Welcome to the Systemair Interim Report Q2 2020. Throughout the call, all participants will be in listen-only mode, so there's no need to mute your own individual lines. Afterwards, there'll be a question-and-answer session. Just to remind you, this conference call is being recorded. Today, I'm pleased to present Roland Kasper, CEO, Anders Ulff, CFO. Please begin your meeting.
Good morning, ladies and gentlemen.
Good morning, everyone. I'm with Mr. Roland Kasper here. I'm happy that you called in, and I hope also that you have found our presentation on our website. It's on the Investor Relations side. So should we get started, Roland?
Absolutely. Let's go for it. So I'll start with the presentation, and I'll start directly to switch into slide number one. So as you hopefully all know, Systemair was founded in 1974, and over the last 50 years, we had a total turnover of EUR 890 million, and we were listed on the Nasdaq Stock Exchange market since October 2007. Today, we operate our own sales companies in 52 countries, and we have in 19 countries, we have 27 factories, and we have a little bit more than 6,200 employees and exporting into 135 countries all over the world. Switching to slide number three. So as you know, what we do is covering actually the ventilation and air conditioning market, and we provide energy-saving solutions and products covering all the aspects of dealing for people's health, performance, and comfort. Slide number four. Going right in our quarter two report.
In our quarter two, we reached a total turnover of SEK 2.207 million. This represents a growth of 11.1% negative versus the same quarter last year and organic growth of 3.8% negative. On the right side of the slide, you can see a graph of the organic growth development, which so far during this pandemic situation has been negative for us. Going to the next slide, slide number five, and going into the growth analysis of our second quarter. So we had a good organic growth in North America, but in total, the organic growth was negative, with 3.8% negative. The acquisitions contributed slightly, but were 0.1% positive, only small effect due to the acquisition of Poly-Rek in Croatia and Frico in Denmark.
Then we have the biggest negative contribution, which is the currency effect of the strength of Swedish krona, negatively 7.4%, which brings us to the total amount of - 11.1% of growth in this quarter. Going to slide number six. Looking into our operating profit for the second quarter, the gross margin in the quarter increased actually to 35.9% versus 35.8% in the quarter of the year before. Our sales and admin expenses for the quarter decreased to 8.5% for comparable units, and the operating profit includes also COVID-19-related government subsidies of a total of SEK 5.9 million , reported as operating income. During this quarter, we also made an impairment of goodwill related to our acquisition of Traydus in Brazil, which we had to write down of SEK 10.8 million .
So all in all, the operating profit for the first quarter amounted to SEK 213.5 million compared to SEK 283.9 million last year, which actually contributes to 9.7% in the quarter. Adjusted for the goodwill write-down, it's 10.2% for the second quarter, year 2021. Going to slide number seven, our cash flow analysis for the second quarter. Our cash flow from the operating activities in the second quarter 2021 amounts to SEK 245.8 million compared to SEK 320.7 million the year before. Changes in working capital is positively SEK 38.9 million. These changes in working capital mainly due to decreased inventories and increased operating liabilities compared to negative SEK 23.6 million the year before. The net investment, excluding acquisitions, amounted to negative SEK 77.6 million, which is primarily the investment in the new factory in Russia.
This all amounts to a free cash flow of SEK 207.1 million compared to SEK 232 million last year. And also here to look at our net investments, which is SEK 1.6 billion compared to SEK 3.28 billion last year. Going to slide number eight. Here you see the development of our cash flow from the operating activities. And as you can see, the work that we're doing internally with our working capital has given quite a good effect so that we can still improve the cash flow from our activities. Going to slide number nine. Looking into the markets for the last six months, our first half year, which we have in the full pandemic situation from 1st of May. So Eastern Europe has developed to 14% of our total turnover the year before, 17%, so a drop of 2%. North and South America actually developed positively from 10% to 11%.
Other markets being Turkey, Middle East, Asia, Africa, is 12% stable. The Nordic regions slight growth to 19% from 18% the year before. Western Europe also with a slight positive growth from 43% to 44%. Going to slide number 10 and looking into the different markets, here starting with the Nordics. Sales in the Nordic countries decreased by 8.5% in the second quarter compared to previous year. Adjusted for foreign exchange effect and acquisitions, sales decreased by 3.5% organic. Here I have to point out the Danish market showed growth during the quarter, while sales in Swedish, Norwegian, and Finnish markets decreased, even though it decreased only slightly in some of the markets. Next slide, slide number 11. Western Europe. Sales in Western European markets were 7.8% below, corresponding to last year.
Also here, adjusted for foreign exchange effect and acquisitions, the sales fell by 3.8% for that. Austria, Ireland, Spain, and England showed growth during the period, while other markets in the region declined, including, for example, Portugal, Greece, Italy, and Belgium. Going to slide number 12. Eastern Europe and CIS. Sales in Eastern Europe and the CIS countries decreased by 19.6% during the quarter. Adjusted here for foreign exchange effect and acquisitions, the sales fell by 9.2%. As you found out here, the sales in Russia decreased by 17% compared to previous year calculated in Swedish krona though. For us, the Russian market has always been quite important, so just to give you this figure here, also the Russian market represents 31% of sales in this region, Eastern Europe and CIS. Other major markets in the region that fell during the period are Czech Republic, Estonia, and Slovakia.
Last year, we had to point out the growth in this region was 20%, so here the comparative figures can therefore be rather challenging for us. Going to the next slide, slide number 13. North and South America. Sales in North and South America region decreased by 7.6% during the quarter compared to the same period last year. And here, adjusted for the currency effect and acquisitions, sales increased by 3%. The Canadian market decreased slightly but calculated in Swedish krona, while the American market is still unchanged and rather strong. Organic growth 3%. Going to slide 14. Middle East, Asia, Australia, and Africa. Sales in the Middle East, Asia, Australia, and Africa decreased by 18.3% compared to the same period last year. Adjusted here for the currency effect and acquisitions, sales decreased by 3.1%.
Middle East, Australia, and India showed good growth during the period, while other markets such as South Africa, Turkey, and Morocco decreased slightly. Going to our slide number 15. In this quarter, we actually released some very interesting products for our future growth, one of them being our new generation Topvex counterflow units. Our Topvex unit is designed to be easy to work with in every step, so our configurator helps you select the best units for the requirements. It's standardized design and some built-in flexibility to ensure a fast delivery and easy installation. And also our unique Systemair Access control system makes it simple to connect configurator control. As you can see on the picture to the right down, these units are prepared in such way that they fit totally into the new upcoming demand for renovation and upgrades.
So this is something that we really believe in for future growth. Going to the next slide, slide number 16. To give you some feedback also on some nice orders, we have here one order to one of the biggest building projects ongoing in Germany, which is the Kanzlerplatz in Bonn. And we have here received the order for pressurization systems, which is the pressurization systems for the stairwells in case of fire that you can pressurize it and keep the entryways for people to leave the building. The new Kanzlerplatz project will comprise three pentagonal buildings with a skyscraper, and there will be directly what is designed to have the view of the Rhine and the Siebengebirge. Completion in 2021. And also a short follow-up of the ongoing activities. We have been able to move in our new Systemair factory in South Africa.
Since 1st of October, we have opened up also for our customers and for deliveries for the new factory in Johannesburg, as well as the production today of our air handling units, the rooftops, standard and fire-rated fans, as well as our stock of our well-known in-line tube fans. So what we have done here is that we have relocated three existing facilities into one new and half the efficiency. Also the building of our new factory in Russia is according to plan. You can see the picture to the right. The factory will be able to provide high-quality ventilation products to the local markets, and it's especially important for us to move in Russia, which is following the local developer. I'd like to switch over to slide number 18. So thank you very much, and welcome with questions and open up the line. Thank you very much.
Thank you. If you wish to ask a question, please dial zero and one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero and two to cancel. So once again, that's zero and one to ask a question or zero and two if you need to cancel. Our first question comes from the line of Carl Ragnerstam of Nordea. Please go ahead. Your line is open.
Good morning. It's Carl from Nordea. I have a few questions. Firstly, we saw that the Nordic region turned into quite significant negative organic growth during the quarter, at least in a historical context, I would say. So my question is, if you could give some more color on the development in the Nordics, I mean, should we see this as an exceptionally high negative organic growth due to sort of lumpiness, or is this quite a representative level for the underlying market development that you're currently experiencing?
The organic growth, Carl. Good morning, first of all. Sorry. The organic growth in the Nordic region was - 3.5%. In the beginning of our quarter two, I think it was a little bit more weak, but has recovered better at the end. I would see markets as Norway improving, Sweden being more stable, and Denmark actually was really good. So I would rather say that we're coming from a summer situation and coming back to the market. It's more the outlook that is more unstable, I would say. I don't think that this is something that you will see more of in the future.
Okay, perfect and in the quarter, would you say that Norway performed worse than Sweden in the quarter? You might have said it before. Just given it's one of your most profitable markets, I guess.
No, it performed rather okay in the quarter. Below last year, but it was much better than Sweden in this quarter. But I mean, you have to remember that this is an individual quarter, really. In that region for the first six months, I mean, it's rather flat, I mean, organically.
Okay, perfect. And then on the margin side, as you said, the gross margin held up quite well and, in fact, expanded year to year despite the negative organic growth. But on the other hand, you only took down SEK 25 million worth of SG&A year-on- year in the quarter. I mean, did you see that you could do more on the SG&A side, or did you expect the market to come back? And then as such, that you see it's not necessary to take out costs, or how do you view that?
We look on each individual company when we take decisions about SG&A. So I mean, in many markets, I mean, or countries, I mean, the development is quite good, or we see that it's a new recovery. So we don't want to scale down on the personnel because, I mean, that's really long-term that we think about that. And also what Roland told here about the products that we have launched during the period, so I mean, we are thinking much more long-term here. Of course, in some countries where it's really dark, I mean, we have done cuts also in the SG&A for sure. But also, Carl, the SG&A is related to marketing activities because that's what we hear a lot from markets that people are cutting down on market activities.
But we have done some launches of some substantial products that also fill in the line of the demands to be decided today in Brussels, for example, for all the investment packages. So especially what we also presented here, Topvex or our new heat pumps, SYSAQUA BLUE, they are totally in line with what is expected to be the high-end demand product for the next coming three, four years. So we conducted those marketing campaigns nevertheless. We just switched over to digital platforms, which of course also takes time, effort, and you need to have the staff on board.
Okay, perfect. And I know it's a fairly frequently asked question, but I will do it anyway. I mean, could you please update us on the development within Airwell & Menerga during the quarter? I mean, how much did they impact the margin? If you could elaborate on the sort of underlying margin development if you exclude them in the quarter. And also given the pandemic with a sort of higher degree of uncertainty, would you consider to implement more strict cost-cutting programs or similar measures within these units, or how do you view on that?
Let me first start from that part. For the time being, we were after the summer break, of course. I would say it's the high season for air conditioning products. So the air conditioning entities in both France and Italy have performed lower than last year, of course, given the pandemic influence that we have. But nevertheless, on a good development given this year and the influence that we have. Also here, we have to say that over the last two years, we have, of course, done some restructuring in these companies. But first of all, we have developed new products.
So what we have launched now with the new heat pumps is also being followed up in quarter one and quarter three next year with new other products that will be not only in line but front-runners in technology development on the heat pump market during the European market and the investments coming. So this has been something that we have been following and pushing rather hard. So it's more or less in line there. For Menerga as such, of course, we are reviewing, as you know, the setup that we have there. But also here, we have what's called positive problems with really good order backlogs and some really significant projects in order that we have to deliver upon.
For us, it has been a struggle a little bit because we have some restrictions from the German government how to handle operations to create social distancing also on the workshop floor, but nevertheless being able to deliver on time. For the next 24-30 weeks, actually, the workshop floor is fully booked, and we have rather problems to deliver on time for our customers, which is our main priority to keep customers satisfied in this situation. But of course, we're reviewing the total setup, as you know.
Okay. So given a high utilization rate of the production in the coming 24-30 weeks, I mean, should we also expect sort of a better profitability for the group as well then given that, or?
As I said, for the AC companies, it is lower and totally on the top line, but the outlook, of course, with the product that we're launching is positive. Given the total market input that we get, it looks like that from mid of next year, we can expect a recovery to the better. We are positioning ourselves to be, how to say, we are geared for what is coming. On the Menerga side, we are very happy about the high order backlog. But at the same time, given that we need to take extra precautions in our factories of distancing and having several shifts because of keeping people apart, we also have to take into account that the output efficiency in the factory is considerably lower than it should be given these extra precautions that we have to take by government.
So it's, how to say, it's a positive problem, but we need to cope with it. The only thing that we need to take care of is that the customers remain happy so we can deliver what they expect. But it's to a lower efficiency in the Menerga factory just now.
Okay, so it sounds like you have the.
The same is true in Germany.
Perfect. Okay. That's all for me. Thank you.
Thank you, Carl.
Thank you. Our next question comes from the line of Douglas Lindahl of Kepler Cheuvreux. Please go ahead. Your line is open.
Hi, good morning, gentlemen. Hopefully, you can hear me. Just following up on that Menerga situation. I also see that you hired off here into the second quarter in a row. I guess it's continually for the same reasons, meaning social distance needs to be kept at high levels. But with regards to your high order backlog, does that in that context mean that you would really, ideally right now, would like to have a lower order backlog, really, because you need to employ so many people in order to deliver on these orders in Menerga specifically? Or should we view that, really?
That's a good question, Douglas. The problem here is just that by creating, due to these restrictions, so to say, we, of course, we need a little bit more time for every single unit to produce just because people cannot hand over from one shift to another. You have to have time in between, so they need to restart more or less when the second shift is coming and so on. So every delivery time has been prolonged, which is a negative thing for a customer. When you started planning for such an installation, we talked about the time down to final delivery of product and installations of maybe two years. So then coming after two years and saying that you have six months of delivery is not acceptable.
So we need nevertheless to keep a shortest possible delivery time, which means that we, in some cases, for some projects, even need to hire in people to be able to deliver on time to establish a third shift and these kind of things. So it's actually the higher order backlog, if given restriction times, is actually coming to a much higher cost internally. And it would be better for us to have a, I don't say a lower order backlog, but a better balance. That would be nice.
Okay. And I guess you gave a bit of color on this, and it can also be seen in your sequential organic trend. But with regards to demand in the quarter, would you say that it has improved month by month in general for the group?
Yeah, we could say that at the end of the quarter, it looked better than in the beginning, as mentioned before, and I mean, you have to be careful looking too much at an individual quarter because, I mean, sometimes it doesn't really give the full picture.
Okay. And I'm now switching topics on M&A. I guess it's a difficulty to do acquisitions as you can't really travel and see these companies. But looking into next year, do you expect that M&A has the potential to pick up? What's your view about this?
Yes, absolutely. Our pipeline is quite strong. The only restriction just now is exactly correct, what you say. We cannot travel to go there to visit and to look at these different projects. But just to mention, we did an acquisition just some weeks ago here in Sweden, a small consultancy firm for IT that will contribute to our development of software tools. So there is still the possibility to do M&A, but just those being outside Sweden, of course. You're totally right. We cannot travel, so we cannot look at them. But it's a good pipeline. I guess another positive thing here, also with the small amount of interest in M&A for the moment, is that we have focused a lot on building organic growth for the future.
The products developed, but also looking into each and every market and to see how we can continue the organic growth for the future, so.
Okay. And just following up on M&A, is it where or what would an ideal M&A opportunity be within? Would it be geographic exposure or from a technological standpoint that you would be looking into M&A? How do you sort of tackle that?
Both the unique pipeline just now or technological and geographical.
Okay. So both. Yeah. That's it for me. Thank you.
Thank you, Douglas.
Thank you. Our next question comes from the line of [Marcel Klein of SEB Enskilda] . Please go ahead. Your line is open.
Thank you and good morning. At our sustainability trends seminar recently, you mentioned some exciting water cooling solutions within Menerga. Is it these new launches that have caused your luxury problem of too high order backlog, or is it older products and just generally strong demand?
Good morning, Marcela. It is actually a high amount of really exciting projects. Most of them actually are today high energy efficiency projects. I would say for the time being, 30%-35% are going to very special dehumidification projects. The main part today is about the efficiency. Following the energy efficiency trend, this is what we see mostly. When it comes to the water-cooling aspect, we have in Central Europe more than 10 different projects ongoing where we have this technology applied.
Exciting and looks also good for the future. The other interesting launch topics, how is the order situation there? Because that's more for the renovation wave and so on.
Correct. Yes. Here, actually, what you saw here in the pictures in the presentation is the counterflow unit, which is the high-efficient unit that you also see in the picture, which is a unit that you can bring into the normal door openings, which is perfectly situated for renovation and upgrade. We will also complete that line of product in February, March with other versions with side and top connectors, with other heat recovery alternatives. So really coming into what is discussed today in Brussels, it's a perfect situation for us time-wise with the launch of these products. So we're really happy about things going together time-wise this time.
Those are for all European markets?
Yes.
And then the Turkish hospital projects, have they been booked this quarter, and what was the positive effect from those?
We invoiced actually in October several of those projects going to the local Turkish market. That was actually quite nice in that region and that month. As you might have read in the newspaper, the last two, three weeks have been rather going in, how to say, the wrong direction. The COVID development in Turkey is now very much going in the wrong direction. But we still have a good occupation of these kind of projects in the factory. It's just that last week, it was a total lockdown. People were not allowed to go outdoors. So we just have our workers in the factory. We have delivered, but there is slower movement on the building side today. But we still see these projects coming. It's just a bit slower on the installation side.
Can you talk about the net effect of these, how it affected your second quarter in Europe?
For the region, I would say, the region that we defined here as Turkey and Middle East, I think that's a good and big contributor to that region. We also saw several of these hospital or hygiene upgrades in Mid-Europe coming mostly from our factories in Spain and Germany. But the contribution in krona, we haven't followed that up specifically on that application, to be really honest.
But it's starting to show.
Yeah. I think their total share has dropped 30% during the first six months or so. It's significant. So you can see it in the current sector.
And then you mentioned that during the second quarter, demand situation improved towards the end. What can you say about November and starting of December? Is it flat but uncertain, or do you see any trends in demand?
Normally, we don't give any forecast presentation. As I said before, by the end of this quarter, it was better than in the beginning, really, and I would say in general, when we talk around in Europe, North America, and so on, it's rather positive outlooks for the moment. I mean, in general. We normally have one of the first temperatures that we take on the marketability for projects in the future. Normally to consultancy companies. And just now, they have a lot to do, so there is a quite positive signal, but also taking into account when the consultants make their job, it still needs to have someone to start the project, but for us, it's possible to see that there is a lot on their plate just now, so we also hope that the projects will start.
The demand looks good, and basically, it's up to the restrictions what happens to the margins and the productivity. A final question from me. The goodwill write-down in Brazil, is there risk for more? Is there any risk because you previously wrote down in Italy and France? Is there any risk for more goodwill write-downs near-term in any region?
We are working here together with our auditors, and this is a common topic, I guess, on that point, not only us, but also a lot of other companies in these states. Regarding Brazil, then it's zero now. So you can't expect any more write-downs there. But of course, we have other goodwill items that are up for discussion now and then, and we need to look into that quarter by quarter when we see some kind of impairment coming up.
Okay. Thank you.
But I mean, all in all, I would say goodwill for us is not huge in the balance sheet here, so.
Yeah. Okay. Thank you so much.
Thank you.
Thank you, Marcela.
Thank you. We have one further question in the queue. So just as a reminder to participants, if you do wish to ask a question, please dial zero one on your telephone keypad now. That question is from the line of Henrik Alveskog of Rede ye. Please go ahead. Your line is open.
Okay. Hello. Thank you.
Good morning, Henrik.
Good morning.
First, could you just give us a very brief update on the Panasonic partnership? You talked more about this a year ago than you are nowadays. So is everything according to plan more or less, or?
Yes, it's a good question, Henrik. So as we have talked about earlier, we have four main projects. The first one was the ECOi-W, the heat pump that we launched one and a half years ago. That started quite well. But then due to the pandemic, it has slowed down because the Panasonic-based entity in Mid-Europe has really taken those precautions, and they're focusing more on residential just now. Step two was the project for just residential, where we started in October, actually. And it started according to plan, and it's developing well. Number three is that we have a project where they use our EHEM units that has not started. It's delayed because of the restrictions given in the European operations. And number four is the co-development of the product for future, which is going to plan, which will be launched next year.
What has been happening during the summer, I would say, or during this pandemic, is that it hit also actually Japan by quite substantial forces, and it has been rather slow in communication between Japan and Panasonic's European entity, so we have seen a slowdown on their side, which has now picked up again for the last six to eight weeks, so now we're trying to enforce and come back to where we should be time-wise.
Okay. Thanks, and I was also curious about this SYSAQUA BLUE. Well, basically, what markets are you targeting near-term, and well, if you could talk a little bit about your more long-term plans, if this is something for the broader market or not, really?
Absolutely. So there are some specific differences on this SYSAQUA BLUE in terms of compared to other of our products in the same capacity range. It is not only the difference of a GWP factor, only three, which is very, very environmental- friendly, but it's also to a much lower volume of refrigerants to the same effect in these units. And we have been testing these units for the last one and a half years in several conditions. And normally, this kind of heat pump is something for the Mid-European market, but we have actually been testing these units to harsh winter conditions in the north of Norway also. So we will also launch this in the Scandinavian countries. So broaden our market footprint that we normally have with this kind of product.
And this product will also be followed up in the first and third quarter of next year with other products similar in the positioning and similar to the environmental cases, but in a broader capacity range. So we actually look quite positive upon this kind of product and the sales organization that we are about to expand on this.
Great. All right. That's all from me. Thank you very much.
Thank you, Henrik.
Thank you. And there are no further questions on the phones at this time, so I'll hand back to our speakers for the closing comments.
Yes, ladies and gentlemen, then thank you very much for your interest and participation in this call.
Yeah. Don't hesitate to contact us if you have any further questions. And happy to see you next quarter again here in the beginning of March.
Merry Christmas and a Happy New Year then.
Okay.
Thanks a lot.
Thank you.
Bye.