Systemair AB

STO:SYSR

Earnings Call Transcript 2023-Q4

[Operator]

Welcome to the Systemair Interim Report Q4 2023 Call. My name is Lauren, and I'll be coordinating your call today. [Operator Instructions]

I will now hand you over to your host, Anders Ulff, CFO, to begin. Please go ahead.

[Anders Ulff, executive]

Thank you very much. Good morning, everyone. Thank you very much for calling in this morning. You will find a link to the presentation. We have started now with the webcast as well. You will find it on our new -- brand new Investor Relations homepage also linked to investorslive.com.

And by that, I hand over to Roland to start the presentation of our Q4 report.

[Roland Kasper, executive]

Thank you, Anders, and good morning, ladies and gentlemen. And as said, thank you for joining us for this call. So I'll start right away with the presentation that you also can find on the homepage, and it's our Q4 report for '22/'23 and directly switching to what we call our Page #2.

Just a background for Systemair. So as you all know, I hope, established in Skinnskatteberg in Sweden in 1974. Our last year, we made a turnover of total in excess of EUR 1 billion. And we are listed on the NASDAQ or the Nordic stock exchange market since October 2007. Today, we operate our own sales companies in 51 countries, and we have 26 factories in 18 countries. We have around about 6,600 employees. And by that, we are selling and exporting to 135 companies all over the world.

By that, switching to Slide #3 and jumping into the report for our quarter 4. Starting with the net sales in our quarter 4, which amounted to SEK 3.129 billion in the fourth quarter compared to SEK 2.6 billion in the quarter 4 of the year '21/'22. This represents a growth of 17.6% or whereof a growth organic 13.0%. Those of you following on the slides, on the right side, you see the diagram of the development.

And I'll switch over to the Page #4 to just break down this growth a little bit and analyze. So starting on the organic side with 13%, where all our regions showed good organic growth. Then you have a contribution through acquisitions and divestments, which is the main impact here is from the acquisition of SagiCofim in Italy and Group SCS in the U.K. and, of course, also the divestment of the AC business, and that contributes to 1.9%. And then we have an impact from the weaker Swedish krona towards both euro, the U.S. dollar and the Canadian dollar, which is 2.7%, which all in all amounts to 17.6% of growth.

Switching to Slide #5. We were looking a little bit more into the operating profit, and this -- for this quarter is, of course, some special items to explain. The gross margin is stable at 34.2% whereas last year 34.1%. The adjusted operating profit amounted to SEK 281.7 million compared to SEK 230 million the year before. And the adjusted operating margin in percent is 8.9% compared to 8.6%.

Let me expand a little bit to the adjustments. The operating result has been affected by, of course, the capital gain on our sales of the air conditioning business, which amounts to SEK 445.5 million. Then we have an impact by the hyperinflation calculation that we need to do for the Turkish situation, which is an impact of totally SEK 18.5 million negatively. And we also, in this quarter, have an income from a change in pension accounting in Norway, which contributes of SEK 25.8 million positive. So there's a lot of adjustment in the quarter, but that's to explain the difference.

The operating profit then in total, without the adjustment, is then totally SEK 734.5 million compared to SEK 191.4 million the quarter before. And the operating margin in percent amounts to 23.5% compared to 7.2%. The sales and admin expenses for the quarter have increased by 9.8% for comparable units.

Moving to Slide #6, profit after tax. The net financial items for the fourth quarter amounted to negatively SEK 32.7 million compared to positively SEK 5.4 billion, and this is mainly due to increased interest expenses. The currency effects on long-term receivables, loans and bank balances amounted to negatively SEK 8.7 million compared to positive SEK 13.5 billion. And the interest expenses for the quarter amounted to negatively SEK 24.4 million. All in all, the profit after tax on the adjusted volume is SEK 164 million for the fourth quarter compared to adjusted profit after tax, the quarter the year before, SEK 178 million.

Let's move to Slide #7, which is our cash flow analysis for the fourth quarter. In the fourth quarter of '22/'23, the cash flow from the operating activities amounted to SEK 363.9 million compared to SEK 247.9 million the year before. The change in the working capital in the quarter was SEK 193.3 million compared to SEK 279 million, which is mainly due to the increased trade receivables in the quarter.

The net investment, excluding the acquisitions, is negatively SEK 19.5 million compared to SEK 84 million last year. And here is primarily smaller additional investments in machine and capacities in Czech Republic, Slovakia and Spain. So thereby, the amount in free cash flow is SEK 150 million compared to negatively SEK 115 million in the same quarter the year before. And also here to mention our net debt that in the quarter amounts to SEK 1.5 billion compared to SEK 2.1 billion in net debt the quarter year before.

Let me then move over to Slide #8. And here, we're just having an overview of our markets. Just a breakdown where you find the volumes in the quarter: Eastern Europe and the CIS is now 12%, and the biggest impact or the biggest difference versus last year where it was 3.7% more is, of course, would be Russia; then North America, 11%; Western Europe 46%, Nordic Region, 18%; and other markets here, as we call them, which is partly Africa, Turkey, Middle East and Asia, 13% in the quarter.

Let me just briefly touch on the different regions by switching to Slide #9. Starting in the Nordics. The sales in our Nordic region increased during the fourth quarter by 5.1%. Adjusted for the foreign exchange effects and acquisitions, sales increased by 5.3%. And here, we see that the Swedish and Danish market showed growth, mainly in commercial sector during the quarter. The turnover in the Finnish and Norwegian market slightly decreased. So again, growth, 5.1%; organic, 5.3%.

Switching to Slide #10, Western Europe. So sales in this region in Western European market remained strong during the quarter with an increase of 27.6% compared to corresponding period last year. Adjusted here for foreign exchange effects and acquisitions, sales increased by 15.4% in Western Europe. And here is Germany, France and Italy that showed good growth in the quarter, while U.K. turnover decreased slightly compared to last year's same period.

Switching to Slide 11 and Eastern Europe and CIS. Sales in this region in Eastern Europe and CIS decreased in the quarter by 3.3%. Adjusted for foreign exchange effects and acquisitions, sales decreased 0.2%. Main reason to the decrease is stopped deliveries to Russia and the comparables. The growth in the region, excluding Russia, amounted to 23.3%. Other major markets within the region that showed good growth, just to mention, here especially to Czech Republic but also Poland and Slovenia.

Slide #12, North America. Sales here in North America increased by 33.3% in the quarter. Adjusted for foreign exchange effects, the increase is 24.4% organic. And here is both the American and Canadian markets showing good growth during the quarter and here especially and strongly within residential and commercial air handing units.

Switching to Slide #13, Middle East, Asia, Australia and Africa. Sales in this region increased by 9.5% compared to same period last year. And here, adjusted for foreign exchange effects and acquisitions, sales increased by 27.5% organic. And here, the growth is especially positive in both Turkey and India during the period. And here is the high-end applications, pharma and special hospital products that developed really well.

Just to mention some of the highlights in the quarter, I switch to Slide #14, and one of those would be our acquisition of the Group SCS in U.K. On the 15th of March in '23, Systemair acquired the U.K. company, SCS Engineering Ltd and subsidiary Smoke Control Services together, SCS Group. They're a leader in smoke control solutions for residential and commercial buildings. And we see a great addition to our fire safety and also here to our capabilities within smoke control systems for residential multifamily houses, not only for U.K. but also for our European operations where we now have a dedicated competence group for developing that application, which is very favored just now.

The company's revenues amounted to GBP 12 million in 2022. And it has its head office in Cardiff, an assembly plant in Dorset and offices in London in Portsmouth, combining a total of 57 employees.

Also in the quarter, we were very happy to -- switching to Slide #15, to give you here the notice of our newly opened factory in India. So this is what we call our entity 2 in Greater Noida in India, which now amount to 3 factories in totally. This new is in a total area of 10,000 square meters were 6,300 square meters is production and is dedicated to production of air distribution products and fans. And our 2 other factories in India, we manufacture air handling units and fire safety products. This is a very nice achievement, and it's really good for further development in a very positive Indian market.

Switching to next slide, Slide #16. As we are reporting our fourth quarter, I also want to mention just shortly then, of course, the sales for the full year. The sales for the full year '22/'23 then totally amounted to SEK 12.058 billion compared to SEK 9.6 billion the year before, '21/'22. This means that we have a growth of 25.2%, whereof organic 15.9%.

Let me here again just go down a little bit to analyze of the growth on the next slide, on Slide #17, growth for the full year and analyze that. All the regions actually showed a good organic growth for us except Eastern Europe, and you know the reason. And then you have acquisitions and divestments, and here are mainly impact from acquisition of SagiCofim in Italy, Group SCS and the divestment of the AC business. A total impact of 4.1% and add-on. And then we have an overall weakened Swedish krona towards, again, euro, the U.S. dollar and Canadian dollar, which here amounts to 5.2%, which brings us to a total of 25.2% of growth for the total year.

Switching to the next slide, Slide #18, operating profit and for the full year, a breakdown. The operating profit for the total year amounts to SEK 1.4 billion compared to SEK 769.8 million the year before. The operating margin amounts to 11.6% in the year compared to 8%. And the adjusted operating profit here for the already explained different adjustments that we had in the fourth quarter is then SEK 1.1 billion compared to SEK 821 million the year before, and the adjusted operating margin amounts to 9.2%. The sales and admin expenses for the quarter increased by 15.2% for comparable units.

And by then switching to Slide #19, I say thank you for listening in to this call. And now I will be very eager to open up the line for Q&A.

[Operator]

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

[Carl Ragnerstam, analyst]

It's Carl here from Nordea. A couple of questions for me. Firstly, on order intake and order backlog development during the quarter. You gave some flavor on it, but is it possible to give us any numbers on organic order intake during the quarter and also what portion of that number that is related to pricing, so we get the sense of the volume development in orders? And also, could you give some flavor on the order development divided by the dynamic by property type perhaps also by region?

[Roland Kasper, executive]

Carl, first, looking at the organic order intake, if you will call it at that, we -- here in the quarter, we reported an organic growth of 13%. And in our breakdown, we see that around about 5% would be through organic growth and the rest would be the impact of the remaining part of price increases. That is how we see the area just now. When it comes to order intake and looking a little bit, I would say, in the glass bowl how it is developing, but also having some fact, of course, we see that in some regions, if we start in Europe, in the Nordics, we see, as you all can read in the new construction part of multifamily houses, we see, of course, a slowdown. But at the same time, we see a switchover to renovation and upgrades. That is though a little bit impacted about a lot of thoughts on a private level of investors about the inflation and also, of course, the interest rates going up. It will be very good to have a stabilization there.

When it comes to the overall picture, though, I have to say that on the industrial, but also on the commercial side, there are still a lot of projects ongoing and new projects being started. So it's a good mix. I think from our side, as we have a very wide range of products to offer, what we're doing just now is, of course, to try to optimize the product mix. That's why I would also see comments that we, of course, understand. And we see that the markets are in some areas more soft in the outlook, but we still see opportunities to grasp the market where it is and where we can apply other product groups in our offering. And that is, of course, a little bit of switchover. And campaigns ongoing and running, but we are looking into that.

Then, of course, looking, for example, at North America, as we wanted to have some of the regions, we still see a positive development as there is a lot of investment ongoing to favorable areas, especially on residential but also in the light commercial and the school markets. And in Asia, we are still -- comparably, we're a little bit smaller maybe than the market development as such, which is very positive. And for example as also mentioned in the quarterly report here, looking at the regions, for example, like India where we are looking at hospitals and high-end pharmaceuticals, development is still very positive.

[Carl Ragnerstam, analyst]

Okay. Very clear. And also given that component shortage is during the quarter, I guess you saw sort of a catch-up effect in some regions, I guess, especially in North America during the quarter. Is it possible to sort of quantify the catch-up effect on the organic growth in the quarter to know what the sort of underlying organic growth is and also whether you had a tailwind on the group margins from a higher than usual utilization rate?

[Roland Kasper, executive]

Very hard to answer, Carl. If you talk first about the catch-up effect on the motor supply situation, especially in North America, it's getting better, but it's still not stable and it's not where it should be. I need to be very clear on that. Even though those that were the most impacted on our supplier side, they are starting now with new productions, they are starting new models. They will catch up. They are much better than they have been, but they're not there where they should be. So still, there is multiple sourcing from different suppliers, which, of course, is not 100% right from the way we want to do it when it comes to most efficient models and for our sourcing side. But it is better.

Though in North America, still we see that we have -- I would not say the biggest, but quite a large backlog still to work on. And as mentioned earlier, sometimes I do not always like to have really huge backlogs because it does hinder us sometimes to be able to be competitive on existing and new projects that are coming up with shorter lead times. But we are working on those to be more competitive than actually to get capacity. So that's what it's all about.

[Carl Ragnerstam, analyst]

Okay. And are you considering in-sourcing a couple of the components? Or is it still -- are you still sort of too small to source some critical components? Or how do you view the component situation, I mean, post -- not at the big...

[Roland Kasper, executive]

I think you're touching a very interesting point here, Carl, but we have taken a strategic discussion about that, of course. The parts that would be strategic enough to look at and which we have done will be the motor. But the consensus is quite straight here that the motor development and technology development, especially on the electronics part of the motor, is such high running pace and is influenced by so many different players and technical development parts that is for us better to stay as it is that we have strong suppliers. The question though that we need to raise is, do we stick to the suppliers that we have? We will need to review what we are doing in terms of sourcing on the motor side. And that is something that's, of course, dynamically ongoing to be really open.

[Carl Ragnerstam, analyst]

Okay. That's also clear. And the final one from my side is a bit on the operating leverage. It looks -- highlight in the quarter given the -- I mean, still pretty good organic volume growth. I mean what is holding back sort of the drop through in the quarter?

[Anders Ulff, executive]

Yes. I mean, there are various factors. But of course, what we see is the gross margin improving then. You have also there an effect from the inflation accounting in Turkey, and I believe the improvement is 0.5 percentage units on the gross margin. Of course, also what could have been -- investor report, if you compare us with last year, is the effect from the nonexisting Russian sales this year compared to last year. So for us, that was a really profitable market. And that, of course, also affects our operating results, which have probably, I mean, a difference around SEK 20 million quarter-to-quarter then.

[Operator]

Our next question comes from Hjalmar Jernström from Penser Bank.

[Hjalmar Jernström, analyst]

Yes. First one is on the price hikes. Could you elaborate a bit on the price increases in different regions and maybe if there were some particular markets where the price hikes were more sort of emphasized, please?

[Roland Kasper, executive]

Yes, it's a really good question, of course. I think it's -- we cannot break it down per region. For us, it's more about product groups. Just as a background, as you know, I mean, with our wide product portfolio, we do not go into all markets with all products. So it's really about what application and what products are we talking about per country or by region.

Just to say that if you take North America, where we are really strong in residential and then like commercial parts, and there has been, all in all, price adjustments of up to 16%, 18% depending on groups and sizes and applications.

In Europe, you can see everything depending on the different applications and the product categories between 10 up to actually 28%. And the 28%, just to very clear, would more be on very electronics or motor heavy products in the mix of the products.

And in Asia, it has been a little bit lower where we see somewhere between 10% and 15%. And this is when you look back some 12, 18 months, that is what we have behind us.

[Hjalmar Jernström, analyst]

Perfect. That's very useful. And then a second question. If we look at the organic growth then in the Nordic market, did you see new trends leave in the quarter, for example, in markets such as Norway? Or was the organic growth an even level throughout the quarter?

[Anders Ulff, executive]

We see a little bit softening trend, I would say, at the end of the quarter, but still quite good in Norway and also in Sweden, but less favorable than in other countries. I can -- Denmark can pin on that. But in Norway, for example, half of our sales is related to the residential sector. So of course, that's starting to be impacted also, where though the commercial...

[Operator]

Our next question comes from Henrik Alveskog from Redeye.

[Henrik Alveskog, analyst]

Yes, well, just a couple of questions from my side. But just following up on the price increases that you discussed. The most recent one that you implemented in January, has that been accepted and well received, would you say or I mean just in the face of the market being a little bit slower now?

[Roland Kasper, executive]

In January, yes, the price increases, we're still done, yes, and they were accepted. It is -- I would say if you look into the discussions these days after May, I would say it's more a discussion about the different cost impact that you see from different raw materials. But in January, it was still quite okay to do so, yes, absolutely, because the market was still rather dynamic.

[Henrik Alveskog, analyst]

Right. Okay. And then totally different issue. But I thought the selling expenses were quite low here in the quarter, well, compared to what I expected at least. Are you -- is this slightly just temporary? Or are you holding back on these costs now?

[Anders Ulff, executive]

We are always scrutinizing selling and having expenses every day, I would say. So it's quite normal for us to do that. But I guess, in some cases, the increase on the expense side has not been as high as the impacts we have seen on the sales really. So it's a bit lagging behind, but we, of course, believe also that we will see some increases coming also in, for example, salaries and so on. But when it comes to selling expense and the -- especially if it's a little bit more uncertain outlook, we try to question a lot there really.

[Henrik Alveskog, analyst]

Okay. And then just finally, I noticed in your report on Page 18, Note 3 regarding acquired companies, you're saying at the very bottom that, well, net sales for this period -- well, just looking at the numbers, the sales and the EBIT operating profit numbers that you're giving here suggests that margins -- that EBIT margin was around 5%. And then when I read the press release, when you acquired SagiCofim, the numbers for 2021 suggested at least an EBITDA margin just over 10%. So I'm just wondering here if you could comment on, well, the most recent numbers?

[Anders Ulff, executive]

Yes. The SagiCofim profit margin is as expected really. So it's in line with what we communicated earlier. I guess when you read that, you need to consider its multiple things that is the acquisitions, but it's also the divestments that is adjusting these figures there.

[Operator]

[Operator Instructions] Our next question comes from Adela Dashian from Jefferies.

[Adela Dashian, analyst]

Most of my questions have already been answered. But if you just were to summarize the areas within the industry that you're exposed to where you are seeing those pockets for growth, it sounds like it mostly comes from North America, and that's being driven by the investments that are still ongoing. Is there other areas in Europe, for example, where you're seeing the same type of growth trajectory? Or is North America going to be the driving market in the next coming quarters?

[Roland Kasper, executive]

Thank you for a really good question. Yes, of course, North America is still a driving part for us because of the investments that are, of course, coming also supported by government. But at the same time, you also have in several pockets of applications, for example, in Europe, we still see strong growth. And here, especially when it comes to infrastructure investments, but also on -- from our Capital Markets Day where we also highlighted 5 areas that we see that things are really moving in the right direction, also giving the actual circumstances which is overall and residential ventilation that is just now impacted by the new build, but not on the renovation side. We have the data center business. We have service as a business, but we also have health care, hospitals.

So there are certain areas where we see a lot of things ongoing. And these pockets we also have in Europe, of course. And then we have certain markets like Germany that still are really strong all over. And in Asia, you need to consider that we have our factories in India. We are very well established in Malaysia and I mean also in Australia and New Zealand. But there are, of course, a lot of countries around where we still are very small and there's a lot of growth potential for us. So we still see a lot of growth possibilities all over. It's about where to focus and, of course, also to -- looking at our biggest area, which is Europe, to look at those markets where the development for the time being is more soft and to do campaigns and, of course, to react to those at the same time.

[Adela Dashian, analyst]

So would you say that all those growth areas, those 5 that you mentioned during the Capital Markets Day, those are still performing as expected despite the slowdown in other areas of the industry?

[Roland Kasper, executive]

Yes, I would say so. The only one that might be a little bit softer because there is a shift over for the time being, as mentioned, is the residential part because the slowdown in some countries is rather harsh, I would say. And the shift over, driven by inflation and by the interest rates from business to private persons, private investors, is a little bit slower as people are, of course, concerned about inflation and interest rates. And we -- as also mentioned before, it would be good to see a kind of stabilization or an outlook from the banks that will give people more comfort to do the renovation projects. So the shift is a little bit slower than what we are used to from new to renovation, especially on the residential side. On the other areas, also as outlined in the Capital Markets Day, we see that development is according to our expectations.

[Adela Dashian, analyst]

And then of those areas in the industry where you don't have, let's say, as strong as of a geographic presence as the Nordic regions, for example, do you feel like your current platform is good enough to capture that upside? Or will this be -- will you need to expand further in order to do so?

[Roland Kasper, executive]

That's a good question, of course. Yes, we're, of course, a company that we're seeing a lot of possibilities. I would say that we are in certain areas of the world, and here, I would say, in Europe, we feel ourselves that we are in a good position. We don't need to expand when it comes to more products or more manufacturing entities. I would rather look for expansion and growth -- pockets of growth to really new establishments or acquisitions for the time being. I would rather look maybe for Asia or North America.

[Operator]

Thank you. We have no further questions. So I'll now hand back over to the management team for closing remarks.

[Anders Ulff, executive]

Okay. Thank you very much, and thank you all of you for calling in this morning. And I hope to see you back here, we present our Q1 report 31st of August, where we also hold our AGM in Skinnskatteberg. You are welcome to join us there and hopefully see a little bit of what we do over there. We wish you all a nice summer.

[Roland Kasper, executive]

Yes, ladies and gentlemen, enjoy and thank you for listening in, and we would be really pleased to be able to say hello to you in person in Skinnskatteberg for AGM, as Anders mentioned. Thank you very much, and hope to see and hear you soon again.

[Operator]

This concludes today's call. Thank you for joining. You may now disconnect your lines.