Systemair AB

STO:SYSR

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the Systemair Interim Report Q3 2021/'22. [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 your meeting.

[Anders Ulff, executive]

Good morning, everyone. Anders Ulff speaking. So thank you for calling in. You will find our presentation for today on our corporate website, group.systemair.com. And I'll start off with turning over to Roland then for the presentation.

[Roland Kasper, executive]

Good morning, ladies and gentlemen. My name is Roland Kasper. I have the pleasure to present our quarterly report. By that, I want to start with changing to Slide #1 in the presentation.

As you know, Systemair established here in Sweden, in Skinnskatteberg in 1974. We have an annual turnover of around about EUR 850 million, and we are listed on the NASDAQ Nordic Stock Exchange market since October 2007. Today, we have our own sales companies in 54 countries, and we have 29 production facilities in 20 countries and employ around about 6,600 people. Today, we have a continuous export into 135 countries all around the world.

Slide #3, our net sales in the quarter 3. Our net sales amounted to SEK 2.278 billion in the quarter 3 '21/'22, which is a growth of 13.7% or organic 11.8%.

Slide #4, the growth analyze. Organically, besides Western Europe, all regions showed good organic growth. We only had a small impact from acquisitions, which amounted to 0.9%, and we had the strengthened currency by the end of quarter 3 in the euro, U.S. but also Canadian dollars, which is 1%, which gives the total of organic 11.8%.

Next slide, Slide #5, the operating profit. Despite the material shortages and a record high sick leaves, especially in end of December and beginning of January, the gross margin did only decrease slightly to 33.3% compared to 33.6% the year before. Our operating profit amounted to SEK 131 million or 5.8%. The sales and admin expenses for the quarter increased by 11% for comparable units, and the operating margin continued to improve to this 5.8%. Looking back for the last 5 years, it's a continuous improvement.

Next slide, Slide #6, the profit after tax. The net financial items in the third quarter amounted to SEK 2.3 million. The impact of foreign exchange on long-term receivables, loans and bank balance totaled SEK 4.8 million. The interest expense for the quarter totaled to SEK 7.1 million, and the estimated tax for the quarter amounted to SEK 34.2 million, brings us to total profit after tax of SEK 95 million for the third quarter.

Slide #7, the cash flow analysis. The cash flow in the quarter from the operating activities amounted to SEK 142.3 million compared to SEK 139 million the year before. The change in working capital is SEK 115.5 million, which is mainly due to the increased inventories. The net investments, excluding acquisitions, amounted to SEK 44.4 million compared to SEK 133 million the year before, which is primarily the final investment in our factory equipment in Czech Republic, in Canada and in France for coil and [ futures ], which amounts then to a total free cash flow of negatively SEK 17.6 million. This brings us to a total net debt of SEK 1.8 billion in the quarter.

Next slide, Slide #8. This would then be our market share breakdown, which in the quarter 3 '21/'22 amounts to Eastern Europe and the CIS countries an increase of 14% to 15%; North and South America from 10% to 11%; other markets stable with 12%; Nordic region also stable at 20%; and a slight decrease in Western Europe from 44% to 42% market share.

The next slide, going into the markets in depth. So starting with the Nordics, Slide #9. During the third quarter, sales in the Nordic region increased by 18.4% from the same period in preceding year. Adjusted for the effect of foreign exchange and acquisitions, sales rose by 14.6% organically. The markets in Sweden, Norway and Finland showed growth, while the Danish market receded.

Slide #10, Western Europe. Sales in the Western Europe amounted in the quarter to 4.1% higher than in the corresponding period last year. Adjusted here for foreign exchange effects and acquisitions, sales rose by 1.3%. The U.K., Spain and Italy showed growth over the period, while France, the Netherlands and Belgium saw a sales decline. The biggest impact from material shortages and record high sick leaves have been here in Western Europe.

Next slide, Eastern Europe and CIS. Sales in Eastern Europe and CIS rose by 19.2% during the quarter 3. Adjusted here for foreign exchange effects and acquisitions, sales rose by 15.7%. Systemair discontinued its deliveries to Russia and Belarus the 4th of March. The Ukrainian, Russian and Belarusian markets accounted for 4.5% of the total sales. Other major markets that showed growth in the region where Estonia, Hungary and the Czech Republic.

Next slide, Slide #12, North America. Sales in North America in the quarter were 26% higher than the same period last year. Adjusted here for foreign exchange effects and acquisitions, the sales rose by 16.8% organically. And here, it's mainly the Canadian market that is showing continued strong growth in the application for residential and school.

Next slide, Slide #13, Middle East, Asia, Australia and Africa. Sales in this region rose by 23.4% compared with the same period last year. Adjusted here for foreign exchange effects and acquisitions, sales rose actually by 36.5% organically. Here, it's India, the Middle East, Australia showed good growth during the period, while sales in Malaysia declined slightly.

Slide #14. As you know, we have been -- or we are here sponsors for the Expo 2020, which is now Expo 2021 in Dubai. And on the 16th of February, on the second location, Systemair Sweden was hosting guests in the Swedish pavilion at the expo. Our Managing Director of Systemair Sweden, Sofia Rask, introduced the event with topics like, let's co-create for sustainable HVAC, which then followed by a presentation of Systemair's products and solutions, a tour of the pavilion as well as networking dinners with our guests.

Slide #15. As reported in the quarter, Systemair acquired Tecnair LV in Italy. Tecnair is an international supplier of indoor close control air conditioning units, and the products are delivered to hospitals and data centers. Here, the Italian market accounts for around about 25% of their sales, and the rest is exported within Europe. Tecnair is located in Uboldo outside Milan but will, with immediate effect after closing, relocate the Systemair's existing premises in Barlassina, which is on a distance of 15 kilometers. Tecnair's sales in '21 amounted to EUR 12 million with an EBITDA result of EUR 1.2 million. The company has 43 employees.

By that, I'll end the presentation and open up for questions. Thank you.

[Operator]

[Operator Instructions] The first question is from Hjalmar Jernström of Erik Penser Bank.

[Hjalmar Jernström, analyst]

I was wondering if you could elaborate a bit on the North and South American markets. They keep delivering strong growth. Can you elaborate on particular segments that is contributing, if it's still educational facilities in Canada and the U.S.?

[Roland Kasper, executive]

Thank you for the question, yes. What we see is that still, Canada is very, very strong in residential primarily. In U.S., the educational sector is investing quite a lot. And what also happened during the last 2 quarters is that the building code regulation has changed in parts of U.S. It was now -- in the summer, they started in California and in Arizona. And now it's following Texas and other states where they change the building code to be inclusive for residential, which hasn't been the case before. So this is, of course, something that is very beneficial for our factory and our sales organizations in North America.

[Hjalmar Jernström, analyst]

All right. And also on the gross margin, you mentioned the price hikes that you were not fully able to carry out in the quarter. Are you confident looking forward that you will be able to carry out price hike? Or how should we view this statement?

[Anders Ulff, executive]

Yes. We have implemented several price increases, and especially now from beginning of January, the latest one also.

[Roland Kasper, executive]

The 15.

[Anders Ulff, executive]

Yes, the 15 order. And I mean, as always, it takes a little bit of time in order for them to have full effect. So we expect it to have increasing effect during year 2022. And of course, then what is happening now with prices and so on, we will, of course, be also looking into making further price increases if needed.

[Hjalmar Jernström, analyst]

All right. And also on the M&A agenda, I was wondering if you could elaborate a bit on the current pipeline and perhaps elaborate on, in particular, what you target, residential, commercial sector or if you view certain segments that are particularly interesting within these segments.

[Roland Kasper, executive]

As you might have seen, as we also did from 1st of February, we have also changed our management, and we have a new position, Vice President of M&A. So of course, this is something that we will focus on moving ahead. The pipeline is, of course, quite existing, and it's very interesting. And our focus, if you look at our main markets, which is, of course, is Europe, it's exactly what you're describing here, Hjalmar, which is that we're looking into residential and light commercial because of the Green deal, the renovation wave and, of course, also to increase energy efficiency of buildings, which is something that is driving us forward for the 2030, 2050 agenda.

[Operator]

[Operator Instructions] The next question is from Anna Widström of Handelsbanken.

[Anna Lindholm-Widström, analyst]

I'm just curious about the component shortages if, you're seeing in some ways affect the product mixes and if that could have any margin effect that we should be aware of.

[Roland Kasper, executive]

Yes, the component shortages is, of course, just now an issue that is continuous bothering us. It is changing a little bit from what components are in -- that we are looking for. It has been quite a lot to focus on motors lately, but now it's cabling, it's processors and more on the electronics side. This is, of course, something that is bothering us a little bit because the logistics cost for these components has increased quite tremendously. And in some areas where we have to have safety stocks is, of course, also something that is impacting.

But looking ahead, we see that the situation has eased a little bit. It's not been really good but a little bit better. But I hope that the actual situation that we have around us today in Europe will not have a bigger impact really, which, of course, would be possible. So we are a little bit waiting on the next couple of weeks for evaluate the situation.

[Anna Lindholm-Widström, analyst]

Perfect. And I know this is impossible to know, but if you were to maybe think about some indirect effects that you could have from having to close down Russia and Belarus, do you see any indirect effects that could happen within the upcoming quarters?

[Roland Kasper, executive]

Yes. We're, of course, looking into these issues. I would say that just standing here today, it's very hard for me to make a conclusive answer to this. We're looking into what are the different scenarios. I would, of course, on a human base, hope that everything will end by tomorrow with the ongoing activities in Ukraine, that we will have a clear view on how this will move on. But I cannot take a clear statement to that today. But it's under reevaluation, of course, very deeply so.

[Operator]

The next question is from [indiscernible] of DNB Markets.

[Unknown Analyst]

Sorry, I missed the beginning of the call, so apologies if this question has already been asked. But I note that you continue to reduce staff in Menerga. I just wanted to see if you can give us an update on how far you come there with getting that business into the shape you want it to be. Or should we see this personnel reduction more as driven by short-term volume issues? Some sort of -- some comments on that would be useful. Start there.

[Roland Kasper, executive]

Yes, absolutely. Thank you for the question. [ Jansen ] and I, we are following the plan. As announced earlier, we are shifting over part of the production from Menerga in Germany to Slovenia. This, of course, has an impact on the staffing also. We are a little bit delayed on that shift over because the fans ordered in February, March last year and some of the electrical components for the units to be shipped from Slovenia are delayed until March this year. So we're starting as soon as we have the material in place. But of course, everything else that could be physically moved has been done. So you will see further actions in that activity.

[Unknown Analyst]

Okay. And I guess the time frame is uncertain.

[Roland Kasper, executive]

To us, it's more or less as soon as possible.

[Unknown Analyst]

Yes, obviously. I -- sorry again, I assume that the question for Russia have already been asked, but I just wanted to understand that. Obviously, you said now that you will not deliver products and so on. But what sort of risks do you see? Are there any sort of -- do you have any sort of, I mean, obligations to clients to deliver some products? Or what sort of liabilities might you have in Russia beyond you just shutting down sales? And [indiscernible] that is included there.

[Roland Kasper, executive]

Yes, absolutely. Let's focus on Russia. We have no obligations that we can interfere with in that sort. It's more of taking care of, of course, the staffing that is still with us and looking into how we can take it from here and what the impacts will be and how we should take it. So it's a constant evaluation that we're doing looking into this, of course. But yes, as announced, we have stopped the deliveries to Russia by last week. So...

[Unknown Analyst]

And are you able to pay salaries to these employees? Or how does that work?

[Roland Kasper, executive]

Yes, we will be able to continue to pay salaries for -- I mean for the time being and as long -- I mean they also continue to sell on the market from stock as it is. But at some point, I mean, it will be impossible without sending more money to the entity in order to pay the wages for the staff. But I mean it's really early. And I mean we need to look into the different scenarios here. And yes, there's a lot of things going on, especially in Russia for the moment also with all these companies shutting down their operations.

[Unknown Analyst]

And I guess you're looking into sort of the long-term plan with Russia as well. Talk about that later also possibly even.

[Roland Kasper, executive]

Yes, it's, of course, looking into how you should sustain or close down, of course.

[Operator]

As there are no further questions, I hand back to the speakers.

[Roland Kasper, executive]

Okay. Then thank you very much for today. Should there be any other questions that are coming up later on, we are more than happy to comment at those. So please give us a call or a mail if you want to address more questions regarding our quarter report, we'll be happy to do so. Always thanks a lot.

[Anders Ulff, executive]

Yes. Thank you very much for calling in. And otherwise, we will keep in contact each of you when we present our Q4 report. And hopefully, it will be -- yes, better news at that point.

[Roland Kasper, executive]

Yes. Thank you very much. Take care.

[Operator]

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