and January were rather short months when it comes to operation days for a factory. So all that together gives, of course, an impact on the bottom line for us.

[Douglas Lindahl, Analyst]

So going forward, what would you -- how should we think about these effects going forward then? In the next quarter, for example, will these issues still weigh on profitability? And also, did you have -- was it -- this negative utilization, does that mean negative earnings from that specific operation?

[Roland Kasper, Group CEO & President]

Yes.

[Douglas Lindahl, Analyst]

And that the impact is quite significant?

[Roland Kasper, Group CEO & President]

Yes, when you have a negative -- let's say, if you're running on a low utilization in a factory, but you need to maintain the factory operations and all, of course, it's a negative effect on the bottom line, absolutely. But at the same time, the order volumes and the production volumes for the next coming months are picking up quite well. But in the same time, as mentioned to the questioner before you, we are, in the same time, we are finalizing now the implementation, all the big changes that we're doing for the structure of Menerga, such with the implementation of the ERP system changing from SAP to our existing that we have in the rest of the group, the new product selection tools and, of course, the biggest thing is that we physically changed the product with the implementation of the Geniox platform as we have them in the other factories in the Systemair and the AHUs, which is coming on in the next 2 months.

[Anders Ulff, CFO & Secretary to the Board]

I wouldn't expect any big increase in profitability during the fourth quarter for Menerga due to all these actions that are ongoing for the moment. So that will take it's time before it has come through as a profitable company.

[Roland Kasper, Group CEO & President]

So just now, we are -- sorry, but just now, of course, we need to finalize all these things to be able to, I would say, clean up and put the structure to make Menerga coming through a better level after quarter 4. That's, of course, now where we have the maintenance showing just to be very clear.

[Douglas Lindahl, Analyst]

Yes. I was just thinking if the profitability levels right now is clearly negative in absolute numbers and if it were to be flat, I mean, even breakeven, it would have a significant positive impact on earnings, the delta. But you don't expect that effect to sort of come through in the next few months from what it seems. Okay, and if we look at the other -- if we exclude Menerga and we exclude Koolair, can you say what's the profitability for the group overall? Was it flat, up, down year-over-year if we look at profitability on margins?

[Anders Ulff, CFO & Secretary to the Board]

I mean, there are several reasons also for the poor margin. I mean, we mentioned some of them really, but it also was a short month for us in several factories also, coming out and hitting the gross margin in some factories on there. We are also doing the phase out of the old models and phasing in Geniox, for example, in our Danish factory. So we run still parallel. Half of the volume is the old version and the other half is the new. So we're still facing double cost there in some aspects also. So that's still hitting us. So there are many reasons really.

[Roland Kasper, Group CEO & President]

But I want to point out, of course, to mention that I don't want to -- want you to misunderstand that. Koolair, the way Koolair is set up is that they have a gross margin that is lower than our normal average gross margin that we operate in other Systemair companies, due to the way that they have the agents and they have the way that they structure the sales. It is quite lower gross margin. They make a bottom line profit that is expected -- that is according to the Systemair targets. So it's just another way of making the business. But of course, we see that it's hitting our overall consolidated gross margin in the group, just to be very clear.

[Douglas Lindahl, Analyst]

Yes, okay. But on EBIT level?

[Roland Kasper, Group CEO & President]

Exactly. On EBIT level, it's good.

[Douglas Lindahl, Analyst]

On EBIT level, it's good or the same. Okay. Just a final question from my side. On M&A, can you say anything about your thinking here going forward?

[Roland Kasper, Group CEO & President]

Yes. I mean, for the time being, you will not see that high activity, and the things we're doing are a little bit more on the smaller side and more like the Greentek case where it's a more logic bolt-on, taking volume and putting it into existing factories. That is more in the way of the acquisitions that we're looking for just now. But otherwise, it will still be that we're looking at different geographies like in the Americas and Southeast Asia, but nothing that is just shortly ahead of us.

[Operator]

We are now over to the line of Marlon Varnik at Erik Penser Bank.

[Marlon Varnik, Research Analyst]

Marlon Varnik here, Erik Penser. Gross margin down to 31.9% from 33% year-on-year. You said there's other reasons for the gross margin being that low. Can you somehow quantify how much Menerga was? And what are the regions have impacted this negatively? And what can we expect going forward in terms of maybe restructuring costs in some regions?

[Anders Ulff, CFO & Secretary to the Board]

We can quantify Menerga to that 0.5% of the reasons if compared with last year. Koolair is another 0.2 percentage unit. And then we have the other reasons that we mentioned also like Denmark, for example.

[Roland Kasper, Group CEO & President]

Yes. And then the 2 short months because both December and January are short production months for us. These together, then you have the reasons. That's the difference.

[Marlon Varnik, Research Analyst]

Okay. And going forward, what can we expect in terms of regions, do you think? Restructuring cost, for example, any -- I guess, Menerga going forward, for how long do you expect this to go on?

[Anders Ulff, CFO & Secretary to the Board]

As we already said, the 50% changes, if you can call it like that, with the ERP system, the selection tools and first of all, of course, the change of the casing platform, everything. This is what we want to finalize now until May, June, and then the software tool in June, July. So we try to make it as fast as possible with all forces also coming in from our IT teams from other countries. So it's really a common project. But yes, hard to define when it comes all through to the bottom line on the -- for the project costs, but we try to keep it, of course, as focused and as short as possible. But also saying that, what could maybe be expected is, of course, after implementation of these measures with the new process in place, I do not want you to say that there will not be any staff or resource restructuring coming in at the same time in parallel. Because that could, of course, be the case. We're reviewing that. And it is dedicated to Menerga.

[Operator]

We now go to the line of Henrik Alveskog at Redeye.

[Henrik Alveskog, Equity Analyst]

Well, I'm interested in the Panasonic cooperation. It sounds and seems like your plan -- you have a quite ambitious and expensive plan together with Panasonic. And reading their press release, well, it kind of confirms that. But should we expect this to grow into a joint venture kind of structure in the future? Or well, could you tell us a little bit more about how you organize this?

[Roland Kasper, Group CEO & President]

Yes, I can do it. So the partnership that we envisage here with Panasonic will go in different steps, as also announced. The first step here is that all -- let's say, we have 4 projects ongoing, 4 main projects with Panasonic. The first one, which is also announced here, is that we are producing a special chiller heat pump type for them to be launched during summer from Panasonic side for their sales channel, produced in our factories in -- for the -- in our AC factories, which is giving us volume, of course, in those entities. And then second, third and fourth projects are actually that they also need, for example, some air handling units for their channels which will be delivered from Systemair. And then we have technical co-development projects that are related to residentials and that are related to AC units auxiliaries, which is then fan coil units and special heat pump technologies and also air cleaning technologies. They will come -- they are co-developments, so we are benefiting from the technologies coming from Panasonic and Systemair and join them together. There's also, of course, joining the resources and technical resources, which is beneficial for both parties taking into the European market. And I think it's worth mentioning this is -- the first step is focused on Europe, but then after the evaluation, we'll see how we take it further. But of course, yes, we are happy to be part of this partnership. And we see benefits both in volume and in competence. And of course, it's -- the first appears really only to be considered the first step because it will come in several phases.

[Henrik Alveskog, Equity Analyst]

All right, then. Okay. Then just regarding raw material costs and I guess various metal prices mainly, have you been successful in raising your prices to compensate for this? Or where are you in this process?

[Roland Kasper, Group CEO & President]

What you see in raw material just now, I can say that we see more a flattish development of the steel since October, November last year, and that was already accounted for in the price increases done in September and November. And then we have adjusted prices in special operations and countries like in Denmark and other entities also where we saw the need of that. What we see in general just now, the last 1, 2 months, especially on [ weeks ], is an increase in motors as a follow-up of what happens on the copper side. But there, we are in good negotiations. I think we can compensate for that. But we see a little trouble, some development on electronics, on CPUs, coming from the electronics market side, which is affecting controls. But I think all in all, it seems to be a little bit under control, but it might be that -- or it might not be, but we are really following what's happening on electronics because that is not only the motors but also controls. So I hope that it will be better. I hear it also from the colleagues from computer side, they have problems with CPU deliveries also. So it's a common thing just now.

[Operator]

Before we go to the next question, which is Max Fryden at Danske Bank. [Operator Instructions]

[Max Fryden, Analyst]

I actually just had 2 questions on the gross margin decline from Menerga and Koolair and on the pricing, which you just now answered quite well. So thank you for that, and no further questions from my side.

[Roland Kasper, Group CEO & President]

Thank you, Max. You're welcome.

[Operator]

There are no further questions in the queue at this stage, so can I please pass it back to you for any closing comments?

[Roland Kasper, Group CEO & President]

Yes, first of all, thank you. Thank you for your interest in taking part of this. I think what was worth mentioning from our side, was actually perfectly covered by your questions. From my side, no further comments to that. Thank you, first of all. And...

[Anders Ulff, CFO & Secretary to the Board]

Thank you very much.

[Roland Kasper, Group CEO & President]

Absolutely. And hear you soon again and hope -- just maybe I can say that we're more than happy if you are interested to actually meet us and to come to meet us in our facilities and headquarters in Skinnskatteberg in Sweden for further elaboration, but also to show a little bit what we're doing on the technical side on the developments. So with that, thank you very much, and hope to hear and see you soon again. Bye-bye.

[Anders Ulff, CFO & Secretary to the Board]

Bye.

[Operator]

This now concludes the call. Thank you all very much for attending, and you can now disconnect.