Welcome to the Systemair Interim Report Q1 2020. Throughout the call, all participants will be in listen-only mode, and afterwards, there will be a question-and-answer session. Just to remind you, this conference call is being recorded. Today, I am pleased to present Roland Kasper, CEO, and Anders Ulff, CFO. Gentlemen, please begin.
Hello, ladies and gentlemen.
Hello, Anders and Pierre as well. So you will find a presentation for today on our website under Investor Relations. So let's get started, Roland.
Yes, thank you, Anders. Welcome to the Systemair Quarter One Report 2021. Let's start directly with slide number one there. Systemair established here in Skinnskatteberg in Sweden in 1974. Last fiscal year, we had a turnover of EUR 890 million, and since October 2007, we're listed on Nasdaq OMX and Nordic Exchange stock market. Today, in 51 countries, we operate our own sales companies, and in 19 countries, we operate our own manufacturing and sales entities. We have today 6,160 employees in the group, and by doing this business, we export to 135 countries all over the world annually. Next slide, slide number three. Our business model. Systemair provides products within ventilation and air conditioning for the benefit of health, performance, and comfort of human beings, and of course, for energy-saving reasons.
That is the main task and the main target in our product development and in performance measurement, and not to forget that good ventilation reduces the spread of infections and virus throughout. Next slide, slide number four. Jumping directly into our Quarter One. In our Quarter One 2021, we achieved a total turnover of EUR 2.1 billion compared to EUR 2.25 the quarter year before. By that, we achieved a growth of - 6.8%, whereof 4.4% organic negative. On the right side of this slide, you will see the chart of the development of the organic growth on a rolling 12 some years back, and of course, last quarter was the first quarter of our last year, which includes March and April. We had a negative effect starting off with a slightly negative this quarter also. Next slide, slide number five.
If we analyze the growth in Quarter One, organically, we had good organic growth actually in the Nordic region and in North America. West and Eastern Europe with negative growth of 4.4% in total. Through acquisitions, we had an effect of the acquisition of the Pacific Ventilation in Australia, Systemair Maroc, Polirek, and Sweco in Denmark of positive 1.6%. And then at the end, also an effect of the weakened currency, the euro strengthened currency, mainly here the Swedish krona, which contributed with 4% in total and negatively 6.8%. Going to the next slide, slide number six. The operating profit for our Quarter One. Our gross margin decreased to actually 33.6% compared to 34% the quarter year before due to the lower capacity utilization in most of our factories. Our selling and administration expenses for the quarter decreased to 5.3% from comparative units.
The operating profit includes COVID-19-related governmental subsidies in several countries, which amounted to SEK 23 million, which is reported as other operating income. Thereby, the operating profit for the first quarter all in all amounted to SEK 182.1 million to be compared with last year's result of 173. This is then a result of 8.7% operating profit for the Quarter One. Slide number seven. The cash flow analysis. In the first quarter of 2021, we had cash flow from operating activities resulting in SEK 142.3 million compared to 223 the year before. The change in working capital amounted to SEK 35 million, which is mainly affected by the decreased inventories in the company.
The net investment, excluding acquisitions, amounted to -SEK 93 million compared to 48.9 the year before, which is investment in buildings and machines, and here primarily the startup of our building in Russia and some machine investment in Lithuania. This resulted in a total free cash flow of SEK 84.3 million compared to 145.3 last year, but also, on a positive, our net investment has decreased to SEK 1.8 billion versus 2.2 the year before. Next slide, slide number 8. Here you see a chart of the development of our cash flow from the operating activities, and we had a very positive momentum, which is kept, which we will build further on in future. There are several activities that have reached us here, especially control of the operations. We are changing to slide number 9.
Looking into our markets for our first quarter 2021, the development has been following Eastern Europe and its CIS countries, now 14% of our total turnover from 18% same quarter the year before. North and South America amounted to 12% market shares compared to 11% the year before. Other markets contributed with 13%, whereas 11% the year before. Nordic region 17% compared to 16% the year before, and Western Europe stable at 44%. Next slide, slide number ten. Let's go into our different regions. Let's start with Nordics. Sales in the Nordic countries actually decreased by 1% in the first quarter compared to the previous year. If we adjust for foreign exchange effects and acquisitions, sales increased by 5%. The Swedish and the Finnish market actually showed good growth during the quarter, while sales in the Norwegian and Danish markets decreased slightly.
So the growth - 1% organic, whereas positive 5%. Next slide, slide number 11. Let's have a look in Western Europe. Sales in the Western European market were 7% below the corresponding figure last year. Adjusted for the foreign exchange effects and acquisitions, sales fell by 5%. The German and the Belgian market showed growth during the period, while other major markets in the region declined as a result of the pandemic, including especially France, Netherlands, UK, and Spain. Changing to slide number 12. Eastern Europe and CIS. Sales in Eastern Europe and the CIS decreased by 26% during the quarter. Though adjusted for foreign exchange effects and acquisitions, sales fell by 21%. Looking at Russia, sales in Russia decreased by 26% compared to the previous period, though calculated in Swedish kronas. The Russian market represents 30% of sales in the region in this quarter.
Other major markets in the region that fell during the period have been Poland, Czech Republic, and Slovenia, though have improved at the end of this quarter. Last year, the growth in the region was 23%, though given that, comparative figures can therefore be considered as very challenging. Next slide, slide number 13. North and South America. Sales in North and South America region increased by 3% during the quarter compared to the same period last year. Adjusted for currency effects and acquisitions, sales actually increased by 7%. Especially here, the Canadian market showed very good development in the quarter. The American market stayed stable, but through lower growth. Next slide, slide number 14. Here we combine the Middle East, Asia, Australia, and Africa. Sales in this region increased by 5% compared to the same period last year. Adjusted for currency effects and acquisitions, sales increased by 1%.
Especially Middle East and Morocco showed growth during the period, while other major markets such as Turkey and India decreased slightly. Here we can gladly present we had in the last quarter report, we presented our first deliveries to Serum, and we're now very happy to be able to present that Serum continues to choose Systemair for the second part of the extension for the COVID-19 vaccine facility. Serum is thereby expanding the vaccine manufacturing facility to increase the production capacity for the human trials when the human trials are successfully for the vaccine developers. The delivery from Systemair contains 42 hygiene air handling units that need to be delivered with very short notice, which is critical in this project.
The total order value in the second phase for us is approximately SEK 7 million, which is just now under production and shall be finally delivered and installed before end of October at the site. Slide number 16. Special trends that are global and affecting our market. Here need to be mentioned the announced recovery investment packages by European Union, which will put focus on sustainability and infrastructure. The EU ministers, as you know, have agreed on the 21st of July on a budget for EUR 1.8 billion composed of the multi-annual financial framework. The Green Deal hereof relies on EUR 503 billion from this multi-financial framework. The Renovation Wave is part of the Green Deal actions and announced at the end of 2019 as a major initiative towards energy and climate goals, which is a big part of the ventilation and energy saving activities of Systemair Group.
By that, I switch to our last slide. Thank you for your attention, and I open up for questions.
Thank you. If you wish to ask a question, please dial 01 on your cell phone keypads now to enter the queue. Once your name's announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial 02 to cancel. So once again, that's 01 to ask a question or 02 if you need to cancel. Our first question comes from the line of Carl Ragnarsson of Nordea. Please go ahead. Your line is open.
Hi, it's Carl here from Nordea. I have a few questions. First of all, if you could, I mean, you reported mid-single digit, if I remember it correctly, in the Nordics organic growth values. I mean, that is seemingly better than some of your competitors, I think. So first of all, I wonder whether you believe that you have gained market shares during Q1, and secondly, whether you have seen any changes in the demand after the Q1.
Hello, Carl, first of all. When it comes to the development in Q1, I would say in the beginning of Q1, it was seemingly a little bit more negative. After that, it has improved in the second and third months of our first quarter. If you look at the different markets, I would say that Sweden is somewhat stable in demand. In Norway, we were a little bit more concerned, but it has proven to be more stable and still better developing than expected. Denmark also outperformed in the second and third months versus our expectations. So I would say it's more an effort for the whole Nordic region. It's not a single country that has developed better or worse versus others.
Yeah, and you still see a quite healthy demand in the market, or have you seen any major changes?
I would say, Carl, that the biggest problem that we would have to mention this is that there is, of course, a very dynamic development on the consultancy basis and also out on billing sites. We don't have visibility today what will happen at the end of our second quarter or even in the middle of the second quarter. It is still very hard to predict how it will continue. What we do have just now in demand is, I would say, it's good.
I believe also that our Swedish sales organization has been through a period of restructuring over the last two years, and I think it's also starting to pay off somehow. I believe in Sweden that we are gaining market shares.
Okay, very interesting. And as you said, you report also strong organic growth in America. What's the driver behind that? You mentioned Canadian market, but if you could give us, yeah, on a product basis, some flavor at least, and also if you expect the COVID-19 effect to hit you maybe later on?
Yeah, the interesting part and the really strong development that we have seen in North America, Carl, has especially been within residential ventilation. As you might remember, we made an acquisition here one and a half years ago, which was the company GreenTek in Canada. That has developed very well for us. And especially in Canada, the increase of residential application, but now also what we can see in America, or let's say in the US, has also during this quarter been surprisingly positive. How this will continue, especially within residential, I can't predict today, but we also see from the competitors that the market level is quite satisfying at the moment for just residential. We see some hiccups when it comes to the commercial and industrial applications, but as this is a very, very minor part of our North American business, we are not that affected at all.
Yeah, perfect. And you also reported a fairly strong EBIT margin, I must say, given the circumstances. Could you please help us to sort of understand the dynamics in it? I mean, could you explain, for instance, the development within the AC business, Menerga, a little bit on the pricing as well? This could help out with that.
Of course, yes. I would say at this time, it has been that we had a quite good momentum even prior to COVID. We have done a lot of activities, as you know, already implemented over last year on proactive pricing, more market-based pricing, looking really for customers' best expectations and levels, but also looking at improvements of cost and activities internally in the Systemair Group. I think you have to bring all that together to really understand the development. Then, of course, also, as you asked specifically for air conditioning and Menerga, the air conditioning for us is, of course, Italy and France, which has been or was quite hit by the pandemic, as you know, of the lockdowns. So there is not a major part in the development that is attributable to especially air conditioning.
Or Menerga.
Or Menerga.
There's more potential there.
Absolutely.
And do you expect to pump that demand in the AC units because people couldn't buy an air conditioning unit during the COVID-19 period or the lockdown?
As you know, Carl, I think the main part of our business within AC is still for the bigger units. We are not that big into private housing, I would say, here, like split units. It's not the main part of what we're doing. For the light commercial and commercial applications, building sites were closed down, especially in those countries, for some weeks, but we see it coming back. But we do see huge potential in the developments that we have ahead of us with new products and new refrigerants. So we would have on the midterm a very positive outlook on this.
Okay, perfect.
Thank you, Carl.
From my side, if I may. It is whether you still believe that you are on track to reach your 10% margin target. And I mean, you communicated that you expect to reach it in two to three years, but I wonder, given the current pace, at least the past two quarters, did you expect that you could possibly reach it even quicker than in two to three years, or will we more see a flat development or a slower margin development ahead, or how should we look at it?
As we announced this in September 2019, that it would be two to three years ahead. It was, of course, without having any pandemic in mind, of course. But as I already said before, I mean, all these measures that we have been doing, not only pricing but also the cost-based and all that, that was already done before. So we see the effect of that. Will we reach it earlier? I don't think so. Will it flatten out? We'll reach the target. I'm a little bit. I'd like to leave it open on the timeline. Two to three years still seems doable, but I won't promise more than that.
Okay, thank you very much.
Thank you, Carl.
Thank you. Our next question comes from the line of Henrik Alveskog of Redeye. Please, go ahead, your line is open.
Yeah, I'm on.
Okay, gentlemen, do you hear me?
Yes, yes, Henrik, hey.
Great, hi, hey. You mentioned a couple of your better markets, but could you mention which ones are of major concern to you at the moment? Which markets are not picking up at all?
I would say those that are clearly not picking up, maybe the wrong words, but still have troubles due to pandemic, for instance, would clearly be Brazil, South Africa.
It still isn't.
But it's given due to external circumstances. I mean, they are still in partial lockdowns. You still have some kind of uncontrolled development. So our manufacturing entities are open, they're working, but the market is, of course, going up and down.
Okay. But Turkey and India is less of a concern than the ones you mentioned?
Clearly, yes. Less of a concern, absolutely.
Okay, great. Also, are you still receiving some government support or subsidies today in any countries?
Yeah, we are, but a lot less than before. I mean, the major part of the subsidies we received was regarding Sweden, I would say. So here in Sweden, at the moment, we are running 100%. So we are not receiving any grants from the state at the moment.
Okay. And then you mentioned here that, well, good ventilation reduces the spread of the virus, which is good for, well, demand. Could you be a bit more specific and let us know how you see this?
I mean, there are certain drivers on the market, of course. Long term, Henrik, I mean, you have the urbanization, you have the eco design, these energy directives, and on the top of that, nowadays, of course, with the Green Deal and all these investments, they will, mid and long term, certainly be drivers. We do think that with this pandemic that has hit us, the awareness amongst even private people about how important it is to have clean, healthy indoor air quality is something that will give us a positive effect also as a certain driver to our business, so we absolutely see this as an additional driver for the future.
Okay, great. Thanks. And then could you maybe give us a little more information on your investment in Russia? What's the planned size of this in terms of CapEx and then also the size of the production facility when it's up and running and also what they will produce there?
Yes, of course. I mean, this is following our announcement that we actually did on the capital market date where we have been looking over the last couple of years of having some kind of acquisition or establishment in Russia. The main reason being that in Russia, it is establishing more and more as a rule that in governmental and other private projects, you need to have a part of the products that are actually made in Russia. And for that, it's not possible that you relabel things on entry into Russia, but you really have a strict rule of how much of the product and what part and what kind of manufacturing needs to be on a certain product to be brought to market with made in Russia. So we identified we needed to have a factory, and that's what we now have started. Actually, the building is started.
It is thought to be, in the first stage, a warehouse and a manufacturing entity and to be manufacturing products that actually are more capital intensive and needs, let's say, to more adapt the technical version for the local market. The first product to be produced here will be air handling units and airborne heating products. It is expected that the factory will be accessible for us somewhere at the end of this fiscal year.
Okay, well, during this fiscal year, but by the end?
Yes, absolutely by the end.
Yeah. Okay, then. Thanks. And also, you mentioned Menerga briefly earlier, and I just noticed in the report that you have hired 20 new staff in Menerga. Should we see that as a sign of good order booking or?
No, it was more a sign, Henrik, of precautions in manufacturing, especially in Germany. They're running against strict rules on how to handle health aspects during the pandemic. So we needed to establish a certain, how to say, distance between workers, which slows down the processes and doesn't make them very effective. And you also have to install several shifts. Having several shifts and having a full factory that needs to operate due to good order intake means that you need to have more part-time workers, and that is the increase. The plan that we have of the restructuring, everything is going on according to plan. We're just filling up to be able to deliver according to customers' expectations. But this is only over a certain time.
This is compared to one year ago, not compared to three months ago.
Oh, yeah. Okay, I see. Well, thank you very much. That was all from me.
Thank you, Henrik.
Thank you.
Thank you. Our next question comes from the line of Jan Ihrfelt of Erik Penser Bank. Please go ahead. Your line is open.
Hello. I was wondering if you could elaborate on the current environment for acquisitions and how it has developed during the pandemic?
Yes. I would say to be very clear, a lot of things are on hold. A big part of acquiring companies and organizations, manufacturing and product producers, distributors, is, of course, to be able to visit and to get your own understanding of business complexities and challenges and possibilities, and this has not been very possible during the last couple of weeks and months, so a little bit paused, but you do as much as you can in the background. Looking at the amount of M&A objects available, it's also decreased. I think people are quite hesitant to wait. Okay, what will the outlook be? What can you provide as a kind of guidance for future? I mean, if you don't have visibility on the future of a certain company, it's very hard to be in a selling space.
Thank you. Also, one additional question regarding the CapEx investments in Russia. Are they completely carried out during this quarter, or will there be additional CapEx spending for the coming quarters?
We have started with some prepayment here, so it will come more as we go along. It's a payment plan here that will follow.
All right. Thank you.
Thank you. And we have one further question in the queue so far. So just as a reminder to participants, if you do wish to ask a question, please dial 01. And the next question comes from the line of Marcela Klang at Handelsbanken. Please go ahead. Your line is open.
Thank you. Hi, gentlemen. I'm especially impressed by the margin development. It is actually up from last year despite organic decrease in sales. You already spoke a little bit about it, but I'm also wondering, could it be a similar situation as one of your competitors, NIBE? They prepared for much worse drop in sales with heavy cost savings, and then the quarter actually turned out better than expected.
I think we write in the report that the sales figures are over our expectations to start with. So we were really cautious when this came in, and we have seen very good actions from our organization in each and every country also. So I think they have taken a lot of actions, really, and we are prepared to cut costs even further. So I think it's—and also all the actions we have done that we presented also before how to reach the 10% is also paying off, of course. And as mentioned a bit earlier also, we believe there is more potential, of course, also within our Menerga and AC business also. But I mean, to be a little bit cautious here also, we don't know really what to expect here moving forward.
Of course, we are a bit afraid that the planning with the architects and so on has dropped and that we will see a little bit drop. But we will see. It will be very hard to predict at the moment.
I mean, everything that you see out there, just now, Marcela, when it comes to Green Deal, the investment packages from different European states, they all agreed a bit, but it's not decided in European Parliament, and they are not implemented in different countries. So we think midterm, this will be very beneficial for us, and the outlook is surely positive, but it's not what we see for the next coming months ahead, so the outlook is very hard to predict for the time being.
So you basically expect to keep most of the cost savings. Are you also looking at further potential for cutting costs, and do you have potential to do that?
Yes. As Anders already indicated, I mean, when we started in mid-March, we already implemented certain activities to adjust our cost base, which proved to be very efficient, and as Anders said, we were quite impressed how fast we could move, but of course, as we are looking constantly on the development as we move along, we are prepared to do more if it's needed.
Yeah. Then a question about Russia and this heavy drop there. This is against strong growth a year ago, but was this mostly due to lockdown or any other issues in Russia? Because you then did mention it about among the countries that you are worried about.
It was mainly due to what we can see, at least now. It was mainly due to this lockdown. I mean, people were really forced to stay at home, everyone. So that was a little bit of a constraint to the manufacturing sites during some weeks. But then partly offset by selling from warehouse directly from stock as it also got hot, and we are also distributor of cooling appliances in Russia. So a little bit plus and negative, but of course, the lockdown affected a lot.
That is now fully open in Russia?
No. I think today they are working, I think, three or four days a week. That's what was allowed.
One more question. The CRM projects, when will they be booked, the first one especially? Is it already in your books?
The one will be in September and the other one November.
Yeah. And then a final question. The net financial items that were negative this quarter, which currencies affect you there mostly? Is it euro or anything else?
It's euros and dollars, 50/50. Let's say a little bit more, let's say 60% on euros.
Yeah. Thank you. That's all my questions.
Thank you, Marcela.
Thank you. Once again, if there are any final questions, please dial 01 on your telephone keypads now. Okay. Is there no further questions coming through at this time? I'll hand back to our speakers for the closing comments.
Okay, ladies and gentlemen, then thank you very much for attending our call. Looking forward to being in touch with you next quarter. We will move on then to conducting the AGM here in Skinnskatteberg . Unfortunately, this year, not that many participants. I hope to welcome you here next year in a bigger group also. I hope that is really possible. So thank you very much for your attention today.
Thank you and goodbye.
Bye-bye.
Take care.