Systemair AB

STO:SYSR

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to the Systemair interim report for Q3. My name is Charlie and I'll be coordinating the call today. [Operator Instructions] I'll now hand over to your host, Anders Ulff, CFO, to begin. Anders, please go ahead.

[Anders Ulff, executive]

Thank you very much. Good morning, everyone. Thank you very much for calling in this morning. We will present the Q3 results and the presentation is available under our Investor Relations page. And there you click for the quarterly report and there you'll find the presentation for today's call.

So I will start with handing over then to Roland, who will present what I believe is a fairly positive report this time. Go ahead, Roland.

[Roland Kasper, executive]

Good morning, everyone. My name is Roland Kasper. I will present the quarter 3 report 2022-23. So jumping right into the report that you also could download, and Page #1, just an overview of Systemair. Today, I hope you already know, Systemair found in 1974, headquartered in Skinnskatteberg in Sweden. Our last annual fiscal year was a turnover of around about EUR 960 million, and we are listed on the OMX Nordic stock exchange market since October 2007.

Systemair maintains its own sales companies today in 52 countries, and we have 29 factories in 21 countries per quarter 3. And we have 6,900 employees and selling into 135 countries all around the world.

With that, jumping into the report as such. And as you have already heard from Anders, we think it's a fairly good report. Our net sales in quarter 3 amounted to SEK 3.043 billion. That is compared to the same quarter the year before, a growth of 33.6% whereof organic 22.2%. Those of you who have downloaded the presentation, on the right side, you see the graph of the development since the beginning of the pandemic which, of course, shows a rather good coming back to normalized, but even good growth figures.

Going to the next slide, Slide #4, then the analyze of the growth. The organic growth is mainly attributable to the Nordic region, Western Europe, America, Middle East and Asia, or simply said, all the regions despite the East Europe region. Then we have an impact by acquisitions, which is mainly the acquisition of SagiCofim in Italy, which contributed with 5.1%. And then we have some impact by currency, which mainly is the strengthened euro versus U.S. dollar and the Canadian dollar, with an impact of 6.3%, which brings us in total to 33.6% growth in the quarter.

Next slide, Slide #5, looking into the operating profit for the quarter. As reported, the gross margin increased to 34.2% compared to 33.3% the year before. And this is mainly as a result of the good capacity utilization we see on the pricing power. Then you have an impact of the hyperinflation calculation in Turkey that has affected our gross margin negatively by 0.6 percent points or SEK 17.2 million. The operating result has been positively thereby affected by adjustments after the hyperinflation calculation in Turkey in a total of SEK 3.7 million.

The sales and admin expenses for the quarter increased by 17.9% compared to the organic growth of 22.2% for comparable units. And at the end, the operating profit amounted to SEK 277.5 million compared to SEK 131 million the year before. And the operating margin thereby amounts to 9.1% compared to 5.8% the year before.

Switching to next slide, which is Slide #6, the profit after tax. Our net financial items for the third quarter amounted to negative SEK 59.1 million. And the currency effects on the long-term receivables, loans and bank balances amounted to a net of SEK 37.5 million. Interest expenses for the quarter amounted to SEK 21.6 million, giving us a net financial year of SEK 170 million compared to SEK 95 million the year before the same quarter.

The next slide, Slide #7, going into the cash flow analysis for the quarter 3. The cash flow from the operating activities improved to SEK 274.6 million compared to SEK 142.3 million the year before same quarter. The decreased inventories and the trade receivable improvement have led to the change and positive impact on the working capital. The change in the working capital thereby amounted to, in the quarter, SEK 4.1 million, compared to negatively SEK 150 million the year before. Net investments, excluding the acquisitions, amounted to SEK 33.8 million, and mainly attributable to capacity investments in Czech Republic, in Sweden, Denmark and in the U.S. Thereby, the amounting free cash flow in the quarter of SEK 244.9 million compared to negatively SEK 17.6 million the year before. Our net indebtedness increased from SEK 1.8 billion to SEK 2.6 billion in the third quarter 2022-23.

Going to the next slide, Slide #8, and going into the markets and our business. As you can see from this pie chart on that slide, the development is somewhat little bit different, starting on Eastern Europe, where the total breakdown gives us a decrease from 15% to 12%, and this is, of course, mainly due to Russia. North America, stable at 11% of our total turnover. And other markets, as you know here, some African, but also then Turkey, Middle East and Asia, increased from 12% to 13%. Western Europe, a strong increase from 42% to 45%. And the Nordic regions, a slight decrease to 19%.

Looking into the different regions and looking at the breakdown. Starting with Nordics on Slide #9. Sales in the Nordic region increased by 18.4% during the third quarter, and adjusted here for effects of foreign exchange and acquisitions, with 13.9% organic growth. And here, all the markets and applications in the region showed good growth during the quarter.

Going to Western Europe, somewhat a little different picture. Sales development in the Western European market continued very, very strong in the quarter with an increase of 54.9% compared to corresponding period last year. And here, adjusted for foreign exchange effects and acquisitions, sales increased by 32% organic. I'm happy to say that all the major markets within the region showed good growth during the quarter, and here, especially Germany, France, Italy and U.K. The drivers here, school and residential projects, in particular, showed strong increase in the quarter.

Also to mention, as we are in Western Europe, next slide, Slide #11, that Systemair, we completed the divestment of the commercial air conditioning business to Panasonic. This happened last week, Tuesday, 28th of February. So the divested operations include Systemair S.r.l and Tecnair in Italy, Systemair AC SAS in France, as well as the sales operation of the air conditioning product in Systemair GmbH in Germany. This operation consolidated the turnover for the rolling 12 months for EUR 69 million and employed round about 400 full-time employees.

The financial profit effect related to the divestment will be reported in the year-end report that we will publish the 8th of June 2023.

Thereby going back to the markets and next slide, Eastern Europe and CIS. Sales in Eastern Europe and CIS decreased by 1.1% during the quarter. And here, adjusted for foreign exchange effects and acquisitions, sales decreased by 10.4%. Reason for the negative growth is mainly and only the discontinued sales in Russia. Growth, excluding Russia, amounted to 18.3%, positively. All other major markets in this region showed good growth here, especially to mention Czech Republic, Poland and Slovenia.

Next slide, North America. Sales in North America increased by 29.7% in the quarter. And here, adjusted for foreign exchange effects and acquisitions, 15.5%. Both the American and the Canadian markets showed good growth during the quarter. And here, the main drivers for us is residential and school projects, where a component situation, of course, leasing also helps us quite a lot to catch up on the good order backlog here.

Next slide, Slide #14, Middle East, Asia, Australia and Africa. Sales in these regions increased by 38.4% compared with the same period last year. And here, adjusted for currency effects and acquisitions, sales increased by 50.5%. India, Turkey and Australia showed very good growth during the period, but to mention that the restrictions in Asia due to the pandemic are now mostly gone and what you see here is, of course, the effect of the market is showing absolutely more activity than the year before.

Thereby going to next slide, also to mention as we have very good impact by the development in Asia. Also, here to mention the landmark project for Systemair India. Systemair India landed a prestigious order for the Indira Gandhi International Airport here with a new development on the Terminal 1. Here, Systemair India will supply air handling units, all the ADP products, fans and volume control dampers to a total amount in the order of EUR 3.2 million. And all the deliveries will be completed before the 30th of April 2023, a really nice project for our colleagues in India.

Also to mention here that Systemair commits to setting science-based targets. We have completed our filing here. And by that, Systemair is taking another step to mitigate climate change and reduce the greenhouse gas emissions, both from our own operations and throughout the whole value chain with our products and services. This is something that we really look forward to, and it will really help us.

Going to the next one, sustainability reporting. As a part of our sustainability work, as also mentioned in the report, we are following through our quarterly reporting that we started in quarter 2. We see continued decrease of work-related injuries due to the focused preventive work. And as you can see in the graph on the right side, it's absolutely going down, quite clear, quarter-to-quarter, and we really like the development. Also, female leaders have increased. Here is an increase, not a decrease to now 24.2%. And the emission intensity from the Scope 1 and 2 in our operations has continued to decrease. So all the KPIs for us in the sustainability work are really going in the right direction.

At the end, I also wanted to mention the outcome or a short report about the Capital Markets Day that we had in January this year, where we also presented the selected growth opportunities where we see that we are focusing our work in going ahead. We provided a lot of information regarding financial targets for growth pockets, profitability, financial strength and dividends, and the selected growth areas that were presented and discussed throughout our Capital Markets Day are shown here on the right side. It's for us, residential ventilation, it's public buildings, for example, also there are schools with our product solutions, health care, data center, and the service part with replace, retrofit, and update on installed product base.

We think with that focus, and with these five main focus areas, we can guarantee the mid- and long-term positive development of the group.

By that, ladies and gentlemen, I want to stop my presentation on our quarter 3 report. And thank you for listening to me. I'm opening up for any questions related to our quarter 3 report. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Carl Ragnerstam of Nordea.

[Carl Ragnerstam, analyst]

It's Carl here from Nordea. A couple of questions. Firstly, you mentioned that the resi side was particularly strong in Western Europe during the quarter. I mean, is it driven by energy efficiency-related renovations or upgrades? Or would you say that it's sort of a catch-up effect in conjunction with completion of new production projects and should sort of not be extrapolated in the coming quarters here as resi starts on the weaker side?

[Roland Kasper, executive]

No, for us, I would say that the school and residential project is more related to awareness of people of indoor air quality. I think it's the indoor air quality that is pushed not only from us, as a company, but also from the whole industry, certification bodies and local industrial organizations throughout Europe. I think it's one of the main drivers of looking not only to new build, but also to upgrade and the residential renovations. So this is a big point where people are investing in still.

[Carl Ragnerstam, analyst]

So you can finally see the effects from the post-COVID we've been talking about for a couple of quarters here. That's correct?

[Roland Kasper, executive]

We see that being the strong drivers, yes. What we see is the indoor air quality discussion is driving a lot. The green deal discussion is driving, but we don't see that much of yet actually the fundings that are coming into it. But we see that the occupational level with the consultants in the planning phase is really high. They have high workload, which is a good indicator for the future business.

[Carl Ragnerstam, analyst]

Okay. Very good. And you also guided for, I mean, firm orders during the quarter. Is it possible to sort of quantify the organic order development, both including, excluding prices? And also whether you have a positive book-to-bill now during Q3?

[Roland Kasper, executive]

Yes, related to the organic growth and how much of it will be inflation driven, there I would say that from the 22.2% on the organic growth, inflation and price increasing driven here, will be around 14%, 15%.

Looking on the book-to-bill or our backlog, it's also reported in conjunction with our Capital Markets Day. It has been really strong still in November, December. A little bit less strong, but still around 30% in January. So I would not say that 1 month should be a guidance for a trend, but you know that the next quarter is a good start for running into the high season.

So we are waiting a little bit on that. But, of course, we see that a lot of the contractors in Mid and North Europe still have a really good occupancy level throughout whole 2023. So it's good times in the market for us.

[Carl Ragnerstam, analyst]

Okay. Sounds obviously quite promising here. And also on -- I mean, could you update us on the production for Menerga. Is it going according to plan? And also, could we see some potential effects from the efficiency improvements already in the quarter on the gross margin? Or is it too early to be seen?

[Roland Kasper, executive]

Related to Menerga, we are working according to the plan. We, of course, have to follow strict also communication and movement plan. And what already is said is, of course, that we have moved over private pool units and we're working on the next steps. I will be able to disclose more about that later.

When it comes to improvement and impact on that on the gross margin moving ahead, it's a little bit early to say. The impact will come step by step throughout 2023, but the guidance would come later on. It's a little bit early in that, Carl.

[Carl Ragnerstam, analyst]

Okay. Very good. And the final question from my side is a bit on pricing. If I remember correctly, you've announced price increases on 1st of January this year. What is the initial feedback from your customer on those? I mean, are you able to implement them? Or have we sort of reached the max level for what the market or end market could stand in this environment? Of course, I acknowledge that it might differ between product categories, but in general?

[Roland Kasper, executive]

In general, I would say that there is still a high acceptance level. We have to be really open. We had no problems in any countries, in any market, and in no application with the price increase that we have been doing. 1st of January, you're right in that.

Looking ahead, though, last year, we made four price increases throughout the group. Looking ahead, I would say the expectations are that we will not do four price increases throughout the year. The expectation from the market would be that, of course, they understand that the pressure from energy costs, from transportation, et cetera, et cetera, is still over normal, which also needs to be reflected in the pricing, but maybe not that it gives the open way to make four adjustments. Maybe 1 or 2 more this year, but maybe not four. So let's wait and see.

But I think we have come to a level where it's more an open discussion about the different factors going into the price increases.

[Operator]

Our next question comes from Douglas Lindahl of DNB Markets.

[Douglas Lindahl, analyst]

Thanks for the interesting answers on the previous questions. So coming back on pricing, I just wanted to check if you are sort of incorporating similar price changes in your different geographies? Or is there any large deviations that we should know that's potentially driving in this quarter? That's my first question.

[Roland Kasper, executive]

If I do understand your question right, Douglas, the question is if we have different set of price adjustments for different regions, is that right?

[Douglas Lindahl, analyst]

Yes, basically, you said you did 14% to 15% price growth here in this quarter. Would that be a fair number throughout your different geographies, maybe focusing on the Nordics and Western Europe?

[Roland Kasper, executive]

Okay. I get it. Now, of course, the price adjustment is -- we are not making an adjustment that is, how to say, one figure across all the different geographies and products. It is rather specific looking into material part of product of offerings, how much is labor, et cetera, et cetera. And a big part of the pricing cost also is, for us, the transportation and AC setup.

So different geographies, different products, different, I would say, size and component, content gives a different set of pricing. So it's a rather, how to say, intricate process and the way we can handle that. But I think that is also part of why the customers are accepting it, because they understand that we actually are not taking, let's say, for example, 10% everywhere the same. It's really to reflect a true base.

[Douglas Lindahl, analyst]

And transportation, I guess that's a pretty big part of pricing discussions. Is it so and it could be so going forward? Or...

[Roland Kasper, executive]

Yes. It is still logistic costs, absolutely. It's driven by, of course, the cost for trucks and logistics, and from us internally, but also external through customers. That's a big part of it, yes.

[Douglas Lindahl, analyst]

Okay. And I guess the question on the backlog was already asked, but I guess I'll try off in a different way. Are you seeing backlogs at all-time high levels now? Or...

[Roland Kasper, executive]

Still -- in many areas, especially in North America, but also in some of our European facilities, yes, we still have really high backlogs. I think I had another question earlier today in the morning, how we value our high order backlog. In some areas, I would actually be quite happy to come down from the very high order backlogs that are giving us occupancy level in factories for, in some of them, 10, 12 months ahead because that would give us the possibility to also serve on short-term orders that we are not able to take on today. So that would be nice, but we still have high backlogs, yes.

[Anders Ulff, executive]

But the backlogs are also then due to the component shortage problems that we have had. And those also, as we mentioned in the report, are starting to ease up a bit. So we have been able to take it down and, I guess, a little bit also that is fueling the growth for the quarter also.

[Operator]

Our next question comes from Hjalmar Jernström of Erik Penser Bank.

[Hjalmar Jernström, analyst]

First one is on the school or residential that you mentioned was particularly strong in Europe. I was wondering, could you give us some flavor on particular countries or particular submarkets within Europe where this is particularly visible? And maybe how you see the future because you mentioned the funding of these kind of projects. How do you see the future rolling out in terms of funding projects as a driver?

[Roland Kasper, executive]

Residence, I think I already answered a little bit earlier that with residential, we see it's driving quite well throughout Mid-Europe. When it comes to the school project, this is mainly driven by Netherlands, Belgium, Germany, Swiss, Austria, Slovenia. They have special funding from government when it comes to upgrading existing schools, and we're talking about -- really about ventilation in the classrooms. And that is a clear thing, I would say, or an initiative after the pandemic.

I mean opening up the windows is not possible, especially given the weather conditions we have currently, for example, here in Sweden. So it's more about creating indoor air with ventilation upgrade in existing. That is something that is really ongoing in Europe. That's the mass development, of course.

We have a special unit that is developed in Europe for this kind of aftermarket upgrades, and that is running really, really well.

[Hjalmar Jernström, analyst]

All right. And second is on investments. You mentioned room for investments. Of course, you presented the plans on your Capital Markets Day. But could you give us some flavor on maybe the short-term developments of the levels of investments if we look forward a bit?

[Anders Ulff, executive]

It's a bit early to say actually. Also that we're just going into that season then for budget and we plan also for the coming year then. But we see, with this kind of growth that we have right now, that we are outgrowing some of our production units. So we need to make investments in order to get additional production capacity in some places also. So we are looking into that right now, and we are planning on that. And I think we can come back here, yes, on the Q4 report with a little bit more details about the plan for investments then.

[Roland Kasper, executive]

But the ongoing -- just to add on that, the ongoing ones is where we have high capacity needs, it's machinery ongoing just now in the U.S. It is ongoing in Czech and in Slovenia, but we really need to build up capacity that we're lacking.

[Anders Ulff, executive]

Yes, machinery ones, yes.

[Operator]

Our next question comes from Anna Widström of Handelsbanken.

[Anna Lindholm-Widström, analyst]

My first question is to get some additional comments on the supply chain situation. Basically, your expectations ahead? What's the current situation? And how we should interpret your comments on the easy situation? I mean, could we see an additional underlying profitability from these levels? Or is the situation extremely easy now so you can have sort of all the positive effects already?

[Roland Kasper, executive]

Yes. On the pricing side, as already elaborated a little bit, some of our component prices and also steel prices are, of course, they're adjusting. They went down a little bit at the beginning of the year, then they turned up again a little bit. The biggest part of the price variations that we are looking out for when it comes to price adjustments are today actually driven by electricity, driven by transportation and logistics, and of course, also the inflation when it comes to our workers and the compensation.

How that will move on from here is, I would say, a little bit softer, as also we said to one of the earlier questions that we got. I will not say that we'll have four adjustments this year. I hope not. But we are, of course, in the process and reviewing that constantly.

[Anders Ulff, executive]

Regarding the pricing problem, wants you to comment on that as well.

[Roland Kasper, executive]

Yes. The supply chain problems, they're a little bit, let's just call them, dynamic. It started with the motors clearly and the problems related to that and controls. Today, most of the problems, when it comes to our main markets like Europe, we're talking about power connectors that we shared a component with, for example, automotive. And that is a little bit tricky. But it's stabilizing. It's getting better, not good, but better.

Most problems for us in operations are still related to North America for not only power connectors, but also motors. But we see an ease on the problems. It's better than last year, not good, but better. And the forecast from our main suppliers in that area see that by end of the year, we are reaching a new normal that would make our life, of course, and the operations much better and more stable when it comes to deliveries to our customers and working on the backlog.

[Anna Lindholm-Widström, analyst]

Okay. And if we go into the cash flow effect from the working capital, could you maybe talk about on your expectations for the year? And also, if we should expect a difference in seasonality or something other as you divest the AC business?

[Anders Ulff, executive]

Yes, of course, talking about the divestment of the AC business then and how it affects the network capital, we see that it's going to improve because the main market share is Southern Europe and of course, with longer credit times and also -- so that will be a positive effect, especially on the trade receivables side.

Also as mentioned then during the Capital Markets Day, we are running a project right now in order to reduce the inventory levels, and especially on the component side, with the pricing problems easing up, that will make it possible for us to reduce that. And we already see them as we saw here in the Q3 report the first effects of that.

Also, this has affected also the level of finished goods and delayed deliveries due to some component shortages and that we don't have all the components in place in order to make the shipment really. So it affects on different levels -- yes. So we hope to see that trend continue to be positive, really. And I don't want to throw out any numbers here really, but I think we can see a fairly good improvement potential here in the next 6 months.

[Operator]

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

[Henrik Alveskog, analyst]

Well, just a quick one on the price increases that you -- well, that we've been talking about, the last one in January. Could you give us just a rough ballpark number on the size of those?

[Roland Kasper, executive]

As I said before in one of the other questions, of course, what we do is a quite selective pricing. So we have some of the products that are up 3%, 4%; others up 10%, 15%. We even have some where we have lowered the prices as they were impacted quite heavily when we had to buy some of the electronic parts on the spot market. So it's a really wide variety of adjustments. But of course, the total sum in January was still somewhere between 5% and 7%, depending on the region.

[Henrik Alveskog, analyst]

And then well, your last acquisition here in Italy, SagiCofim. Could you give us just a brief update on how they have performed so far? Are they growing in line with group? Or well, just a general idea of how they're doing?

[Roland Kasper, executive]

Yes, absolutely. A really good question there. SagiCofim, as said, in filtration and in air distribution products. On air distribution products, they had the low season, which is the winter part in Italy. And on the filtration side, they're running on full capacity. So actually, it is a new machine line ordered to increase capacity as they're running on 100% a little bit over. We're increasing also here the shift going in Italy to bring up that volumes. So it's more that we are preparing for the future growth here. That's where we are with SagiCofim.

[Henrik Alveskog, analyst]

Okay. And then sorry to bother you, but I need to ask you about Russia. And they still had -- well, some sales here of around SEK 50 million, I guess, if I translate your numbers in the quarter. And as you mentioned also in the report, working capital of SEK 114 million. But I guess the inventory will quite soon be depleted. And just what are your options in Russia going forward? Is it a particularly sensitive matter? Or could you give us an idea of what...

[Anders Ulff, executive]

No, no. I mean, we are quite open with this. I mean, we have an operation there, and we have -- I believe it's around 160 colleagues still working there.

[Roland Kasper, executive]

158.

[Anders Ulff, executive]

Yes. So it is an operation and what they have done in order really to survive a bit there, even though we don't supply them internally, they are sourcing products from China, India, and so on, that they are trading with the Russian market in order to survive, more or less. So that is what is happening.

The options we are looking into then is some kind of divestment of the company. But unfortunately, this is quite a moving target as it is right now with new sanctions then being added all the time. The latest were here on the 24th of February, then on the -- yes.

So we are looking into different options here, and we hope that we can communicate something here in the coming months. But as I said, everything is moving a bit here also. But then the decision is taken that we will -- Systemair will exit Russia.

[Roland Kasper, executive]

Maybe to be clear, the investment for us, it is just very, very bureaucratic with the Russian organizations and with the Ministry of Trade in Russia, as we are in Sweden and our friendly country as a main owner. So we are a little bit cached up in this bureaucratic circumstances, which are not easy to handle from Sweden.

[Operator]

[Operator Instructions] At this stage, we currently have no further questions, and therefore, this concludes today's conference call. Thank you all for attending. You may now disconnect your lines.