Systemair AB

STO:SYSR

Earnings Call Transcript

[Operator]

Welcome to Systemair Q2 2024-'25 Report Presentation. [Operator Instructions] Now I will hand the conference over to the President and CEO, Roland Kasper; and CFO, Anders Ulff. Please go ahead.

[Anders Ulff, executive]

Good morning, everyone, and very welcome to the presentation of Systemair second quarter report for the year '24, '25. We will start off with a rather short presentation of our second quarter, in our 50th business year, and then we will open up for questions. The presentation, you find available on our start page of our Investor Relations website.

I will now hand over to Roland to start off the presentation.

[Roland Kasper, executive]

Thank you very much, Anders. Good morning. My name is Roland Kasper. I'm the CEO. I'm really happy to present our quarter 2 report for our year '24. So switching directly to that. So what we want to present is short Systemair in brief, where we are, a short summary of the second quarter, switching to our quarter 2 financials and then a very short and brief second quarter acquisition and project highlights, followed up by the Q&A.

So going directly into Systemair in brief. Today, Systemair, we're operating from core values of simplicity and reliability. Our business concept is to develop, manufacture and market energy-efficient, high-quality ventilation products. With our customers and focus, our aim is to be seen as a company to rely on, of course, with emphasis on availability, sustainability and quality.

Systemair, as a company, was established in 1974 in Skinnskatteberg by our Founder, Mr. Gerald Engström; today, our Chairman of the Board. In our last fiscal year, we had an annual turnover of SEK 1.1 billion, and we are listed on the Nasdaq Nordic Stock Exchange since October 2007. We operate our own sales companies in 51 countries and we operate 25 factories in 18 countries with a total book value of SEK 1.3 billion and employ around about 6,700 employees. Last year, we had sales to 135 countries around the world.

Some recent highlights. We had some machine capacity investments that we finalized in Lithuania, Germany and Italy in the quarter. We, earlier this year, also acquired a company, PHEM Engineering, a manufacturing of AHUs in Kuala Lumpur in Malaysia. And late June this year, we relocated Menerga's product from Muelheim in Germany to Maribor in Slovenia. And finally, in September, we also finalized our investments and expansion of our existing facilities in Ukmergé in Lithuania.

Within our public affairs efforts, we now finally have joined EHPA, the European Heat Pump Association. And we are very proud to have been reelected to a Chair of the Presidency in Eurovent with our Systemair candidate.

In Systemair -- sorry, in September 20, Systemair Germany celebrated its 30th anniversary. And in connection to that, we also officially opened our new warehousing production hall in Windischbuch where we had then -- were visited then by around about 4,500 visitors in this building. And then in October, finally, we also celebrate our 50 years anniversary with 600 of our Swedish colleagues in Västerås.

Going into our markets. So let's have a look at the markets in the quarter. As you know, we have a global and diversified customer base, which provides us with a solid foundation for profitable growth.

Looking at the different regions, starting with the Nordic region, which represents 16% of our total turnover in the quarter. Western Europe has 44% share and is thereby, compared to the same quarter last year, a decrease from 46% to 44%. Eastern Europe increased to 13% share and North America remained stable to be 12% share of sales in the quarter.

Other markets, which, as you know, incorporates South Africa, Turkey, Middle East and Asia, is continuing its growth path and increases from 14% to 15% of the total sales in the quarter.

By that, ladies and gentlemen, we'll continue with a closer look at the financial outcome in the quarter, and I hand over to Anders.

[Anders Ulff, executive]

Thank you, Roland. Let's start with net sales. For the period, the quarter, it amounted to SEK 3.146 billion compared to SEK 3.186 billion last year. This is a decrease of minus 1.3%. However, currency effect played an important role with minus 4.3%. The organic growth was positive and amounted to plus 2.6%. And we can conclude that we are again back on positive organic growth and that the trend is positive in several markets.

We go to the next slide, Slide #7. To give a bit more details behind the net sales, we saw organic growth in Nordics, Eastern Europe, North America, Middle East, Asia and Africa. Acquisition of PHEM in Malaysia had a minor effect and contributed to sales by 0.4 percentage only. And then finally, currency effects in the quarter, negative, minus 4.3% coming from the strengthened Swedish krona during the quarter, where the biggest effect is the euro-SEK conversion for us, but several other currencies also affected.

Slide #8. Then we'll come to the geographic breakdown and here, I will focus on the organic growth rates for each region then. So let's start off with the Nordics, where specifically in Norway, contributed to the growth of the region. The Danish and Finnish market contracted during the quarter, while the Swedish was rather flat. All in all, a positive organic growth of 4.1%. And I guess you need to go back around 18 months since we reported organic growth in this region. So we see it as a change in the recent trend.

In Western Europe, we are still experiencing a bit slower demand. Organic sales declined by minus 4.5%. Within the region, we can see the positive signs in U.K., Italy and Spain. But unfortunately, the German market is still struggling and is showing no clear signs of recovery yet.

Going down to Eastern Europe, the organic growth was 8.2%. The main reason for the positive development is due to project deliveries in Azerbaijan, but also Czech and Polish market had a positive development. Markets were a bit slower in Slovakia, Slovenia and Lithuania.

Then we come to North America, and organic growth rate of 17.3%, which was due to considerable growth in Canada, but also a growth in U.S. And it is especially within our residential products that we see that our customers have started to build stock again. We although believe that it is a bit early to say that this kind of growth is what we can expect moving forward.

In Middle East, Asia, Australia and Africa, we had a good growth of 7.7% organically, driven mainly by the markets in India, Australia and Morocco. All in all, then an organic growth of 2.6%.

Then we go to Slide #9. Gross margin in the quarter was again strong and amounted to 37.3% compared to 33.9% in the previous year. We can conclude that the positive trend in our gross margin continues. The effect is due to high utilization in several of our factories, change in product mix, but also positive effects from implemented cost reductions and efficiency measures in general. The operating profit amounted to record high SEK 347 million, or an operating profit margin of 11% compared to 10.1% in previous year. The major reason behind the improvement in the increase -- is the increased gross margin. All in all, we are very proud to see that several years of consistent focus on our margin is given a return on our efforts.

Selling and admin expenses in comparable units increased by 1.7% or SEK 13.4 million.

Then we head to Slide #10. Profit after tax amounted to SEK 236 million compared to SEK 246 million last year. We had a negative effect from net financials of minus SEK 24.7 million compared to SEK 15.4 million last year, where currency effects on loans and bank balances amounted to minus SEK 7 million and the interest expenses amounted to minus SEK 19.2 million. By reducing our net debt significantly, the interest expense is SEK 13 million lower than the same period last year. Tax rate for the period amounted to 26.8% or SEK 86.5 million.

And then Slide #11. Going to the cash flow for the quarter. Our working capital increased, leading to a decrease in the cash flow by minus SEK 15.6 million, mainly due to increased -- slightly increased trade receivables and inventory, leading to a free cash flow of SEK 323.8 million compared to around SEK 348 million last year. Net debt stand, as mentioned a little bit before, significantly lower than last year, amounts to SEK 1,020 million compared to SEK 1,457 million last year. Net debt to EBITDA amounts to a very low 0.71 compared to 0.69 last year.

And by that back to you, Roland, again.

[Roland Kasper, executive]

Thank you, Anders. So then looking at some acquisitions, events and order highlights and here, especially want to showcase 2 of them.

Going to the first here, which is here now on our -- this proper slide, Slide #13. The first reference project I'd like to share is the fourth phase of the daily metro expansion. We are proud to have gained the continued trust from the Delhi Metro Rail Corporation to supply the ventilation of the fourth phase expansion of Delhi Metro. The Delhi Metro, which is renowned for its efficiency and extensive network, serves as a lifeline for millions of commuters in new Delhi today. In this fourth phase of expansion, Systemair is supplying tunnel ventilation fans to 17 underground stations from our factory in Germany and India. Majority of supplies planned for April '25, and the last lot will be installed by November '25. The total order value for all these supplies is approximately EUR 3 million.

Going to the next, which is then a major Menerga retrofit project in Norway, showcasing our abilities. The Skien Fritidspark, one of Norway's largest water parks, faced the challenge of rising energy and cost and declining efficiency in the units installed base in 2007. The customer required a comprehensive optimization of the existing units to bring them up to the latest technology standards. And after detailed consultation with our local Menerga brand, Menerga was awarded the contract in September '24.

The energy upgrade of the units will replace all outdated components with state-of-the-art, energy-efficient parts. And the existing Fresh Air exhaust and modules will be checked in maintenance with highly efficient heat exchanges that ensures optimal heat recovery for future. And of course, we will also then change to high-performance EC fans and uniform air distribution and very low noise level.

So the retrofit project will deliver improvement, energy efficient and the energy consumption will be reduced by up to 30%, resulting in significant operational cost savings. The Systemair's, where available, has increased significantly. And maintenance efforts will, of course, also be substantially reduced and extending the life cycle of units or the lifetime by additional 15 years. And the work has been carried out already, and we could do that without closing the park. The approximate order value for this project was around EUR 1 million.

By that, ladies and gentlemen, I'll switch over to the last slide, which actually stated Q&A. I thank you for presenting this and open up for the questions.

[Operator]

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

[Adela Dashian, analyst]

My first question relates to the strong performance in North America. Could you maybe elaborate a bit about if there are any regional differences between Canada and the U.S. because I do know that you've also mentioned previously that there is an expectation that the residential segment in the U.S. will also start to pick up again in coming months. But here, it was more driven by Canada. So is your offering different? Or is it more like a timing effect?

[Roland Kasper, executive]

Yes, Adela, thank you for the question. What we see in the quarter specifically is more a strengthened residential market back in Canada, I have to say, and strengthened in terms of its normalized market coming back to where it has been and should be to our standards. Distributors have restocked and the business is picking up to normal cases.

The -- as you mentioned rightly, the residential market in U.S. has been of great interest and has developed quite well, has done -- been a little bit slower throughout the election. And what we still see is that there are, how to say, some expectations and awaiting what is coming. But just now, the Canadian market is the clear, stronger part for the residential.

[Adela Dashian, analyst]

Got it. All right. And then maybe just on the topic of the election since you just mentioned it, how do you perceive that? And is there potential tariff risk that could impact your operations in that market?

[Roland Kasper, executive]

Yes, it's of course, a little bit, how to say, speculative to answer that one. We saw throughout -- or even before the elections, specifically in U.S., a kind of a slowdown. People were more waiting what will happen. Canada has, though been quite normal in the development.

Regarding the tariffs, as I say, I see it a little bit of speculations. I think the last that I read was that Mr. Trudeau has been meeting the President candidate. I think this will be more like a normalization. I don't see a bigger threat from my personal perspective, just now for the NAFTA agreements and the tariffs from Canada to U.S.

[Anders Ulff, executive]

Yes, just to restate there also, we have production also in U.S. So there is possibilities to transfer also production volumes from Canada into U.S.

[Adela Dashian, analyst]

Okay. That's good to hear. And then maybe lastly on the profitability improvement. I thought it was quite impressive that you got to deliver even margin of 11% despite the strategic decisions that you've taken throughout the quarter. Can you maybe provide us some more details on the new factory in Lithuania and how that is expected to impact your production capacity and maybe also market reach going forward?

[Roland Kasper, executive]

In the Lithuania factory, today, we are producing all residential units for Europe, but also air handling units for the North European markets. As said before, and stated, that the North European market for us, when it comes to the normal ventilation business, is still going rather stable and residential has been a switchover from new builds to more renovation projects. So we have had the necessity already before, you saw the development in the North European markets on residential sites to expand our facility and capacity.

We're really happy that it comes now quite handy as we see that, especially on the industrial side and bigger sizes of our air handling units, we already need that space. So we're quite positive to the further development and utilization of that factory.

[Adela Dashian, analyst]

Okay. And maybe just lastly on the net debt levels coming down, how should we expect your growth strategy to progress going into next year? Are you still seeing good opportunities on the M&A front? And do you have a more robust pipeline now with the newly established Head of M&A to be driving that going forward?

[Roland Kasper, executive]

Yes, of course. I mean we have a quite stable and very interesting M&A pipeline. We are quite busy with that one. There are -- we see -- for the last 3 to 6 months, we see also the amount of interesting objects picking up. So it's good activity levels on that side. So we will, for sure, have more things to be done there.

[Adela Dashian, analyst]

And congrats on the quarter.

[Roland Kasper, executive]

Thank you, Adela.

[Operator]

The next question comes from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, analyst]

It's Carl from Nordea. Looking at SG&A, I mean, when I look at it adjusted, it's up 1.5% year-over-year, which is clearly less than organic volume growth in the quarter. When you look at your order intake and your current organization, how scalable would you say that your operating cost base is currently?

[Anders Ulff, executive]

I would say that it's very scalable. I mean we have good availability, especially if we talk in Europe, sort of scale volumes and to see synergies of scale. It's really what we see going forward. Have to remember also maybe when looking at the SG&A, that it's more or less coming back to more normalized level right now. I think we are on 26.8%. And that's -- from a historic perspective, I would say that's more of a normal level.

[Carl Ragnerstam, analyst]

Okay. That is very clear. I can also see that you cut 60 employees in South Africa in the report. In annual report, you had 124 employees, so quite a big cut here. Are you exiting that country? Or how should we look at that?

[Roland Kasper, executive]

No, Carl. What we're doing, we are, how to say, repositioning our company in South Africa. We have, for the last 3 years or you can say, post pandemic, we served several bigger projects, but now we're going back to the, I would say, normal ventilation market. And for that, we are just optimizing our base. We need to have the right competence and the right staffing and the right skills on board and that's what we have adjusted to.

[Anders Ulff, executive]

Yes. And we have a new management in place, and so we are quite optimistic of the change that is happening right now.

[Carl Ragnerstam, analyst]

Okay. But you have cut your FTEs by 50%. Do you think that is enough to take that into profitability of that geography?

[Roland Kasper, executive]

As I said, this is more a strategic approach. We think that we need to reposition where we want to serve the market and what kind of pockets of the markets. And that's what we have done. We know historically that we can be a really good player where we are heading now. So we think that we have resized the company to where it should be at least.

[Anders Ulff, executive]

But it's a very minor market in Europe as well. So...

[Carl Ragnerstam, analyst]

Yes, sure. And also looking at your order intake, I mean, pointing in the right direction as you're stating in the outlook. I mean you previously said that you have a healthy degree of quotations and good activities among the installers. But now, when I read what you've written is that it sounds like it's been converted into actual or firm orders now. So if you could give any comments on client or customer behaviors from installers as well as technical consultants.

And also, you mentioned the larger project. Is it projects that have been on pause for a period of time when rates were sort of higher? Or is it new projects coming in, in certain regions or end markets?

[Roland Kasper, executive]

In general, Carl, I know we stated and it's -- what we have seen that, especially I would say after the typical summer break that you saw in Europe, for example, the level of activities amongst installers and especially consultants have been rather high. That, we saw quite a lot. The projects that we're mentioning are mainly coming on the industrial side, the bigger ones. But also, I would say, geographically, really spread.

It's not to say it's more mid-Europe or similar. It's really spread all over the different geographies, which we think is really healthy and good. We still see, as also mentioned in the report that in the geographies, especially in Middle East and Asia, that the bigger projects are more frequent today.

To your comments, if there are -- this is the result of the higher activity level, I think there is more to come. We think that especially in mid and North Europe, there is still potential to pick up.

[Operator]

The next question comes from Lina Blume from Handelsbanken.

[Lina Blume, analyst]

First of all, regarding the positive sales development in Norway, is it possible to say what has contributed to this development? And if it's in your view, temporary and short term and more just, I would say, signs of a recovery in the Norwegian market?

[Roland Kasper, executive]

Yes. The -- in Norway, specifically, we see that -- as reported also, what you can read in newspapers, the newbuild in residential is continuously not where it has been but we see more renovation projects. So the quantity wise, the drop is not as severe as we would have expected. But what is driving mostly the come back to normalized levels is for us bigger projects on the air handling unit side on the commercial ventilation side, but also some interesting export projects from Norway to Faroe and similar. So the market as such, I see a quite good activity level in Norway.

[Lina Blume, analyst]

And then on profitability, while you reported an impressive operating margin in Europe, the operating margin in the rest of the segment came in at 4.1%, I believe. Is it possible to give some color on what has led to this margin development in the regions outside of Europe?

[Anders Ulff, executive]

I would say that the main reason behind that lower profitability in other markets, that is due to a little bit less profitable business currently in Turkey for us.

[Operator]

The next question comes from Douglas Lindahl from DNB Markets.

[Douglas Lindahl, analyst]

Just circling back to the Norway comment there briefly. Obviously, it seems to be very strong given all other markets or I guess, you comment that Finland and Denmark is down, I would expect Sweden also being down. So Norway must be very strong. And you said that there are some projects in there. Is that the majority of the growth from projects? Or can you just give some additional colors to Norway starting there?

[Roland Kasper, executive]

A good part of the growth is projects on the air handling unit side that are, I would say, rather constant. They have been rather strong throughout the last 12 months. The part that has been a little bit volatile was the residential part where we have a very strong position in Norway, but the shift over from new build to renovation took a little bit of time. And we see a strength in part in the renovation business for residential.

So I would say it's a more stabilized development that we see, and we're happy to come back to that. But I think there's also some contributors, as mentioned in some export projects to adjacent countries like -- that are out of Norway. But in general, the market is quite nicely and stable for us.

[Douglas Lindahl, analyst]

Can you just comment that the Swedish market then was flat in the quarter?

[Anders Ulff, executive]

Yes. So it's not a drop, also flat.

[Douglas Lindahl, analyst]

Okay. And then on the topic of growth, North America, obviously, a significant step-up here organically. And I guess sort of similar question, is there a project mix that's driving this?

And Anders, you already said in your presentation that we shouldn't probably expect this growth rate going forward. What sort of growth rate do you think we should expect then going forward?

[Anders Ulff, executive]

I mean it has been a little bit volatile, I would say, in the North American market. We have seen the first half year here quite good demand, quite good volumes, but also, as mentioned, and a bit of a recovery in the building stocks with the distributors, especially on the residential side, and that, we see, is a bit up and down right now.

So we are a bit cautious when we talk about the North American market, but we are very sure in -- I mean, in the midterm perspective that we can see a very decent growth in that market also. We hope to see that now, especially in the U.S. market after elections, things will start to pick up as well in the U.S.

[Douglas Lindahl, analyst]

So there are some inventory readjustments or stocks [indiscernible] basically effect here in the quarter, you think?

[Anders Ulff, executive]

Yes, post pandemic, everybody was building stock, they buy everything they could get a hand on, and then they had to take it down quite rapidly and now it's coming back up again. So I'm just saying that there's a stock effect here.

[Roland Kasper, executive]

And the normalization on the behavior in the markets, I would say.

[Douglas Lindahl, analyst]

Okay. And then on the gross margin side, which is quite impressive, I think, again. Do you see even further upside here, I guess, with Western Europe potentially bouncing back? How sustainable do you see the gross margins? Or what sort of upside potentially you see further on the gross margin side?

[Anders Ulff, executive]

There are different aspects into the gross margin. But of course, there are things where there is an upside. Still to mention one is that as I have been communicated already that we are not fully finalized with building up the volumes that we have moved regarding Menerga from Germany into Slovenia. So when everything is up and running 100%, there, starting from next financial year, there is an upside absolutely on that.

What we are also indicating here is a little bit that where we are delivering to bigger projects, and what we had in this period was several projects that with quite good margins then. The bigger projects also that -- also has a healthy effect on the gross margin. But it's also long and consistent work that has been put into the efficiency of our factories, and so, that is also there. And there's always more to do. I mean we can continue to -- yes.

[Douglas Lindahl, analyst]

Yes. But the gross margin is slightly boosted by certain projects you mentioned here in the short term?

[Anders Ulff, executive]

Partly...

[Douglas Lindahl, analyst]

There are also structural positives underlyings.

[Anders Ulff, executive]

Absolutely. And I think now we have seen a couple of quarters here that we have a positive trend there.

[Operator]

[Operator Instructions] There are no more questions from the phone lines at this time. So I hand the conference back to the speakers for any written questions and closing comments. Please go ahead.

[Anders Ulff, executive]

Thank you very much. If there are no further questions, I would then thereby conclude this webcast. Thank you for listening in.

[Roland Kasper, executive]

And see you again in March for Q3 or if not earlier.

[Anders Ulff, executive]

And in between that, a very Merry Christmas.

[Roland Kasper, executive]

Thank you.

[Anders Ulff, executive]

Thank you. Bye-bye.