Systemair AB

STO:SYSR

Earnings Call Transcript 2019-Q4

[Operator]

Hello, everyone, and welcome to the Systemair Q4 Interim Report. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present Roland Kasper, CEO; and Anders Ulff, CFO. Please begin your meeting.

[Anders Ulff, CFO & Secretary to the Board]

Good morning, everyone. Anders Ulff here.

[Roland Kasper, Group CEO & President]

And Roland Kasper. Good morning.

[Anders Ulff, CFO & Secretary to the Board]

First of all, we would like to say that you can find the presentation on our web page on the Investor Relation on the Systemair group web page. So Roland, shall we get started?

[Roland Kasper, Group CEO & President]

Yes, let's do this. So gentlemen -- ladies and gentlemen, welcome.And if you move to Slide #1 (sic) [ Slide #2 ] where you see our history. As you know, our company, Systemair, established in 1974 in Skinnskatteberg in Sweden. Our last year's annual turnover in euro according to the currency effect is around about EUR 800 million last year. And we are listed on the stock exchange market since October 2007.We do today maintain in 50 countries our own sales companies, and we carry more than 1,400 products on stock in average. And today, Systemair group has a little bit above 6,000 employees in the company. We have in our common ERP system more than 20,300 customers registered and working daily with. And all in all, we are selling today to more than 100 countries all around the world, to be precise, 136 plus counting. Moving to Slide #3, coming directly into quarter 4 report. So in the quarter 4 year '18/'19 for Systemair group, we achieved a total turnover of SEK 2.143 billion, which is a growth of 17.3%, whereof organic, 9.3%.Slide #4, the sales growth broken down. Looking into the organic part of 9.3% is mostly the good growth in almost all regions, but especially I want to here mention is the organic growth in North America and Western Europe. Contributing with 5.2% through acquisitions is mainly the effect of the acquired companies, Greentek and Koolair, and also a small effect of the divestment of the company Reftec in Norway. And then we have the strengthened currency effect of mainly the euro, which contributed 2.8%, which gives the total of 17.3% of total growth in quarter 4.Next slide, Slide #5, our operating profit in quarter 4. Our gross margin increased nationally to 32.8% compared to last year's quarter 4 of 32.3%. The sales and admin expenses for the quarter increased with 4.1% for comparable units. And our operating profit for the fourth quarter amounted to SEK 114.1 million compared to SEK 5.2 million. Or looking here at the effects of last year's results that included nonrecurring items of SEK 43.7 million, so all in all, it would have been SEK 49 million. So compared with that is the operating profit this quarter this year, SEK 114 million, which is 5.3%.Slide #6, profit after tax in quarter 4. Our net financial items ended in the fourth quarter at SEK 17.7 million. The interest expense for the quarter totaled at negative SEK 10.1 million. And the estimated tax for the quarter amounted to SEK 18.3 million or 19%. All in all, the profit after tax is SEK 78 million.Slide #7, our cash flow analysis for quarter 4. As reported, the operating profit was SEK 114.1 million. The change in working capital, which is mainly due to the increase in trade accounts receivables, amounted to SEK 106.6 million compared to SEK 61.3 million at last year's quarter 4. And the net investment, excluding acquisitions, amounted to SEK 52.4 million. And here, it's mainly related to investments in our office building in Germany in Windischbuch and some machine investments in mainly Canada, Czech Republic and Lithuania compared to SEK 76.3 million in the same quarter the year before. This amounts to the free cash flow of SEK 44.9 million versus SEK 132.4 million negative last year, and that is our cash flow analysis for the quarter 4. Moving to Slide #8 and looking into the markets, starting with the Nordic markets. Sales in the Nordic region actually were 8% higher than the same period last year. So adjusted for currency effect, acquisitions and divestments, the sales increased by 7%. And here, the Finnish and Norwegian markets have shown very good growth during the quarter. Also, Danish and Swedish markets shows good growth but at lower levels.Slide #9, moving into Western Europe. Here in sales in Western Europe were 27% higher than in the corresponding period last year. Just before currency effect and acquisitions, sales increased by 13%. And here, we have to mention that the acquisition of the Spanish Koolair has a significant impact, of course, in the difference between the growth of 27% and organic 13%. But also several markets in the region developed very well in the period, especially U.K., England, Italy, the Netherlands and Portugal, while sales declined slightly in Greece and Ireland. In Greece, especially, the comparables are really tougher as it was a bigger project in quarter 4 last year.Slide #10, moving into Eastern Europe and CIS. Sales in Eastern Europe and the OSS countries increased by 1% during the quarter. And here, adjusted for currency effects and acquisitions, it actually decreased by 1%. But just to mention in Russia, which is the region's largest market, sales increased by 4% compared to the same quarter last year. Other markets in the region showing good growth was Belarus, Estonia, Lithuania and Slovakia.Slide #11, North and South America. Sales in this region, North and South America, actually increased by 37% during the quarter compared to the same period last year. Adjusted though for currency effects and the acquisitions, sales increased by 14% in the region. And here, both the U.S. and Canadian markets performed well during the quarter. Our efforts, especially for the applications of Radon solutions and car park ventilations are contributing to the increase, especially in the U.S. and the [ export ] sales.Next slide, Slide #12, Middle East, Asia and Africa. Sales in the Middle East, Asia and Africa increased by 12% compared to the same period last year. Adjusted here for currency effects and acquisitions, the sales increased by 13%. Especially here is Malaysia, Qatar and South Africa during the quarter and a slight decrease in Dubai and stable on good levels in India. And the decrease in Dubai is mainly related to the change of business model to non-exporter.Slide #13. As a result of the quarter 4 report, the sales for full year. The sales for the full year amounted to SEK 8.3 billion compared to the SEK 7.3 billion the year before, which gives us a total growth of 14% and organic growth of 7.6% for the full year.Let me break this down. The growth for the full year, as reported, the organic 7.6%. And here we see overall good development in almost all regions. The contributing 3.0% through the acquisitions is Koolair, Greentek, Syneco, Ilo-Hora and Viking. And then on the top of that, we have the currency effect of mainly the strengthened euro, which is contributing with 3.4% to a total of 14% in the full year.Next slide, Slide #15, our operating profit for the full year. The operating profit for the financial year from May 2018 to April 2019 amounted to SEK 528.1 million compared to SEK 349.6 million the year before. Thereby, the operating margin was 6.3% compared to 4.8% the year before. Sales and admin expenses increased by SEK 153 million or 7.6%. And the selling expenses for the full year were charged, we have to say here, with SEK 34.6 million for anticipated and confirmed impairment losses on trade receivables.Next slide, Slide #16. This is then how the breakdown sales by market and volumes is looking today for us after this year. Let's start with the Nordic regions that contributed 22% to the total turnover. Eastern Europe and CIS countries, 15%. Western Europe is contributing with 43%. North and South America, 9%. Middle East, Asia and Africa, 11%, for the total turnover of Systemair group.Slide #17, we're moving into some projects to highlight those, which will bring us to Slide #18. We decided around about 1 year ago to move with our Frico brand and solutions into the North American market. Today, we're a European market leader in air curtains. And the North American market has featured some changes in the building codes, shown good growth, and we expect to exceed the size of the European market within some years. This is related to this new legislation. And what we're bringing to the market is the state-of-the-art European technology, especially related to energy efficiency motors with EC motors. We have all units tested. We have very modern controls and design. And our units are also in this market available from stock.So what has led to within a year after start is that we see a very promising start. The solutions are today already listed and included in specifications of some rather big national accounts in both Canada and North America. And here, for example, Starbucks, McDonald's, A&W All-American Food, Loblaw and Assa Abloy. And our target is, of course, to achieve a good market share here over the next coming years.Also here to mention some news on Slide #20, news in air conditioning. And here, we have a couple of news coming out in the same time. We have our new SysCoil Comfort, extra-silent floor and ceiling fan coil units, which is the new-generation design and developed in our French entity. The SysLoop, a new water source heat pump, which is a very good solution for large shopping centers, hotels and offices. And to control and maintain a good proactive service level of maintenance interventions, we have developed our AC cloud or ACloud, which control our units and decrease energy consumption and optimize maintenance intervention possibilities. These are just some highlights to show the development and our move to be a better partner for our customers in the future. This brings us to Slide #21, our summary. So we see continued good growth, 9% organic growth for the quarter and 8% for the full year. The organic growth during the last 9 years with 1 quarter as exception. Increased operating margin in the quarter to 5.3% versus the 0.3% the year before. And adjusted margin last year was 2.7% in the same period. And also to highlight that this has been the best result ever for the full year with SEK 528 million for the company. The highly improved cash flow is due to improved operating result and the lower investment rates. And we see a continued focus on reaching the 10% EBIT margin as our total target.With that, I want to move to the last slide. I will say thank you. And to welcome your questions, we'll open up the lines.

[Operator]

[Operator Instructions] And the first question is from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, Analyst]

I have a few questions. First, can you comment on Airwell and Menerga's development during the quarter? And are they at breakeven levels yet?

[Roland Kasper, Group CEO & President]

Carl, what we have done during the quarter in Menerga, we are not on breakeven levels as we have started -- or we have actually finalized the implementation of our common ERP data system in also Menerga now. And other activities are lined up to move these around now. We have changed management and we are changing organization, which has also contributed during the quarter that is now being reported. So you will see some very fast effects now in the next coming month to go.

[Carl Ragnerstam, Analyst]

Okay. And the utilization rate of Menerga during the quarter, was it improved compared to Q3?

[Roland Kasper, Group CEO & President]

Not really yet. These effects are to come with the changes that we've given just now.

[Carl Ragnerstam, Analyst]

Okay. And the changes, is it just management? Or are you implementing some cost cutting as well? Or what can we expect there?

[Roland Kasper, Group CEO & President]

Of course, yes. It's not only management. It's a restructuring of organization, of the platform for the products, of the selection tools, not the -- of the system in the workshop also.

[Anders Ulff, CFO & Secretary to the Board]

In the new ERP systems, we will see improved processes, more lean processes in the workflow in the whole organization. So this is a big possibility for making improvements in the work.

[Carl Ragnerstam, Analyst]

Okay. And in terms of Airwell?

[Roland Kasper, Group CEO & President]

In Airwell, actually, the bigger change is on the infrastructure of the company or of the 2 entities, as we are relating to the French and Italian entities, are actually more or less conducted. And here, we actually have already seen very positive results and changes already in the last quarter and in the full year. This is just on a very good track.

[Anders Ulff, CFO & Secretary to the Board]

And very nice improvement compared to last year.

[Carl Ragnerstam, Analyst]

Okay. And in terms of growth in the quarter, could you perhaps comment on the growth dividing into product categories?

[Roland Kasper, Group CEO & President]

The good growth is actually coming from different categories. It's mainly related to France, to residential for different applications. And here, maybe car parks, but also industrial, and then also some of the air handling unit entities have shown very good growth, driven by projects in -- especially in North America and in the southern part of Europe.

[Carl Ragnerstam, Analyst]

Okay. And the final one for me, if I may. The outlook, your comment on continued efforts in reaching 10% margin target, I wonder whether you can explain or give a bridge to that target on how you will reach it. Is it driven by SG&A or gross margin? And what do you actually need to do to materialize this?

[Roland Kasper, Group CEO & President]

Carl, here, as reported before, we are doing several measures at the same time. It is, of course, keeping customer control. It is more efficient utilization of existing factories and product groups, bringing factories -- or leave it to cash synergies to bring product from some factories closer together or even to co-locate them. It is also to working with our setup when it comes to pricing, to selling, to choosing the right products and to be more efficient in the processes. And here it comes to several activities that we do throughout the organization.Also highlighting, of course, that we are working with some special entities more intense, those that you already mentioned yourself and, of course, also looking at a constant review of our small and not profitable entities how to move them or close them.

[Operator]

Next question is from Marcela Klang.

[Marcela Klang, Analyst]

Congratulation on the very strong result. I see here on the screen that the stock market also appreciates it. A couple of questions from me. You saw the chart with fourth quarter EBIT at SEK 114 million this year compared to levels around SEK 48 million, SEK 49 million in the coming 2 years. In your view, is this a new sustainable level? Or were there any temporary effects that helped this quarter?

[Roland Kasper, Group CEO & President]

You mean -- sorry, just a question. You meant the 2 last quarters, the SEK 48 million and SEK 49 million for the last 2 years?

[Marcela Klang, Analyst]

Yes.

[Roland Kasper, Group CEO & President]

Yes. Of course, going ahead, for the fourth quarter, you know in the fourth quarter, there are of course some impacts when it comes to how many working days are, especially in December and January, depending on the calendar. But in an average year, we should be at around somewhere at this level where we are today when all businesses are performing. So I will not say that this is an exception. This is according to the plan of the development of turning the company into our targets for achieving this 10%.

[Marcela Klang, Analyst]

So this is the new and improved Systemair operating EBIT level, basically, for the fourth quarter?

[Roland Kasper, Group CEO & President]

Mostly to achieve the 10% on an annual basis, we of course need to get these results. Absolutely.

[Marcela Klang, Analyst]

Yes. Yes. You also mentioned that Menerga is not at the breakeven level yet, but you expect fast effect in the coming months. What are your expectations for Menerga for the coming fiscal year? Do you expect to be above breakeven? And a similar question on your Italian French operations.

[Roland Kasper, Group CEO & President]

The Italian and French operations, to start with them, they should be about breakeven, yes. Here also to mention, they are of course in the focus when it comes also to the announced partnership with Panasonic. So they will have some benefits on volumes of that.When it comes to Menerga, we are working as an intense care. Within Menerga especially, as I said, we have put in new management there. And here, we will see the results coming around. We have here a 3-year plan to move them to a good profitable company. The different steps will give different effects, but we would expect to see it will -- of course, to have a breakeven, yes.

[Marcela Klang, Analyst]

And a final question. You mentioned in the report divestment of Reftec. What was the reason for you doing this? And are you expecting to divest more operations?

[Roland Kasper, Group CEO & President]

The key reason for divesting Reftec was actually given that Norway is not following the European, how to say, technical development, they had a very special local demand when it comes to refrigerants. And for us, as a supplier to almost all European markets, the demands from Norway were standing out. And with this 80-20 rule, we try to serve almost all markets. But if we would like to fulfill also the Norwegian market demands to be a good market player, we would have to develop a special platform for just the Norwegian market. So the decision together with the local management was to let them buy that company back to be able to focus on other suppliers that could be more proactive for the Norwegian market and us to focus on our main markets. So it's expected, that's why we did this.

[Anders Ulff, CFO & Secretary to the Board]

Yes, but they remain as a customer to us. They are still our agent in Norway.

[Roland Kasper, Group CEO & President]

But we don't [ reach out ] on the market development especially as we have before. So that's fine.

[Operator]

Next question is from Douglas Lindahl from Kepler Cheuvreux.

[Douglas Lindahl, Analyst]

I missed part of the call, so I apologize if my questions have already been asked. First of all, congratulations to a strong set of results. In your own words, what would you say are the main drivers behind this strong operating margin? Is it because of pricing, mix size, better utilization ratios or...

[Anders Ulff, CFO & Secretary to the Board]

It's driven by a good organic growth, I would say. That's mainly the main reason. And I mean, of course, it can be even better whenever we have managed to make the turnaround of companies like Menerga and then also AC and a bigger scale, but still, there's work to be done within Menerga. And we have initiated a large researching program there right now, as Roland already mentioned. But I think this is one step towards the 10%, really. We hope to maintain this level now going forward.

[Douglas Lindahl, Analyst]

Okay. So the good organic growth is the driver. And with regards to your order book situation and order intake situation, that's looking solid as well, I would assume?

[Roland Kasper, Group CEO & President]

Yes.

[Anders Ulff, CFO & Secretary to the Board]

We don't see any, what to say, weakness -- signs of weakening markets or so right now. So it's -- we are still optimistic far ahead.

[Douglas Lindahl, Analyst]

And the Menerga issues, when would you expect those to be resolved?

[Roland Kasper, Group CEO & President]

As explained a little bit here earlier, we have here a 3-year plan to turn this totally to be a different company. So we have different steps that are coming in effect and giving effect step by step also. But we would already expect having some stabilization and some changes to show in the next coming months ahead. So this is one of the biggest activities that we're doing just now.

[Operator]

The next question is from Marlon Varnik from Erik Penser Bank.

[Marlon Varnik, Research Analyst]

So Roland, you mentioned in the report that you focused on improved profitability from synergies. I remember last year, we spoke a bit about shifting from larger projects to smaller projects to increase profitability. Can you please give us an update there? Have you seen any effects of it already [indiscernible]?

[Roland Kasper, Group CEO & President]

Actually, what we see is, especially it's a higher focus on almost all entities in the market, which also brings that -- the amount of requests because we have an internal proven system for bigger projects. And here, the amount of bigger project has become less. It is more about mid-sized projects today and it's about improved profitabilities on those. So these are the effects, I would say, from this job, yes.

[Marlon Varnik, Research Analyst]

Perfect. And also you mentioned or reported the organic growth is expected to continue. More specifically, what regions and drivers are behind this?

[Roland Kasper, Group CEO & President]

When it comes to regions, I would say almost all regions today are developing quite sustainably good. I would see some question marks where this is unpredictable a little bit today, which are in some countries in the Middle East or even in Turkey. But for the rest of the markets just now, we don't see any troublesome clouds ahead, actually. Even those where we have some questions, we still -- question marks, we still see projects coming. So the forecast of extra request in those countries is still positive. So it is -- overall, I would say, we don't see, as Anders Ulff indicated, any troublesome clouds just now.

[Marlon Varnik, Research Analyst]

All right. And you talked a little about Russia, that was minus 4% organic growth for the quarter. Can you please comment a bit more about Russian market?

[Roland Kasper, Group CEO & President]

The region of Eastern Europe was at minus 1% organic, but Russia has actually a growth of 4%. So Russia was 4%. So Russia, yes, it's a little bit slower in the growth compared to a few, but this is, I would say, more seasonal. So during summer normally, the cooling part of the business in Russia is normally a very strong one. So we will see that during summer, most likely.

[Anders Ulff, CFO & Secretary to the Board]

Yes. You have to note also that last year, we had a growth -- organic growth of 20% in the Eastern European region, so it was really tough comparables this year also.

[Operator]

[Operator Instructions] Next question is from Henrik Alveskog from Redeye.

[Henrik Alveskog, Equity Analyst]

Yes, I have 2 questions. First, in your previous reports, you have mentioned that the introduction of the new air handling units in Europe weighed on your results since you had some extra costs related to that. Could you tell us where you are in this process now?

[Roland Kasper, Group CEO & President]

Yes. We have almost switched over fully now in 2 factories that before was not in full. The one in North America is not yet full only with that. And now we're starting the implementation of this new platform also in Menerga. This is one of the things that we're doing there. So it's now in 6 factories whereof 2 fully and -- now 3 fully with North America and 2 are 50% and 1 just started. That's the rate that we have just now.

[Henrik Alveskog, Equity Analyst]

All right, all right. Okay, okay. And then another one. Yes, the -- you had a slide here on Frico and the U.S. market. And I'm not sure if you already mentioned it in the presentation, but the -- one of the bullet points here is the target to achieve 15% to 20% market share. Did you mention anything about the time line? What's your ambition there?

[Roland Kasper, Group CEO & President]

We have set here a plan of 3 years ahead. And throughout the -- we thought -- actually, in the beginning, we had targeted much lower figures. But we have had a very, very promising start that's also by presenting this at all. So this is a 3-year plan.

[Operator]

And there are currently no further questions registered, so I will hand the call back to the speakers for any closing comments.

[Roland Kasper, Group CEO & President]

Okay. Ladies and gentlemen, from our side, we want to thank you for the interest and for the presentation. And looking forward to meeting you in person or on these lines in our next quarter reports.

[Anders Ulff, CFO & Secretary to the Board]

Yes. And we can also take the chance to remind you about our Annual General Meeting in Skinnskatteberg on the 29th of August. So you're all very welcome to visit us there and to -- also, we will arrange the factory to send the presentation of our new technical centers, so very welcome.

[Roland Kasper, Group CEO & President]

And by that, we wish you all a very nice summer, and thank you for today.

[Operator]

And this now concludes the conference call. Thank you all for attending. You may now disconnect your lines.