Systemair AB

STO:SYSR

Earnings Call Transcript 2022-Q4

[Anders Ulff, executive]

Good morning, everyone. Anders Ulff and Roland Kasper here to present our Q4 report. And as usual, you will find our presentation under our Investor Relations part on the web. Please go ahead, Roland with the presentation.

[Roland Kasper, executive]

Good morning. Welcome to the quarter 4 report '21-'22. I hope you have the presentation in front of you and I'll start right away. So going for Slide #2. As you know, Systemair AB is established in 1974 in Skinnskatteberg in Sweden. We have an annual turnover of around about EUR 940 million, and we're listed on the NASDAQ stock Exchange Market since October 2007.

Currently, we are running our own sales companies in 52 countries in the world, and we have our own production facilities in 20 countries. The actual number of employees in the group is 6,700, and we are currently exporting to 135 countries all over the world.

Switching over to Slide #3, we're going left on the report. So our net sales in quarter 4 amounted to SEK 2.662 billion, that compared to SEK 2.2 billion in the same quarter the year before. That corresponds to a growth of 20.5%; and the organic, 16.4%. On the right side of the slide, if you have it in front of you, you can see the graph of the development on the organic growth on the rolling 12.

Switching to Slide #4. The growth analysis. We could break it down and look into the details. Organically, all regions showed good organic growth. Then we only had a small impact from the acquisitions of 1.5%. And currencies, the strengthened currencies of euro versus U.S. dollars and Canadian dollars contributed with 2.6% maybe. And altogether, that amounts to 20.5% growth in the quarter.

Going to next slide, Slide #5, the operating profit in the quarter. The gross margin, as reported, decreased to 34.1% compared to 35.7% the same quarter the year before due to higher material prices, reduced productivity, increased component deficiencies, we had a higher rate of sick leaves and, of course, also some price increases for customers that did not make full impact during the quarter.

The sales and admin expenses for the quarter increased by 14.5% for comparable units, and the operating profit for the fourth quarter thereby increased to SEK 191.4 million compared to SEK 173.1 million the year before.

During this quarter, though, we had goodwill related to Menerga in Germany and Lautner in Germany that has been written down, which totally amounted to SEK 38.6 million. By that, the adjusted operating margin in the quarter was 8.6%, and the adjusted operating profit amounted to SEK 230 million in the quarter.

Switching to next slide, the profit after tax, Slide #6. The profit after tax in the quarter 4. The net financial items for the fourth quarter amounted to SEK 5.4 million. The currency effect on the long-term receivables, loans and bank balances amounted to a net of SEK 13.8 million, and interest expenses for the quarter amounted to SEK 8.9 million. All in all, the profit after tax amounts to SEK 139 million in the quarter 4 '21-'22.

The next slide, Slide #7, the cash flow analysis. The cash flow from the operating activities in the quarter amounted to SEK 247.9 million. The change in working capital was negative SEK 279.5 million. This mainly is due to the increased inventories, contribution of SEK 272 million, and trade receivables, SEK 182 million. So the change in working capital amounts to negative SEK 279.5 million compared to SEK 43 million the year before.

The net investments in the quarter, excluding acquisitions, is SEK 84 million, primarily the buying and installment of machineries for the new plant in Czech Republic, also some machine investments in both Canada and France. Thereby, the amounting free cash flow is negative SEK 115.6 million. And the net debt increased from SEK 1.5 billion to SEK 2.1 billion in the quarter.

Next slide, and moving over to the markets. We'll start with Slide #8 with overview, which is a pie chart and looking at the different regions. What you can see starting on the right side is the Nordic region stable, 20% market share on the total turnover. Then Western Europe with a minimal decrease of 42%, coming from 43%. The other markets with Poland is 12%, I'll come back to that. North and South America 11%, and Eastern Europe and CIS countries 15% of the total turnover.

Going into the details and starting with the Nordic markets on Slide #9. The sales in the Nordic region increased by 5.4% during the fourth quarter compared with the previous year. We have adjusted for the effects of foreign exchange and acquisitions. Sales increased by 1.4%. The markets in Denmark, Finland, and Norway showed very good growth in the quarter, while the Swedish markets are back due to the component deficiencies that affected our factories in Sweden.

Next slide, Slide #10, and Western Europe. Sales in Western European market increased during the quarter by 27.3% compared with the corresponding period last year. Here adjusted for foreign exchange effects and acquisitions, sales increased by 21.1%. And it's actually all markets in the region that showed good growth during the quarter, but mainly here we have U.K., France, Netherlands and Germany.

Slide #11 and Eastern Europe and CIS. Sales in Eastern Europe and CIS increased by 17.8% during the quarter. Adjusted for foreign exchange effects and acquisitions, sales increased by 11.6%. It needs to be mentioned that sales in Russia increased during the quarter in Swedish kronas, although, of course, clearly declining during the latter part of the quarter due to that we stopped all the deliveries and business by the 4th of March.

Ukraine and Russian and Belarusian markets accounted for 4.6% for the group sales. Other major markets have shown really good growth in the region and also here, of course, filling in the gap is Czech Republic, Poland and Slovakia.

Next slide, Slide #12, North America. Sales in North America increased by 25.7% during the quarter compared with the same period last year. Adjusted for the foreign exchange effects and acquisitions, sales increased by 12.6%. And here both the Canadian and U.S. markets have shown really strong business growth during the quarter.

Next slide, Slide #13, Middle East, Asia, Australia and Africa. The sales in this region increased by 23% compared with the same period last year. Here adjusted for currency effects and acquisitions, the sales actually increased by 35.2%. India, Morocco, and Australia showed good growth during the period, while sales in Turkey decreased in Swedish kronas. And as you can see, it's, of course, inflation and revenue effective.

Next slide, Slide #14, giving you, as we present, quarter 4 review on the sales for full year basis. So the sales for Systemair year '21-'22 on a full year basis amounts to SEK 9.634 billion compared to the year before SEK 8.5 billion. This means that it's an organic growth of 12.7% with a total growth of 13.1%.

With that, switching to next slide, Slide #15, and looking at the growth breakdown. Organically, all regions saw good growth, 12.7%. The acquisitions during the year, as they came in the latter part of the year, they only contributed really on the lower side, only 1%. And the strength in currencies for U.S. and Canadian dollars contributed with a negative 0.6%, which brings us to 13.1% of total growth on the yearly basis.

The operating profit on the total year is shown on the next slide, Slide 16. The operating profit totaled SEK 769.8 million compared to SEK 676 million the year before, and the operating margin was 8%. The adjusted operating margin here amounted to 8.5%, the same year before, and this is SEK 821 million. Here, I need to point out that during the financial year, we had an impairment loss of SEK 32.5 million arising from the divestment of Systemair Traydus in Brazil, as well as positive revaluations of SEK 9.8 million related to the acquisitions of minority shareholding in Burda, Germany.

Goodwill related to acquisition of Menerga and Lautner, both in Germany, has also been written down by SEK 38.6 million. The selling and admin expenses for the like-for-like units rose by 8.9% and amounts as shown on the right side, to SEK 770 million or 8% for the full year '21-'22.

Looking at the quarter 4 again, I also want to mention 2 highlights in the quarter. One is project here where Systemair delivered ventilation products for the 2022 Commonwealth Games Aquatic Centre in U.K. As shown here on Slide 17, it's the Sandwell Aquatics Centre, a new venue for the Birmingham 2022 Commonwealth Games.

It will house swimming and diving competition pool, and this venue will host lot of medal events that will come up here in later July and August in 2022. Systemair U.K. provided different ventilation equipment, Geniox, Topvex Air handling, also with Menerga units for the swimming pool humidification. And the deliveries to this project amounted to EUR 700,000.

Next slide, Slide #18. The Italian authorities have approved Systemair's acquisition of SagiCofim S.p.A. Systemair announced on April 7 in 2022 the agreement to acquire all shares in the Italian company, SagiCofim S.p.A. The purchase has now been approved by the Italian authorities and closing is therefore estimated on the 13th of June.

SagiCofim is an international supplier with extensive experience in air filtration and air distribution. The company produces highly efficient air filters of HEPA and ULPA class. In Sondrio in the Valtellina Valley, the company also manufactures products for air distribution. The company's consolidated sales in 2021 amounted to approximately EUR 36 million with an EBITDA result of EUR 4 million. The company has about 200 employees.

Thereby, I switch to the last slide. I say thank you, and would like to open up the lines for questions. Thank you very much.

[Operator]

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

[Carl Ragnerstam, analyst]

It's Carl here from Nordea. A few questions from my side. First, you mentioned that component issues burden the Nordic market and particularly Sweden. Would you say that you have seen any improvement in the component issues so far in June or is it same as during Q4?

[Roland Kasper, executive]

Carl, I would say it is more switching over in different sizes and some changes in components going from electric to be more on motor and fan side and switching over from November, December, it was more on small motor sizes or more focused on heating products. And now it's more on the medium sizes that is also affecting other products and bigger sizes. So it's more a switchover on different areas. I would say that the constraints on the components will continue, but it's switching over from the areas.

[Carl Ragnerstam, analyst]

Okay. Perfect. Very good. And also, you mentioned that you had elevated sick levels, as many companies had during the quarter. And also impacts from raw material headwinds. Is it possible to quantify the impact maybe on a gross margin or EBIT margin level?

[Roland Kasper, executive]

Yes, Carl. Of course, we have been looking into that, but it's very hard to determine the difference in between. But it would be only a guestimate. So I'd like to refrain from that part, as it is very different from geographical area and the different product areas that we have.

[Carl Ragnerstam, analyst]

But would you say that it's the main reason behind the gross margin contraction?

[Roland Kasper, executive]

I would say the main reason behind it is that we cannot operate our manufacturing as optimized as we normally can. So we have full supply of components that we need to deliver the orders. And of course, also the unexpected absence of workers that are away for 1 to 2 weeks for COVID that were, in some weeks in March and the beginning of April, rather high compared to the world. That made, of course, -- the inefficiencies in the operations led, of course, to stable overheads, but not the output that we expect for the calculation. So these are the main drivers for us.

[Carl Ragnerstam, analyst]

Perfect. And also a question. On the demand side, you guided that order intake is still quite strong and the backlog is on a high level. But of course, there is a lot of discussions on what the impact the inflation will have on the construction market. So have you lately seen any changes in the demand situation or postponed projects, et cetera? And the second part of that is, of course, you were quite nicely in the North America. So I guess it's partly driven by ventilation, and also if you have seen sign of a weakening consumer in the North Americas?

[Roland Kasper, executive]

Very good question, Carl. Looking at overall, yes, you're right, we have a historical very, very high backlog in order intake. The outlook, of course, is, how to say, you're right that we've seen ever-increasing cost issue. We also see that, of course, that, that amounts to a huge increase on the building costs.

And we have first signs of products being put on hold, being put to little wait, but still on a lower level. Of course, how this would further develop going 3, 4 months down the road, very hard to say. It's still not seen. I would say that from the indications that we have got, I would at least say that for the rest of the year, it should be on a stable level. Beyond that, it's very hard to foresee.

As to the second part of the question for the North American market, what we can see today is, on the commercial side, there is only forecasted a smaller growth going ahead with around about 2%. But still on the residential side, on an annual basis, there's forecasted growth in around 20%. This is driven by changes in the building codes, especially in the U.S., where we are changing safety building codes from normal ventilation to balanced ventilation, which is, of course, very beneficial for eventual ventilation units, where we have a very strong stand in North America. So I would not be very concerned about North America as there are continued also investment programs from state to private persons. So that, I think, will be due by that mainly.

[Carl Ragnerstam, analyst]

Perfect. And the final 1 from my side, if I may. With the price increase you implemented during the quarter, when fully materialized, did you expect to be, I mean, fully compensated by the raw materials in Q1? Or is it maybe in Q2 given some lag? And also given rapidly falling steel spot prices, how did your customers react when you implemented the price increase? Is it getting tougher and tougher?

[Roland Kasper, executive]

Overall, I would say that in the beginning of all the price increases, if I can name it like that, in the beginning of last year, the customers were more concerned. Today, due to that, all of our competitors and markets that follow us, we have all had the same issues that we need to adopt the prices constantly, the acceptance is not the problem. The problem is just that the increases are coming very unstructured, very unplanned from top suppliers and their suppliers and it can be not even monthly, it can be on a weekly basis. So there is a constant need to compensate it. And by that also answering the part of your question, if we have, by 1 price increase, compensated truly for the next quarter?

Of course, that's always the plan when you do the increase. But I would say, in the current situations on the market, that is a good plan. But as I said, the increases can occur on a weekly basis. So it's very hard to say that it will actually compensate for everything.

[Operator]

Our next question is from Henrik Alveskog from Redeye.

[Henrik Alveskog, analyst]

Well, yes, then a few questions from my side too. But could we start and just talk a little bit about your most recent acquisition, SagiCofim. I think it's pronounced something like that. And then what was the major reason for this acquisition? I mean they are deep into the air filter market. And if that -- was that like the main reason for this? And if you could, in that case, maybe talk a little bit about your, well, maybe ambitions within air filter, that area in general, if this is like a new growth area maybe that you have identified?

[Roland Kasper, executive]

Very good question. Thank you for that, Henrik. So SagiCofim, they're actually standing on 3 different legs, I would say. The main part, as you also mentioned, is filtration, 60% of the business. And here, their absolutely sweet spot is that they are the main suppliers for operation theaters and hospital applications.

This is an area where we have specialized hand units, and it's a growing application for us, where we have had partially both SagiCofim and other sub-suppliers that we have partnered with in the past. And then this opportunity gives us much stronger stance towards these kind of applications that are, for the time being, growing extensively in all the world after the pandemic.

The other part of the business for SagiCofim is air distribution applications for both offshore and marine. Here, especially, I would say that 90% of that part to the marine is air distribution. And the other part is air distribution products. And here, their specialty is actually the customized air distribution products that they do up in this special factory in Sondrio.

This is where it's a very good big competition to our offering in Italy. There is a growing application for air distribution with the Systemair standard products in air distribution and their part is the customized products. So it's for us also on the Berlin and neighboring markets a very good competition to the offering to all installations.

So 1 part, hospitals and these special applications are very much growing and a very good competition to our local offering in Italy and the neighboring countries when it comes to the projects for air distributions.

[Henrik Alveskog, analyst]

Okay. Yes. And maybe it's too early, but is this an area where you are seeing further investments already to grow?

[Roland Kasper, executive]

Yes. We will invest in that. We see that the possibility, especially increase the volume and output on the filter side for the applications just for hospital and for clean rooms is very much growing in these times and we see that we can absolutely increase the output here.

[Henrik Alveskog, analyst]

Okay. All right. Then over to something else. Well, you have previously talked about that you have a few underperformers within the group. Well, obviously, it's a matter of definition, but are there any subsidiaries or maybe countries where you are now taking specific action to improve profitability?

[Anders Ulff, executive]

I guess, we are always taking actions on underperformance. It's part of the normal business for us. I mean we have regular meetings and put a lot of focus on underperformance really. But at this time, what we show here with the impairment also of the goodwill in Menerga is that we are starting to come to the end of the road really with Menerga. And we had big problems really to protect the value of that goodwill really.

And yes, so we are now looking at what kind of options we have there really to move forward. But there's a lot of focus on underperformance regularly.

[Henrik Alveskog, analyst]

Okay. Would you like to expand a little bit about what you said about Menerga, or what the options are?

[Roland Kasper, executive]

Yes. As we talked about, we, of course, by taking this write-down there, of course, also making quite clear where we'll focus on some dedicated projects, of course. As you know from earlier reports, we have already started with this transferring part of production from Menerga, for example, to Slovenia. That has now finally started to come up in pace. Due to that we had component issues also in this fiscal, especially for the fan combinations for these units. That is now more stable.

Then, of course, also, as you know, we have, for example, also divested Brazil, which was also underperforming company. So we are looking especially into these different entities and taking these different measures, of course. But special focus just now is Menerga, which you also see in these write-downs.

[Henrik Alveskog, analyst]

Okay. And then maybe could you give us like an update on Russia? What kind of activities are you able to continue with? And well, can you give us a brief update on the current status?

[Roland Kasper, executive]

Yes. Since the 4th of March, when we stopped the deliveries from all our entities to Russia, it's, of course, a very different situation. To be really honest, we have closed almost all sales offices. They are not existing anymore. We have also moved out of our headquarter in Moscow. The employees left with the companies are sitting in the main factory in Moscow.

We have, of course, a situation where no supply is coming in, only selling of the things that are still on stock. So it's a very limited operation only possible today. That's where we are. We have heavily reduced costs and staff, just sitting on the factory in Moscow that we could never open any operations. So that's where we are today.

[Operator]

[Operator Instructions] Our next question comes from [ Douglas Lindell ] from DNB Markets.

[Unknown Analyst]

Yes. I have a few. Following up on 1 of the previous questions there. Roland, you mentioned that you are seeing some projects being delayed, talking about the construction industry now in general. Is it possible to give some sort of indication on which geographies we're talking about, what sort of projects and any more details on that?

[Roland Kasper, executive]

Yes. The first thing not to forget, for example, is that you have the governmental projects for residential, for example, in Denmark are stopped. You have some similar activities in Austria, you have similar in France. So it's a little bit going through Europe, I would say. It's not overall, most of them are not industry related.

They are more, I would say, governmentally funded where they let construction companies to fix price and make the projects, and where the construction companies with all the increasing costs now put down the, how to say, putting the brakes and request more money, where if the government is not giving them, they stop it.

[Unknown Analyst]

Okay. So it's more a question of them probably negotiating the prices.

[Roland Kasper, executive]

Or postponing, yes.

[Unknown Analyst]

Yes. You talk about pricing weighing on margins here, and you talked a little bit about raising prices as well. But just to be clear, when do you expect to catch up there, meaning normalizing margins from pricing. Should that be effective from the next quarter already or...

[Roland Kasper, executive]

I think this question is quite different due to the different product really. So some of the products are directly from the shelf, of course, we can increase the prices directly from day 1, but others are long-term projects that has been planned for a year or 2 and where the delivery timings could be 6 months or something like that. So then it takes time. So I guess, maximum, it could take up to 2 to 3 quarters until we are caught up to the material increase.

[Unknown Analyst]

Okay. On organic growth, which was strong, obviously, in the quarter, and you're lagging a bit on pricing. I'm assuming volume was the main component too? Or how should we think about the growth in terms of pricing versus volume?

[Roland Kasper, executive]

Yes. I mean, it's really hard to say exactly here, but our estimation is that price increases is around 10% to 12% of the growth and the rest then is organic, pure organic, you would say.

[Unknown Analyst]

Okay. And just -- obviously, I realize we've had a few questions now on Menerga, but it's a company bought in 2013, and we're still talking about it. So what sort of additional related costs do you foresee for this business going forward? Is it something we should expect that you already know about now, I guess, obviously not, but what are the risks there going forward in terms of additional costs, would you say?

[Roland Kasper, executive]

What we can see and say today, I would not expect any extraordinary cost coming up. It's more for us to clear the path to do all the different measures that we now finally can do when the company is coming or the country is coming out of the pandemic. As you know, especially for Germany, there was a special protections against workers act and these kind of things throughout the pandemic. And they had very strict measures how to hand the workers, drifters and so on and so on. So we are now finally out of that and cannot start to open positions as we want to do.

[Unknown Analyst]

Okay. And I guess, based on your questions for Russia, you still don't have sort of a long-term plan. The plan is to basically sell the stock you have and keep the factory as it, hoping that Russia will come back to the world, I guess? Or what's the more long-term plan, because we're not seeing any indications that Russia is changing its direction really.

[Roland Kasper, executive]

We agree with you. We would not see any short-term changes in that now. We're actually -- on a monthly basis, we are evaluating the next steps on how to do it. Also in response to the question from the partner before here, of course, it's not a good plan to just sit still and wait what will happen, just take the cost for it.

So we are evaluating the situation on a monthly basis, and we are ready to take the steps and we see the possibility to do so.

[Unknown Analyst]

And is asset sale, I guess, on the table?

[Roland Kasper, executive]

Sorry, once again, I didn't get you.

[Unknown Analyst]

Selling the facilities in Russia, I guess, is on the table? I mean it's not an excluded option, I would assume?

[Roland Kasper, executive]

Correct.

[Operator]

Those are all the questions we have for today. So Anders and Roland, I'll hand back to you for any concluding remarks.

[Anders Ulff, executive]

All right. Thank you very much for calling in. And if you have any further questions, don't hesitate to contact us directly, and hope to see you otherwise on the Annual General Shareholders Meeting in Skinnskatteberg on August 25, I believe. So thank you very much for today.

[Roland Kasper, executive]

Also from my side, thanks a lot. And I hope, meanwhile, until we hopefully see each other in August, I wish all of you a very pleasant summer. Thanks a lot and take care. Bye-bye.

[Anders Ulff, executive]

Bye.

[Operator]

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