Systemair AB

STO:SYSR

Earnings Call Transcript 2020-Q3

[Operator]

Welcome to the Systemair AB Interim Report Q3 2019/'20 call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present Roland Kasper, CEO; and Anders Ulff, CFO. Please, begin.

[Roland Kasper, Group CEO & President]

Good morning, ladies and gentlemen, and welcome to the Quarter 3 Report 2019/'20 for Systemair AB.

[Anders Ulff, CFO & Secretary to the Board]

Good morning, Anders Ulff here also, just to mention that you find the presentation for this call in our website on the Investor Relations part and under Investor. You will find the presentation for this call. So why not get started, Roland?

[Roland Kasper, Group CEO & President]

Yes. So bear with me, I'll jump to our -- Page #2. So as we get -- Systemair AB, started in 1974. Last year, we recorded a general EUR 830 million. We are listed on the Nasdaq stock exchange since October 2007. We're having our own sales companies today in 50 countries, and we have today around about 6,300 people employed within Systemair. And we export currently to more than 100 countries or to be precise, 136 countries. Switching to Page #3. A -- sorry, a view on the market and the development. Today, in our business, 17% of our volume is recorded from Eastern European and CIS countries coming from the year before in the same quarter, 16%. North and South America corresponds to 10% of our business, coming from 9% the year before. The other markets being South America, Asia and Middle East is for us, 12% of our total turnover, coming from 11% the year before. Nordic region amounts to 19%, a dropped from 22% the year before. And Western Europe stable at 42%. Switching to Slide #4, Diving down into the quarter 3 results here. In quarter 3, we recorded a net sales of SEK 2.147 billion, which corresponds to a growth of 6.4% versus the year before of SEK 2.018 billion, were organic 1.8%. On the right side of this slide, you can see the organic growth development in a rolling 12 chapter, and you see quite a stable development here. Jumping to Slide #5, where we break down the growth of 6.4%. And as said before, organically year, 1.8%, especially good in North America, Asia and actually South Africa, 1.3% contributed by acquisitions. And here, maybe the effect of the acquisition of Pacific Ventilation in Australia and Systemair Maroc. And then we had a currency effect of 3.3%, and here, mainly due to the strength in euro, all in all, contributed to 6.4%. Going to Slide #6. The operating profit in the quarter 3 amounted to SEK 113 million or 5.2%. The gross margin here increased to 33.8%, being 31.9% the year before, and this is mainly due to the high-capacity utilization of our factories and also the result of our profit improvement activities. The sales and admin expenses for the fourth quarter increased to 9.4%. And as a result, as I said, operating profit for the third quarter amounted to SEK 112.6 million or SEK 113 million, being SEK 80.1 million in the year before in quarter 3. Switching to Slide #7. Profit after tax in the quarter 3. The net financial items ended the third quarter at SEK 19.5 million versus SEK 5.8 million the year before. The effect of the foreign exchange change and the long term receivables, loans and bank developments, calculated to SEK 10 million. Interest expenses for the third totaled SEK 9.3 million and adjusted for the IFRS 16, the interest expense totaled actually SEK 7.1 million. And the estimated tax for the quarter amounts to SEK 28.6 million or 30.7%. This all in all gives a profit after tax of SEK 64 million in the quarter 3 2019-'20. Switching to Slide #8. The cash flow analysis. Cash flow from operating activities in quarter 3, 2019-'20, amounted to SEK 123.9 million versus SEK 77.5 million the year before. And here is the -- sorry, and a change in working capital is SEK 163.9 million versus SEK 111.7. And the improvement in the working capital is mainly due to the decrease in trade accounts receivables, which is a positive effect of SEK 263 million versus SEK 188 million the year before. Net investments here, excluding acquisitions, is SEK 34.2 million. And here, mainly a machine investment in Koolair Spain and investments in optimization that we are doing currently in our office head in Skinnskatteberg for our compact air handling units, and an upgrade in the metal -- in the vent workshop in our plant in Maribor Slovenia. All amounts to a free cash flow of SEK 253.6 versus SEK 141.5 in last year. The net investments has decreased to SEK 1.9 billion versus SEK 2.022 million last year. Switching over to Slide #9. Here is more a visualization of our cash flow from the operating activities. And you can see the clear trend being starting from quarter 2 last year, '18, '19 and the improvements that have been achieved here. Switching further to Slide #10. And right here, we're going into the markets. Starting with the Nordics. Sales in the in Nordic countries is more or less unchanged in the third quarter compared to the previous year, as the growth of 0%, whereas organic actually minus 1% and here in Norwegian and Swedish markets declined slightly during the quarter, while sales in Danish and Finish market actually showed good growth. And the foreign exchange effects and acquisitions, as I said, increased the sales for 1% during the quarter. Switching to Slide #11, Western Europe. Sales in Western European market were 4% higher than in the corresponding period last year, and the adjusted for foreign exchange effects and acquisitions, it rose by 1% organic. And here, several markets in the region actually performed really well in the period, especially in Netherlands, Germany and France, while we saw some weaker, more soft development actually in this quarter in Italy, Portugal and Spain. Next slide, Slide #12, Eastern Europe and CIS countries. And here, the sales development in Eastern Europe and CIS had an organic growth of 8%, and where organic 2% and especially the sales in Russia decreased during the quarter, [indiscernible] calculated in Swedish krona. The Russian market represents today 30% of the sales in this region that we call Eastern Europe and CIS. Major markets, is the only region showing very good growth in the period is -- especially Poland, Slovenia and Slovakia. Switching to Slide #13. North and South America. The sales in the North and South America region during the quarter is 10% higher than the same period last year. And here, the American market, in particular, performed well in the quarter. Adjusted for foreign exchange effects and acquisitions, sales increased by 5% organic in the quarter. Next Slide 14, Middle East, Asia and Australia and Africa. Sales is in this region increased by 23% during the quarter. And here, adjusted for foreign exchange effective and the acquisitions, especially here, of course, Pacific Ventilation Australia, the region increased by 9% organic. Above all, we have to mention that the sales in India and Turkey increased, a really nice thing in the quarter. Switching to the Slide #15. As a reminder, in September 2019, we announced our new financial goals. And we informed our -- about our ambitions, where we especially put emphasis here to lower our growth ambitions and raise the dividend goals. So going ahead, we have a growth ambition of being at 10% or higher in equity, asset ratio, should be higher than 30%, EBIT margin, 10% or higher and dividend of approximately 40%. Switch to Slide #16. During the quarter, we have started the supply of residential units and modular housing manufacturer and why we highlighted it, especially with looking at Scandinavian region, there has been a quite good development over the last 3 to 4 years in residential ventilation. And it has been mentioned in media a lot of this is having a negative effect in the future, but we have secured quite nice orders here for a special part of the business, which is to supply complete product solutions. And here, for example, as this one showed here, signed an agreement with the modular house manufacturer in Sweden, where we delivered the first stage, which is 450 residential ventilation units, complete with all components like ducting, diffusors and controls included. The special here for us is to be able to showcase our knowledge so that move together with the customer, have designed a system to be not only efficient from a ventilation point of view, but also sound, recycling, energy usage. And this very much adopted to the modular house manufacturer's way of assembling the modules. So this is a way forward to you, of course, also making good entrances on this product now growing partly in the ventilation business.Switching to Slide #17. Sustainability. It's also mentioning energy savings is a central theme in our product developments. In Europe, the development is being driven by EU directives like EPD and ERPs and that impose requirements and the energy smart products as well as energy-efficient buildings. The trend is now global, really global and other region of the world are actually inspired by European development. And that in this area, that Systemair really makes the biggest difference from a sustainability perspective. As we continuously work to reduce energy usage in products and systems and have proven track record here. Just as an example, that the ventilation units that we sell in Europe during 1 year contribute to reduced carbon dioxide emissions corresponding to the emissions from around about 120,000 cars annually.Switching to Slide #18. As a summary of this presentation, so during the third quarter, growth was recorded at 6.4%, which of 1.8% was organic. And despite subdued demand in parts of Europe and record high winter temperatures, our gross margin continued to improve. The operating profit improved to SEK 113 million or 500% as against SEK 80 million or 4% in the same quarter last year. The free cash flow has improved to -- by SEK 112 million for the first quarter -- third quarter. And over the past 40 quarters, Systemair has actually reported organic growth in every quarter except one. But as I -- on to end this presentation and open up the lines for questions. Thank you very much.

[Unknown Executive]

Operator?

[Operator]

[Operator Instructions] We have a first question from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, Analyst]

It's Carl here from Nordea. Firstly, I have a question regarding the efficiency measures that you communicated on the Capital Markets Day. I mean, did you feel that you are performing according to plan? And in addition to that, I mean, you are working on more or less all measures at the same time, if I understood you correctly. And can you talk a little bit about which one of the defined measures that might be the most challenging to materialize?

[Unknown Executive]

Okay, Paul. Yes, we see that the measures that we are taking, especially when it comes according to the sourcing, when it comes to efficiency measures regarding to the AC companies and the Menerga, we have put most efforts for the time being. Sorry, it's with the AC companies and Menerga as the sourcing is ongoing continuously in the back end of course. Now with efficiency measures and upgrades that we do in manufacturing to raise efficiencies and affecting us there. The main focus where we put most people on -- as a project base today is actually Menerga and the AC companies. But it's a -- a continuous work is ongoing in parallel to with the upgrade result. Absolutely.

[Carl Ragnerstam, Analyst]

And do you -- where are you most -- I mean, where do you see most challenges to sort of materialize the measures?

[Roland Kasper, Group CEO & President]

For the time being, the challenge is, if we just look at, for example, the AC companies and Menerga, I would say it's the -- it's volume for the AC companies, but this has been -- especially in quarter 3, I have to remind that, for us, November, December, January are very low, slow and small months, when it comes to air conditioning products. As they are normally coming in March, April, May, is really when volumes going up for air conditioning. So that was more or less expected, but then it's a good time for us to do the works for efficiency measures in manufacturing, which has been done, but also product development. On the opposite side, we're of course doing a lot of reorganization and measures for Menerga where it is staffing, it is products, it is ERP and IT systems. So it's a little bit different, but it is more the day-to-day work. It takes more time in Menerga and in AC, it is more the organizational process work. That is and ongoing...

[Carl Ragnerstam, Analyst]

Okay, perfect. And in your outlook, you reiterated that you expect decent organic growth in the coming quarters. But I mean, given a softening or growth on both parts, just as the Nordics as well as Western Europe. I wonder where do you expect organic growth to come from. Is it mainly Eastern Europe and North America? And also in your outlook, do you expect that the renovation market starts to pick up? Or is it excluding that?

[Roland Kasper, Group CEO & President]

Yes, as also communicated here in the Capital Markets Day, we expect a little bit lesser in organic growth. It's more a faster switch over in the Nordic markets to renovation as versus the new builds. When it comes to mid Europe, it's still a growth, organic expected on the building and construction market of 2% to 2.5% for the next 2 years, but it's quite impressive growth that we see ahead in the East European markets. So that's where we see the growth coming from as a good mix. And when it comes to the measures that are taken by European Union when it comes to ERP and ecodesign directive that presents further on. I mean, these have to be followed continuously. So we see that the existing facilities have the technical upgrades and is something that is still lacking far behind. So that needs to start. How that impact and how fast this turnover or the change from new builds to this renovation upgrade? It has been rather fast in the past, but how this now will perform, given certain circumstances, what is happening all over Europe and the world just now, I cannot predict, to be honest.

[Carl Ragnerstam, Analyst]

Okay, perfect. And the final one for me. Can you maybe provide any indications of the current level of quotations from your less cyclical parts of the business such as tumble, car parks and hospitals?

[Roland Kasper, Group CEO & President]

You mean how many projects will we have a little better and how shall ...

[Carl Ragnerstam, Analyst]

Exactly, or the current demand -- level of demand, more or less?

[Roland Kasper, Group CEO & President]

Okay. Yes. But when it comes to, I would call it, infrastructure projects, we see a quite stable demand, and it's some hotspots in South America for carparks. It is the air for the Turkish in Middle East for hospitals. So we see that market rather positive, to be honest.

[Operator]

We have a next question from Henrik Alveskog from Redeye.

[Henrik Alveskog, Equity Analyst]

It's Henrik here from Redeye. Let me just -- my first question regarding the general market and particularly in Europe, I guess. Did you -- since the last quarter was a little softer in terms of organic growth. Did you experience this mostly as a slow market around the holidays and then sort of even? Or was it a gradual slowdown? Or could you give us any indication on this?

[Roland Kasper, Group CEO & President]

The biggest impact for -- the little -- little lower organic growth we have is mainly due to that we, of course, had a larger impact on the holidays in both December and January. But also, I would say, Italy, the impact for us is actually the weather conditions. Because the winter that never came, it's actually quite a burden for our heating products, of course.

[Henrik Alveskog, Equity Analyst]

Yes. Okay. Well, then maybe, I think we can continue on that theme. Since you have quite -- or very ambitious plans for Frico in North America to expand that business. Could you tell us a little bit how this is proceeding?

[Roland Kasper, Group CEO & President]

The Frico for North America is actually proceeding on really well. We have to hire more personnel in North America for that. You have to see that the air curtains market as such in North America. The possibility and the underlying demand of what we can achieve is huge, and the only limit -- I mean, less than a handful of players in the market. So even if there would be a slowdown in North American market as such, the possibilities are huge. So there, we actually -- we are proceeding according to plan and will be better than that, actually.

[Henrik Alveskog, Equity Analyst]

Okay. And then if you could give us a little bit more comments around the Panasonic business. Is this something that's gradually ramping up? Or is it more like now you're on the level that you expect to see in the next year or so. And then maybe going on to the next step in that partnership?

[Roland Kasper, Group CEO & President]

Very good question there, Henrik. On the Panasonic, we have only started one of the 3 first [public ] projects, which is the heat pumps that is supplied from Systemair. And Panasonic business here is very short and announced, we are standard since March. So we're just having to kick off for the next year, having quite a department for that product. And we are starting the [ Chiller ], which is a cooperation in residential, where the first orders have been placed by Panasonic and firstly coming by summer, where they're also having supplied from us for handling units. So it's ramping up to make that answer very correct.

[Henrik Alveskog, Equity Analyst]

Yes. Okay. And then just finally, I noticed that Koolair in Spain, the number of employees were reduced by 15 this quarter. Is this -- did this incur any one-off costs for you? And well, maybe if you could comment on one-offs, in general, is there -- you haven't specified anything in this report, but is there anything that we should be aware of?

[Roland Kasper, Group CEO & President]

Just to start with the one-offs then Henrik. I would say this was a rather clean quarter. There might be a positive effect. If you have read that we have -- the amount of bad debt is close to 0 this quarter. Apart from that, it's no bigger restructuring cost taken or a cost related to acquisitions or anything like that. So it's -- I would say, it's a clean quarter and it will step in in the right direction. That would be nice, Henrik.Regarding Koolair, there is no restructuring costs coming out of that. It's a normal adjustment in the company. So business there continues well so -- and the development is as expected, I would say.

[Operator]

We have no more questions for the moment. [Operator Instructions] We have a next question from Hjalmar Jernström from Erik Penser Bank.

[Hjalmar Jernström]

Hjalmar Jernström from Erik Penser Bank. You mentioned some about the situation in China. Could you care to elaborate maybe on the corona issue, maybe with regards to the situation in Italy, perhaps?

[Roland Kasper, Group CEO & President]

We're waiting for that question. Everyone has questions on corona. Just to be very clear, in the quarter 3 report, there were no impact of corona. That's just as a first point. As we have a very, very small or no business today in China, we're just delivering in from distribution points. So we have no impact from that. When it comes to supplies from China. For the time being, we have secured all components that we need for direct supplies to our factories, but we do not have 100% under control or no one in industry, of course, is what subsuppliers to our suppliers would have, but for the time being, what we see from our sourcing organization where we have questioned this, of course, and we had no impact yet. We are, of course, monitoring the circumstances on a day-to-day basis. We see that rather maybe some impacts coming in Europe when it comes to putting in certain countries into quarantines and these kind of things because, of course, in Europe, you have subsuppliers that have their suppliers in other European states especially -- don't see that openly yet. So we're -- but as I said, we are monitoring this on a day-to-day basis. It's more of helping the peer of our employees and customers actually.

[Hjalmar Jernström]

All right. Thank you. Also, regarding the presentation, then you mentioned that you continued to improve margins despite this record high temperatures. Is this something that you believe that you can proceed when into the next quarter? Or do you think that this is an effect that might be displayed in the coming quarter?

[Roland Kasper, Group CEO & President]

Just to explain the comment is not why it is an impact because of the high temperatures, we have less frequencies of our air and heating products. And they have naturally a rather high margin. We are now running that into our fourth quarter, which, of course, also parted and is gone into the warmer months, where the mix of Frico products, financially reduce it lower. So we think they will follow the plan and continue to improve our gross margins because that's according to plan.

[Anders Ulff, CFO & Secretary to the Board]

And that's the plan. But it's a tough comparative quarter last year also. So it will be a challenge, really, because last year, we had 9.3% organic growth, and then we reached EBIT margin of 5.3%. So it's quite tough. I would say, challenging as it is right now. And I mean, we don't see really yet what the effects will be from the corona. I mean, of course, in some countries, we hear that the installation work, the customers, I mean, everything is going down for the moment. So I mean, especially in countries like Italy and so on. And also, I'm also a little bit worried about the [indiscernible] on the weakening of the Norwegian krona and ruble also, the effects on the oil part development also for -- because Russia, Norway are important countries for us, to mention that as well.

[Operator]

We have a next question from Tobias Liner from Kepler Cheuvreux.

[Douglas Lindahl, Analyst]

Douglas here. A question from -- whole question from my side. You mentioned there, Anders, on the Russian market. I noticed that it's -- it was down in the quarter. But I was wondering -- and you mentioned, Roland, that you had some high expectations on the Eastern European market in the longer term. I was wondering in what context Russia, fits here? Do you expect the Russian market to perform strongly going forward? Obviously, it's a market that's very dependent on the oil price, and we've obviously seen what happened there in the last few days. Maybe -- your most sort of recent view on the Russian market is basically my question.

[Roland Kasper, Group CEO & President]

In the quarter 3, Russia is a smaller participant as they have longer Christmas holidays. So it's not that much business normally coming from Eastern Europe in that quarter. But what we see is the forecast that the building activities in Russia have been rather high. So we -- so far, we have only seen very, very limited impact from corona and other things. But as Anders was mentioning how then now with the oil situation is impacting it's very hard to predict, to be honest. But we want to see that they have a high number of start-up projects, and we will prefer not to stop them.

[Douglas Lindahl, Analyst]

Okay. And on your sort of order situation in Russia, would it be fair to say that it's up or down compared to previous year's period?

[Roland Kasper, Group CEO & President]

Well, this quarter it was down.

[Douglas Lindahl, Analyst]

As an indication of the near term?

[Roland Kasper, Group CEO & President]

Yes. And last quarter...

[Douglas Lindahl, Analyst]

And by the end of...

[Roland Kasper, Group CEO & President]

It was down.

[Douglas Lindahl, Analyst]

It was down, yes.

[Roland Kasper, Group CEO & President]

Yes.

[Douglas Lindahl, Analyst]

So in the very short term, we should probably expect continued negative Russian market year-over-year?

[Anders Ulff, CFO & Secretary to the Board]

So many factors, really, it's really hard for us to predict really what will happen in the installation market and order intake for the moment really, with everything happening at the moment.

[Roland Kasper, Group CEO & President]

January and February are normally very low months in Russia. So we haven't seen any impact there, I can say that.

[Anders Ulff, CFO & Secretary to the Board]

If it would be also warm spring here, I think that will also benefit our Russian business because we have lots of air conditioning sales in Russia also. So that could have a positive impact. It's hard to predict.

[Operator]

We have no more questions for the moment. [Operator Instructions] We have no more questions by phone. Back to you for the conclusion, sir.

[Roland Kasper, Group CEO & President]

Okay. Thank you very much, ladies and gentleman. Thank you much -- very much for calling in. And yes, let's talk again next quarter here in June. And you're, of course, welcome to contact us, if you have any sort of questions.

[Anders Ulff, CFO & Secretary to the Board]

Thank you very much.

[Roland Kasper, Group CEO & President]

Stay healthy. Thank you. Bye.

[Operator]

This now concludes our conference call. Thank you all for your participation. You may now disconnect.