Systemair AB

STO:SYSR

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Systemair Q4 Teleconference Conference Call. [Operator Instructions] I would now like to hand over the conference to your speaker today, Roland Kasper. Please go ahead.

[Roland Kasper, President & CEO]

Good morning, ladies and gentlemen. Welcome to the quarter 4 report from Systemair. Turning directly into the presentation, so Slide #1. So Systemair is a company established in 1974. [ And last year, with annual turnover of EUR 730 million, listed on the Nasdaq stock exchange since October 2007, ] and nowadays with 50 sales companies in 50 countries. And we have 5,500 employees all over the world that have been enlisting more than 20,300 customers and export to more than 100 countries annually.To the next slide and jumping directly into the report. Our net sales in quarter 4 amounted to SEK 1.827 billion in quarter 4 2017/'18. Compared to the same quarter the year before, this represents a growth of 5.4%; whereof organic, 1.8%. Next slide, Slide #4. The sales growth in quarter 4 is divided up. If you look at the different details here, organically, it's 1.8%. This is mainly driven by the good organic growth in Nordic region and in Eastern Europe. Also contributing is acquisitions, here mainly Syneco and Frivent, the Swiss and Czech acquisition -- sorry, Austrian acquisition, which contributed 1.6%. And then, of course, we have a strengthened currency effect of 2.0%, which all in all amounts to 5.4% in total in the growth. The operating profit in quarter 4. Our gross margin decreased to 32.3%. Here, this mainly is related to the profit warning message that we gave the other day. Underlying the lower gross margin was this major project order with very low margin that was charged against the profit during this quarter. If we take away the related sum of the profit warning, the gross margin would have amounted to 33.4%. Other nonrecurring items at the quarter related to a goodwill impairment charge resulting from the sale of the Norwegian Reftec AS subsidiary that we had, and this is amounting to SEK 11.2 million. And we also made a provision for a doubtful but not confirmed receivable of SEK 12.2 million. The result of this is that the operating profit amounted to SEK 5 million at 0.3%. The sales and admin expenses increased [ with ] 3.3%. And if we would adjust for these amounts in the profit warning, the operating profit would have come out at SEK 49 million.Next slide, Slide #6. Profit after tax in quarter 4 amounted to SEK 11 million. For the [ fourth ] quarter, the net financial items amounted to SEK 25.5 million positive compared to minus SEK 4.5 million negatively the last year same period.Currency effects on the long-term receivables, loans and bank amounted to SEK 32.4 million compared to SEK 3.1 million and relates mainly to the currency effects euro versus Swedish kronor.Interest expenses amounted to SEK 7 million. And the tax for the quarter amounted to minus SEK 19.2 million or, in this case, 62.2% mainly attributable to non-capitalized tax loss carry-forwards in loss-making companies.Next slide, Slide #7., the cash flow analysis. Our operating profit, as per report, SEK 5.2 million. Changes in the working capital, minus SEK 60.8 million. This negative impact of the working capital is mainly due to the increased inventory and trade receivables in this quarter. Acquisitions of property, plant and equipment, SEK 77 million versus SEK 51 million in the quarter year before. From the financing activities were a result of SEK 104.1 million. And cash and cash equivalents at close of the period were SEK 213.3 million compared to SEK 241 million the period year before. Our net debt increased to SEK 1.8 billion. And here, it's mainly related to investments in building and machinery in Turkey, Germany and Denmark that, of course, were a bigger part of this. Next slide, Slide #8, and now looking into our markets and the sales by market. Western Europe nowadays contributes with 41% of our total volume. North and South America were at 8%. And what we call other markets, I'll come into that when we break it down into the regions, attributes for 12%. The Nordics, 23%. Eastern Europe and the CIS countries, 16%.Next slide, going into the different markets and regions. Let's start with the Nordics. During the fourth quarter, sales in Nordic region actually increased by 9% from the same period in the preceding year. Adjusted for the foreign exchange effects and acquisitions, this increase is 7%. Here, mainly the Swedish and Finnish markets reported very good growth during the quarter. The Norwegian market also reported growth, but the sales declined in the Danish market slightly. And here, we also see a current price pressure due to the decline.Then Western Europe. During the quarter, sales in Western Europe market were 8% higher than the corresponding period in the preceding year. Adjusted for the foreign exchange effects and acquisitions, sales rose by 1%. And here, several markets in the region performed really well during this period here, including Germany, France and Italy. And sales declined slightly in the Netherlands, Switzerland and Spain. So growth, 8%; organic, 1%. And in total, it amounted to SEK 748 million.Next slide, Slide #11, Eastern Europe and CIS. Sales in Eastern Europe and the CIS rose by 20% during the quarter. Here, adjusted for foreign exchange effects and acquisitions, sales is 13% up. As we always mention Russia, we'll also do it here now. Sales in Russia developed modest during the quarter compared with the same period past year, but increased overall. The Russian market accounts nowadays for 6% of our total sales compared with 5% in the previous year. But also to really be announced here is the large markets that reported growth during the period, includes especially Czech Republic, Poland, Slovenia and the Baltic States. So growth, 20%; whereof organic, 13%. Coming to North and South America. Sales in North and South America region were 4% lower during the quarter compared with the same period the preceding year. Adjusted for foreign exchange effects and acquisitions, sales rose by 3% within the region. Sales trend was very positive [ denominated in ] local currencies, where the Canadian market in particular demonstrated a very strong growth during the quarter. Also, U.S. was pretty good, but of course, we see some troubles in South America, especially Brazil. So growth, minus 4%; organic, 3% plus. Going to the next slide, Slide #13, other markets. Sales in other markets declined actually [ with ] 17% during the quarter compared with the same period the preceding year. Adjusted for the effects of foreign exchange and acquisitions, sales were down 15%. And here, to mention that sales in Malaysia and China improved during the quarter, but it fell in Turkey, India and Middle East in volume. Sales also fell in South Africa after adjusting for acquisitions. So growth, minus 17%; whereof organic, minus 15%. Then a short look into the full year as partly reported in the profit warning, so Slide #14. The net sales for the full year amounted to SEK 7.3 billion, which represents a growth of 6.4% annually; whereof organic, 3.6%. If we break it down here again, looking in the growth [ where it contains of ], it's organic, 3.6%. We had a good growth in all regions, except other markets where sales was more driven by this project sales, which we have reported earlier already. Acquisitions here at 2.6% contributing. And here is 2VV, Frivent, Viking, TTL and Syneco. And then over the year, a slight strengthening of the euro has contributed with 0.2%. All in all, in summary, it's 6.4% in growth over the year.Operating profit for the full year. The gross margin ended up at 33.1% due to project order with lower margins and some factories with lower volume. Adjusted for the reported shortcoming in quarter 4, it would have been at 33.8%. Adjusted operating profit includes nonrecurring effects of all in all SEK 69.7 million. And the sales and admin expenses for the year increased by 5%. So the outcome for the total operating profit full year was at 4.8%. Adjusted for the SEK 69.7 million, it would have been 5.4%. Going to the next slide, Slide #17, to draw your attention to what has been achieved during the year, but what we have delivered over the past months. We contributed with our deliveries for the FIFA in 2018, the World Cup that is starting now the next days. We delivered products to 6 arenas in total capacity of all in all 260,000 seats for the World Cup tournament. The project includes, from our side, fans, over 700 pieces of air curtains, more than 750 pieces of infrared heaters and 257 RAC units for cooling. Total order value is exceeding EUR 1.5 million for those.Next slide, Slide #18. Here, it's about a reference that we got just the other day in the quarter, it's Systemair supplying TOPVEX units from Sweden to the European University in Valencia in Spain. We have been chosen to supply 47 TOPVEX units to refurbish all the classrooms of the main buildings in order to guarantee, what is the hot topic that we always talk about, the indoor air quality according to the local Spanish certification levels. And here, especially our reduced dimensions of the air handling units were one of the key points in the project, but most and foremost, the heat recovery of TOPVEX was fulfilling the eco design directive in 2018. And deliveries will continue in July and August.And the last slide and product here, the new Prio EC fan, fulfilling the highest energy efficiency standards for the newest certifications. The energy requirements for buildings increased, as all the reports several times, and this places higher demands on the energy-efficient from day to day. So our new Prio EC is designed and adapted to work with high efficiency even at low pressures. And this is a very unique fan and very unique family that is now brought to the market from Systemair.Going to Slide 20 as a summary. So we see continued organic growth, especially in Eastern Europe and the Nordics. We see a market where technical directives increase the demand on the number. Selling and admin costs are reduced in relation to sales. We do perceive further restructuring activities under evaluation, continued product development for being ahead within products, as shown, and also digitalization. And we see, overall, a positive outlook on several markets. By that, I close it, and I will hand over to the operator for opening up for Q&A. Thank you. Tom?

[Operator]

[Operator Instructions] Your first question comes from the line of Henrik Alveskog.

[Henrik Alveskog, Equity Analyst]

Well, first, could you just help us understand what happened in the Menerga-Linde project, how it could turn so sour? Was there anything -- was this like any set of new products that they were delivering or new configuration or what happened there?

[Roland Kasper, President & CEO]

Generally, in a project like this, it was not a standout product, but that is not an explanation of the error. The error is different things. It is a misjudgment of the total working hours in the factory. It is an error in booking internally in work-in-progress, and it's a project management issue.

[Anders Ulff, CFO & Secretary]

And also, I would say that there's a will to take on this to fill out, to increase the volumes in the factory also. So we knew it was with a lower margin also from the start, to some extent, but maybe not this bad.

[Henrik Alveskog, Equity Analyst]

All right. Also, could you help us, give us some sort of guidance on -- you mentioned in the report that you are taking several initiatives, well, restructuring in different parts of the group. When -- could you give us some idea of what kind of costs this has -- well, what kind of cost that it's weighing on the results currently and maybe also the time spent, when we will see these measures, well, going and giving some sort of positive impact on profitability? Is it near term? Or is this longer projects going on?

[Roland Kasper, President & CEO]

Okay. Restructuring is a very wide and harsh word, but of course, we're doing a lot of improvement internally and externally within our company and the groups, especially related to sales, into manufacturing, into process and all that. It's not only dedicated to, as we have reported earlier, to 2, 3 dedicated factories. It's all over the groups, let's say. So all the improvements that we are doing, working with and now in launching phase should, of course, show effects. But it would be risky to try to, how to say, make a judgment when they will have full effect. But it should start to -- I mean, this year that we are closing by should have been the year of where we end all the different internal measures and then start the rolling out of all the results. So you should see signs of change here.

[Henrik Alveskog, Equity Analyst]

Okay. But previously, you've kind of lined out the amount of restructuring charges in each interim report. But now you are still charging, but you cannot really specify the amount, I guess, or else you would have.

[Anders Ulff, CFO & Secretary]

Yes, well, I mean, we -- I think we have. I mean, totally for the full year, it's SEK 70 million in restructuring and one-offs. So in the last quarter, it was SEK 44 million coming out. So prior to that, SEK 70 million minus SEK 44 million, that was the restructuring we did in quarter 1 to quarter 3. So during the fourth quarter, there's no big, say, top restructuring for scaling down production somewhere or something like that. It's just the one-off effect that we have taken out.

[Henrik Alveskog, Equity Analyst]

Okay. And then in the last slide, further restructuring activities are under evaluation. And is that also like several smaller projects? Or is it also -- does it also include maybe, well, shutting down some factories and such more, well, larger one-offs?

[Roland Kasper, President & CEO]

As it is stated, Henrik, it's under evaluation, but it's everything from small to big to review. I mean, we are really looking into how to optimize and to focus on our core, and that's what I can say to that.

[Anders Ulff, CFO & Secretary]

I think we mentioned this already at the profit warning we made that we are still evaluating and that we are doing measures, and especially then in the Airwell factories and in the Menerga factory. But -- so we will see where it leads and when the volumes will come back also.

[Henrik Alveskog, Equity Analyst]

Yes. Okay, just one final question then. Steel prices, I heard some of your peers talk about that. How do you [ experience ] steel prices going up now?

[Roland Kasper, President & CEO]

From what we are seeing, we, of course, are preparing for certain raw material increases, not only steel. But what we are looking for, what we're preparing, of course, is to be really, really fast with having adjustments in our pricing onto our customers. So we keep a quite good flexibility in that and try to be well-prepared, so we have the things in place to be flexible on that.

[Henrik Alveskog, Equity Analyst]

Okay. But you do expect steel prices to go up?

[Roland Kasper, President & CEO]

We do expect not only steel price, but also the blue-collar force...

[Anders Ulff, CFO & Secretary]

The wages.

[Roland Kasper, President & CEO]

The wages to go up in some countries quite rapidly, so we need to be able to act fast.

[Operator]

Your next question comes from the line of Douglas Lindahl.

[Douglas Lindahl, Analyst]

A few questions from my side. Just coming back to steel prices there. I guess this -- the negative effects of these increased raw material prices are now being offset by price increases, or is that correct?

[Roland Kasper, President & CEO]

During our last year, we did adjust our prices twice. And we normally have, in the beginning of a normal year, we have the normal standard list price adjustments, which has been done already. And we are keeping the flexibility, as mentioned earlier, to anywhere when we see that, that deviation is going above or below certain KPIs that we have set, we will be able to adjust our price again. So we are monitoring this quite closely. Hello?

[Operator]

Your next question comes from the line of [ Martin Bungie ].

[Unknown Analyst]

My name is [ Martin Bungie ]. I had a couple of questions regarding -- could you elaborate a bit about the growth drivers in the industry? What do you see in terms of regular changes, trends in the industry? Where do you see the growth coming in the coming year?

[Roland Kasper, President & CEO]

Absolutely. We have mainly -- of course, I mean, we're talking about, for several years, energy efficiency. But this is, of course, then fueled by the latest directives coming from the European Union, especially when we look at Europe, which is the equity stand directive or ERP, energy-related products, which is giving specific targets of energy reductions or energy efficiency measures that have to be fulfilled for products and also buildings. This, of course, brings not only higher demand, but also better business because also existing buildings need to improve the energy efficiency. And a lot of the energy efficiency nowadays is related to running the building, operating the building, ventilating, cooling, heating, et cetera. So we're in the middle of that part. And I mean, if you have a business that is fueled by directives that you need to fulfill, of course, we see it as quite positive.

[Unknown Analyst]

Is that more regarding to new buildings or old buildings as well?

[Roland Kasper, President & CEO]

Old buildings as well. You need -- if you look at the European Union, at least, all these countries, you also need to make an, for example, an energy declaration of existing buildings during operation, but also when you want to sell them. So you need to declare the energy efficiency and, of course, also what measures you have planned and done for, I think, at times, [ indiscernible ] 7 years. So it's quite closely monitored. And then, of course, it's a driving factor in the background. But also, there is another driving factor, as we are talking more and more and now finally, we also have the European volume. We have the certification for indoor air quality. And this, of course, is affecting directly our ventilation business. And we're quite happy about that, that we're finally talking about the quality of the air, which means that you really have to ventilate in a certain way and close out not only, of course, dust and particles, but also bacterias and everything. So you need to have a controlled ventilation system in buildings. That is, of course, something that is very good for us and for our industry at all, brings quite a good monitoring of what we're doing, but most of all, how we can improve our being. As people nowadays, and this is also statistics that is available, people with normal work life in the westerly world will spend around about 90% of our daytime indoors, so we need to take care of the indoor air quality. That's quite important. And that's, of course, a major driver.

[Unknown Analyst]

Another question, around BIM and BIM objects. Is that an increasing sales channel for you, or do you look at it?

[Roland Kasper, President & CEO]

Oh, yes, we actually invest a lot our time and efforts in BIM. We have a dedicated team of nowadays 4 persons only working with BIM objects, sitting in our factory in Slovakia. We are monitoring not only how much the consultants are using our BIM objects, how much they are looking into solutions and using them, but also, of course, we are updating the database constantly and filling it up with easier ways to access it but also to download it. And then we are working with the Autodesk, with the Revit, with the MagiCAD, with all the given normal AutoCAD providers in Europe and on the world basis.

[Unknown Analyst]

Are you working also with BIMobject, the Swedish company?

[Roland Kasper, President & CEO]

BIMobject is part of what we call plug-ins. It's a company which actually is around the tool where you up and download BIM objects from your databases then to the AutoCAD suppliers. So they're in the, what we call, the plug-ins and we use them locally, yes.

[Unknown Analyst]

Okay, great. My last question is it's more maybe a question for the board, but you're keeping the dividend, but you're increasing the net debt. What is your comment and feeling around that?

[Anders Ulff, CFO & Secretary]

Yes. As you say, it's probably a question for the board, but the board thought it was important to keep the dividend on the same level, and meaning that they are confident for the future also.

[Roland Kasper, President & CEO]

And so are we because the measures that we're doing will show the results coming in. That's the design that you should see in the dividend.

[Operator]

Your next question comes from the line of Emmi Östlund.

[Emmi Östlund, Lead Analyst]

So I just wanted to continue a little bit on those sort of technical directives and how they will change sort of -- how will they change sort of the composition of demand? Will the change just sort of [ the product price ] ? And will there be a shift towards larger projects? And how will that impact sort of gross margins and selling cost and things like that?

[Roland Kasper, President & CEO]

Yes. I think it's not actually changing the demand when it comes to physical sizes or something. It's more changing demand to, first of all, that you need to invest and update existing, but also invest in new. When you are building buildings, you cannot only rely on ventilating by opening up the window, but it relates more to that you are measuring the energy efficiency and efficiency of the whole system, which means that the consultants actually need to, as your previous colleague here asked about, you need to have access to the tools for BIM objects to look into the right units, the right specification, the right products, which, in a total solution, brings the best result. But what also, of course, brings us something is that, as it is an overall directive that you need to apply on not only new buildings but also existing buildings, it is actually bringing new projects, not only megaprojects, but first of all, updating and upgrading existing, which have a tendency to be small and midsized projects, which we at Systemair like more because there, normally, competition is a little bit more narrow. And of course, these projects have a tendency to have better margins also.

[Emmi Östlund, Lead Analyst]

Okay. And just a follow-up on that. You talked a little bit about sort of the European -- I mean, change in European directives. How does it look in your other markets?

[Roland Kasper, President & CEO]

Yes. If you look in overall bigger picture, just to say that is, in the Americas, they are a little bit behind, I would say. But you have lots of interest, for example, for low energy [ or passive house and also energy efficiencies coming more and more, ] driven by Canada going into North America. South America is more driven by cooling applications. They don't have these drivers yet. But North America is looking more and more into it. And in Asia and Middle East, it's more about fulfilling the local standards. In the Middle East, actually, they're looking a lot into cooling and cooling efficiency and, therefore, also ventilation efficiency, and a lot about indoor air quality as they absolutely want to keep out the exterior climate, also driven by sandstorms and these kind of things. In Asia, it's nowadays more about keeping out the outdoor air quality. As you know, from statistics, in Asia, in many regions, the outdoor air quality is quite bad. So it's a lot about filtration and indoor air quality measures that are upgrading buildings existing, the new ones especially. So it's a little bit -- in Europe, I would say, the main driver is actually energy efficiency and then the indoor air quality. In other regions of the world, U.S., it's only energy efficiency. But in the Middle East and Asia, it's the outdoor air quality that affects that they want to have a good indoor air quality and, of course, also the thermal performance.

[Operator]

Your next question comes from the line of Douglas Lindahl.

[Douglas Lindahl, Analyst]

I was cut off earlier. I guess I'll ask one more question then before I get cut off. On growth here, in Western Europe, you now report a 1% organic growth. And you said that you saw good growth or maybe better than good growth in markets such as Germany and France, right? And then you mentioned that the Netherlands, Switzerland and Spain are negative. I guess the negative factor from these relatively smaller countries for you, because Germany is one of your most important countries, right, and it is growing, so I guess the negative contribution from these smaller countries would be quite significant. I mean, meaning the growth -- negative growth for this is significant. Is that correct? Or is it just that the positive growth is not as positive as you might sort of have indicated that it is?

[Roland Kasper, President & CEO]

If you, for example, talk about Germany, in Germany, we have sort of said 4 different operations. We have air curtain businesses, but we also have Menerga and we have then the Systemair business. Systemair business is running quite good. The Menerga, we have discussed about, it was quite negative for us. So it's a mix of these different. And then you have to look at where they get the projects. So -- but overall, in Spain, we would have -- actually, we would have expected a little better increase in the total volume in the market because it's coming back, but it's very, very cautious. And it is lower than our expectations, and that's what we also saw in the projects. But it's now finally -- after actually our fourth quarter, we have seen some big steps in the right direction, but it's after the report. And then in the Netherlands, it was, for us, much lower than before because it was driven by bigger projects in the comparatives because last year, we're delivering on some major projects from there very, very successfully. And this year, we didn't have that in the period, so it can make a bigger impact.

[Anders Ulff, CFO & Secretary]

But you can call me down by saying that the growth in Germany was 5%.

[Operator]

[Operator Instructions] There are no further questions at this time. Please continue.

[Roland Kasper, President & CEO]

All right. Thank you very much. Maybe a lot of questions were already answered at the profit warning we made.

[Anders Ulff, CFO & Secretary]

I think so, yes.

[Roland Kasper, President & CEO]

Yes. So we'll meet again at the end of August when we release our quarter 1 report and also hold our Annual General Meeting in Skinnskatteberg. Very welcome to visit us there also. Thank you very much, everyone.

[Anders Ulff, CFO & Secretary]

Thank you, and goodbye.

[Operator]

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