Welcome to the Systemair AB Interim Report Q3 2019-20 call. 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'm pleased to present Roland Kasper, CEO, and Anders Ulff, CFO. Please begin.
Good morning, ladies and gentlemen, and welcome to the Q3 report 2019-20 of Systemair AB.
Good morning. Anders Ulff here also. Just to mention, then, that you find the presentation for this call in our website on the Investor Relations part and under Investor, a little bit further down there, you find the presentation for this call. So why not get started, Roland?
Yes. So, then immediately I'll jump to our page number two. So, as a recap, Systemair AB, started in 1974. Last year we reported a turnover of EUR 830 million. We are listed on the NASDAQ Stock Exchange since October 2007. We have in, our own sales companies today in 60 countries. And we have today around about 6,000 employees employed within Systemair, and we export currently to more than 100 countries, or, 136 countries. Switching to page number three. A view on the markets and the developments. Today in our business, 70% of our volume is reported from Eastern Europe and the CIS countries, coming from the year before, in the same quarter, 60%. North and South America correspond to 10% of our business, coming from 9% year before.
The other markets, being South America, Asia, and the Middle East, is for us 12% of our total turnover, coming from 11% year before. Nordic region amounts to 19%, a drop from 22% the year before. Western Europe stays at 42%. Switching to slide number four. Jumping directly into the Q3 results here. In Q3 we reported net sales of SEK 2.147 billion, which corresponds to a growth of 6.4% versus the year before of SEK 2.018 billion, however organic 1.8%. On the right side of this slide you can see the organic growth development in the rolling 12 months, and you see quite stable development here. Jumping to slide number five, we'll break down the growth up to 6.4%. As said before, organically here 1.8%, especially good in North America, Asia, and ACtually South Africa.
1.2%, exhibited by ACquisitions, and here mainly the ACquisition of significant dealers in Australia and Systemair North America. Then we had the currency effect of 2.3%, and here mainly due to the strength of the euro. All in all contributed to 6.4%. Going to slide number six. The operating profit in the Q3 amounted to SEK 113 million, or 5.2%. The gross margin here increased to 33.8%, being 31.9% the year before. This is mainly due to the high capACity utilization of fACtories, and also due to the presence of profit improvement ACtivities. The sales and admin expenses for the Q4 increased to 9.4%. As a result, as said, operating profit for the Q3 amounted to SEK 102.6 million-SEK 130 million, being SEK 80.1 million in the year before the Q3. Switching to slide number seven. Profit after tax in the Q3.
The net financial items ended the Q3 at SEK 19.5 million versus SEK 5.8 million the year before. The effect of the foreign exchange change and the long-term receivables, loans and bank balances, calculated to SEK 10 million. Interest expenses for the quarter totaled SEK 9.3 million, and adjusted to the IFRS 16, the interest expense total ACtually SEK 7.1 million. The estimated tax for the quarter amounts to SEK 28.6 million, or 30.7%. This all in all gives a profit after tax of SEK 64 million in the Q3 2019-20. Switching to slide number 8. The cash flow analysis. Cash flow from operating ACtivities in Q3 2019-20 amounted to SEK 123.9 million versus SEK 77.5 million the year before. And here is the, sorry, the maintained in working capital is SEK 163.9 million, versus SEK 111.7 million.
The improving in working capital is mainly due to the increase in credit card receivables, which is a positive at SEK 253 million versus SEK 188 million the year before. Net investments here excluding ACquisitions is SEK 34.2 million, and here mainly a mAChine investment in Koolair in Spain, and investments in automation that we're doing currently in our head office in Skinnskatteberg for compACt AHU units, and an upgrade in the metal workshop in our fACtory in Maribor, Slovenia. All amounts to a free cash flow of SEK 253.6 million versus SEK 141.5 million in last year. The net investment has decreased to SEK 1.9 billion versus 2.2 billion last year. Switching over to slide number nine.
Here is more a visualization of our cash flow from operating ACtivities, and you can see the clear trend, being starting from Q2 last year, 2019, and the improvement that has been AChieved here. Switching further to slide number 10, and right here we'll go into the markets. Starting with the Nordics. Sales in the Nordic countries is more or less unchanged in the Q3 compared to the previous year. It's a growth of 0%, whereas organic ACtually minus one. And here in the Norwegian and Swedish markets, the construction market during the quarter, while sales in Danish and Swedish markets ACtually showed good growth. And the foreign exchange effects and ACquisition effects increased at 1% during the quarter. Switching to slide number 11, Western Europe.
Sales in the Western European markets were 4% higher than in the corresponding period last year, and here adjusted for foreign exchange effects and ACquisitions to growth by 1% organic. Here several markets in the region ACtually performed really well in the period, especially in Netherlands, Germany, and France, while we saw some weaker or more soft developments ACtually, in this quarter being excellent for the business in the US. Next slide, slide number 12, Eastern European CIS countries. Here the sales development in Eastern Europe and CIS had a growth of 8%, and organic 2%. Especially the sales in Russia decreased during the quarter, stated in Swedish kronor. The Russian market represents today 30% of the sales in this region that we call Eastern European CIS.
Major markets though in the region showing very good growth in the period is especially Poland, Slovenia, and Slovakia. Switching to slide number 13. North and South America. Sales in North and South America region during the quarter is 10% higher than the same period last year, and here the American market in particular performed well in the quarter. Adjusted for foreign exchange effects and ACquisitions sales increased by 5% organic in the quarter. Next slide, slide number 14. Middle East, Asia, and Australia, and Africa. Sales in this region, increased by 23% during the quarter, and here, adjusted for foreign exchange effects and ACquisitions, especially here in Asia-PACific and Australia, the region increased by 9% organic. Above all, we have to mention that sales in India and Turkey increased really nicely in the quarter. Switching to slide number 15.
As a reminder, in September 2019 we announced our new financial goals, and we announced our ambitions, where we especially put emphasis here to lower our growth ambition and raise the dividend goals. So going ahead, we have a growth ambition of being at 10% or higher, and the equity ratio should be higher than 30%, EBIT margin 10% or higher, and dividend at approximately 40%. Switching to slide number 16. During the quarter we have started the supply of residential units in modular housing manufACturers, and why we highlight this is, especially when we're looking at the Canadian region, there has been a quite good development over the last 3-4 years in residential ventilation, and it has been mentioned in the media a lot.
This is having a negative effect in the future, but we have secured quite nice orders here for a special product of the business, which is to supply complete product solutions. And here we have, for example, as shown here, signed an agreement with a modular house manufACturer here in Sweden where we will deliver the first stage, which is 450 residential ventilation units complete with all components like ductings, diffusers, and control computers. Especially here for us is to be able to showcase our knowledge so that we together with the customer have designed the system to be not only efficient from a ventilation point of view, but also sound, recycling, energy usage. And this is very much adapted to the modular house manufACturer's way of assembling the modules.
So this is a way forward to, of course, also making good entrance on this product, now growing part in the ventilation business. Switching to slide number 17. Sustainability. It's also mentioning energy savings is certainly a theme in our product development. In Europe, the development is being driven by EU directives like EPBD and ErP, and the important requirements on the energy-smart product as well as energy-efficient buildings. The trend is now global, really global, and other regions of the world are ACtually inspired by European development. And it's in this area that Systemair really makes a big difference from a sustainability perspective.
As we continue to work to reduce energy usage in products and systems, and have proven trACk record here, just as many households with ventilation units in Brazil and Europe during one year contribute to reduced carbon dioxide emissions corresponding to emissions from around 120,000 cars annually. Switching to slide 18. As a summary of this presentation, during the first quarter growth was reported at 6.4%, which of 1.8% for organic. Despite slightly demanded parts of Europe and record high winter temperatures, our gross margin continued to improve. The operating profit improved to SEK 130 million, or 5.2%, SEK 80 million of 4% the same quarter last year. The free cash flow has improved by SEK 112 million for the first quarter, the Q3, and over the past 40 quarters, Systemair has ACtually reported organic growth in every quarter except one.
With that, I want to end this presentation and open up the line for questions. Thank you very much. Operator?
Yes, sorry. Ladies and gentlemen, if you wish to ask a question, please press 01 on your telephone. We have a first question from Carl Ragnerstam from Nordea. Sir, please go ahead.
Good morning. It's Carl here from Nordea. First, they have a question regarding the efficiency measures that you communicate on the Capital Markets Day. I mean, do you feel that you are performing ACcording to plan, and, in addition to that, I mean, you are working on more or less all measures at the same time? I mean, if, if I understood you correctly, can you talk a little bit of which one of the defined measures that might be the most challenging to materialize? Okay, Carl.
With, we see that the measures that we are taking, especially when it comes to quarter two to sourcing, when it comes to efficiency measures, regarding the AC companies and Menerga, we're putting most effort for the time being. Sorry, with the AC companies and Menerga, as the sourcing is ongoing continuously in the bACkground, of course, and also the efficiency measures and upgrades we do in manufACturing to raise efficiencies and effectiveness. The main focus, where we put most people on, at the project stage today is ACtually Menerga and the AC companies. So it's a continuous work is ongoing in parallel to the daily operation jobs, absolutely. And did you where are you most? I mean, where do you see most challenges due to sort of materialize the measures?
For the time being, the challenge is if you just look at, for example, the AC companies and Menerga, I would say it's the volume for the AC companies, but this has been especially in Q3. I have to remind that for us, November, December, January are very low, slow, and small months when it comes to air conditioning products, as they are normally coming in March, April, May, which is really when volume is going up for air conditioning. So that was more or less expected, but then good time for us to do the work for efficiency measures in manufACturing, which has been done, but also for our development. On the opposite side, we're, of course, doing a lot of reorganization and measures for the Menerga, where it is staffing, it is products, it is ERP and IT systems.
So it's a little bit different, but it is more the day-to-day work that takes more time in Menerga, and in AC it is more the organizational and process work. Other than all.
Okay, Carl, yeah. Okay, perfect. And in general, I think you reiterated that you expect decent organic growth in the coming quarters, but, but, but I mean, given a softening or growth on both parts of the Nordics as well as Western Europe, I wonder where do you expect the organic growth to come from? Is it mainly Eastern Europe and North America? And also in your outlook, do you expect that the renovation market starts to pick up, or is it excluding that?
Yes. As also communicated here in the Capital Markets Day, we expect a little bit lesser in organic growth.
It's more plus a switch over in the Nordic markets to renovation versus the new builds. When it comes to Mid-Europe, it's a similar organic growth expected on the building and construction market of 2%-2.5% for the next two years, but it's quite impressive growth that we see ahead in the East European markets. So that's where we see the growth coming from as a good mix. And when it comes to the measures that are taken by the European Union when it comes to ErP and Ecod esign Directives and so forth, I mean, these have to be followed continuously. So we see that the existing fACilities have technical upgrades, and it's something that is still lagging far behind, so that needs to start.
how that impACts and how fast this turnover or the change from new build to this renovation upgrade, it has been rather fast in the past, but how this now will perform, given certain circumstances what is happening all over Europe and the world just now, I cannot predict, to be honest.
Okay. Perfect. And the final one for me. Can you maybe provide any indications on the current level of quotations from your less cyclical parts of the business, such as AHU, car parks, and hospitals? You mean how many projects do you have in the pipeline? How should I understand that? ExACtly, or the current level of demand, more or less.
Okay. Yes, sir. When it comes to, I would call it infrastructure projects, we see a quite stable demand, and it's some hot spots in South America for car parks. It is a lot in US and Turkey and Middle East for hospitals. So we see that market rather sensitive, to be honest.
Okay, perfect. Thank you.
You're welcome, Carl.
Thank you. We have our next question from Henrik Alveskog from Redeye. Sir, please go ahead.
Okay. Hello. Good morning. It's Henrik here from Redeye. Well, good morning, Erik. Good morning, Henrik. Morning. Yeah. Then just first question regarding the general, well, market, particularly in Europe, I guess.
Did you expect, since the last quarter was a little softer in terms of organic growth, did you experience this mostly as a slow market around the holidays and then sort of even, or was it a gradual slowdown? Could you give us any indication on this? The biggest impACt for the slightly lower organic growth here, Henrik, it mainly due to that we have also had a larger impACt on the holidays in both December and January. But also, I would say equally big impACt for us is ACtually the weather conditions. Because the winter that never came is ACtually quite a burden for our heating products, of course.
Yeah. Okay. Mm-hmm. Well, then maybe we can continue on that theme.
Since you have quite or very ambitious plans for Frico in North America to expand that business, could you tell us a little bit how this is proceeding? The Frico for North America is ACtually proceeding really well. We have to hire more personnel in North America for that. You have to see that the air curtain market as such in North America, the possibility and the underlying demand of what we can AChieve is huge, and there are only limited, I mean, less than a handful of players on the market. So, even if there would be a slowdown in North America and the market as such, the possibilities are huge. So, there we ACtually are proceeding ACcording to plan, and we have decided on that, ACtually.
Okay. Okay. Thanks.
And then, if you could give us a little bit more comments around the Panasonic business, is this something that's gradually ramping up, or is it more like now you're on a, on the level that you expect to see in the next year or so, and then maybe going on to the next step in that partnership?
Mm-hmm. Very good question there, Henrik. On the Panasonic, we have only started one of the three first market projects, which is the heat pump that is supplied from Tillières-sur-Avre. And Panasonic business year is a little shorter than ours, so we are standing bACk in March. So we are just having the kickoff for the next year and having a quite good pipeline for that product.
We are starting step two, which is a corporation in residential where the first orders have been plACed for Panasonic. And step three is coming by summer, where they also having supplies from us for AHU units. So it's ramping up to make it very correct.
Okay. Thanks. Then just finally, I noticed that Koolair in Spain, the number of employees were reduced by 15 this quarter. Is this, did this incur any one-off costs for you? And well, maybe if you could comment on one-offs in general, is there, you haven't specified anything in this report, but is there anything that we should be aware of?
Just start with the one-offs then, Henrik. I would say that this is a rather clean quarter.
There might be a positive effect if you have read that. I mean, the amount of bad debts is close to zero this quarter. Apart from that, it's no bigger depreciation cost taken or cost related to ACquisitions or anything like that. So it's, I would say, a clean quarter and a good step in the right direction. That would be my summary. Regarding Koolair, there's no restructuring cost coming out of that. It's a normal adjustment in the company, so business is there and continues well. So yep, and the development is as expected, I would say.
Okay. All right. Well, thanks. That's all from me. Thank you.
Okay. Thank you.
Thank you, Henrik.
Thank you. We have no more questions for the moment.
Ladies and gentlemen, I remind you that if you wish to ask a question, press 0 and 1 on your telephone keypad. We have our next question from Karl Bokvist from Erik Penser Bank. Sir, please go ahead.
Hello, Karl Bokvist, Erik Penser Bank. You mentioned something about the situation in China. Could you kind of elaborate maybe on the corona issue, maybe with regards to the situation in Italy, perhaps?
We're waiting for that question. Everyone has questions on corona. Just to be very clear, in the Q3 report, there were no impACts of corona. That's just the first point. As we have a very, very small or no business today in China, we're just delivering from distribution points, so we have no impACt from that.
When it comes to supplies from China, for the time being, we have secured all components that we need for direct supplies to our fACtories. What we do not have 100% under control or no one in the industry, of course, is what sub-subsuppliers and our suppliers would have. For the time being, what we see from our sourcing organization, where we have questioned this, of course, we have no impACt yet. We are, of course, monitoring the circumstances on a day-to-day basis. We see that rather maybe some impACt coming in Europe when it comes to putting certain countries into quarantines and these kind of things. Because, of course, in Europe, you have subsuppliers that have their supplies in other European states that we don't see that openly yet. So we are, as said, monitoring this on a day-to-day basis.
It's more of handling the fear of our employees and customers, ACtually.
All right. Thank you. Also, recalling the presentation, when you mentioned that you continue to improve margins despite these record high temperatures, is this something that you believe that you proceed with in the next quarter, or do you think that this is an effect that might be displayed in the coming quarter?
Just explain the difficulty and detail why this has an impACt. Is that because of the high temperatures, we have less seasonal sales of our air heating products, and they have naturally a rather high margin. We are now running into our Q4, which, of course, also partially is going into the warmer months, where the mix of cooler products will naturally be a little bit lower.
So we think that we will follow the plan and continue to improve our margins. So that's part of the plan, then. That's the plan. But it's a tough comparative quarter last year also, so it will be a challenge, really, because last year we had 9.3% organic growth, and then we reAChed an EBIT margin of 5.3%. So it's quite tough, I would say. Challenging, as it is right now. And I mean, we don't see really yet what the effects will be from the corona. I mean, of course, in some countries, we hear that the installation work, the customers, I mean, everything is going down for the moment. So I mean, especially in countries like Italy as well.
And also, I'm also a little bit worried about the results from the Norwegian krone and the Nordic also and the questions on the development also. So because Russia and Norway are important countries for us to mention that as well.
All right. Thank you.
Appreciate it.
Thank you. We have a next question from Tobias Lukesch from Kepler Cheuvreux. Sir, please go ahead.
Hello. Tobias here. One question from my side. You mentioned there, Henrik, on the Russian markets. I noticed that it was down in the quarter. But I was wondering, and you mentioned, Roland, that you had some high expectations on the Eastern European market in the longer term. I was wondering in what context Russia fits here. Do you expect the Russian market to perform strongly going forward?
Obviously, it's a market that's very dependent on the oil price, and we've obviously seen what's happened there in the last few days. Maybe your most sort of recent view on the Russian market is basically my question. In the Q3, Russia is a smaller participant as we have longer Christmas holidays. So it's not that much business, normally coming in from Eastern Europe in that quarter. But what we see is the forecast that the building ACtivities in Russia have been rather high. So, so far, we have only seen very, very limited impACt from corona and other things. But, as Henrik was mentioning, how the oil situation is now impACting, it's very hard to predict, to be honest.
But we'll obviously see that they have a high number of started projects, and we will not stop them.
Okay. And on your sort of order situation in Russia, would it be fair to say that it's up or down, compared to previous years' peak period?
Well, in the short term as well. Yeah. In the last quarter, it was down. It was down, yeah. Yeah. So in the very short term, we should probably expect continued negative Russian market year-over-year. So many fACtors, really. It's really hard for us to predict, really, what will happen in the installation market and order intake for the moment, really. It's everything happening at the moment. Yeah. So, yeah, February are normally very low months in Russia. So we haven't seen an intake yet, I can say that.
If it would be also a warm spring here, I think that will also penetrate our Russian business because we have lots of air conditioning sales in Russia also. So that could have a positive impACt.
Okay. Thank you, Just difficult t o predict.
Thank you.
Thank you. We have no more questions for the moment, ladies and gentlemen. I remind you that if you wish to ask a question, please press zero, one on your telephone keypad. All right. We have no more questions I saw. Thank you for the conclusion, sir. Okay. Thank you very much, ladies and gentlemen. Thank you very much for calling in. And yeah, let's talk again next quarter here in June. And you're, of course, welcome to contACt us if you have any sort of questions. Thank you very much. Stay healthy. Thank you. Bye. Bye.
This now concludes our conference call. Thank you all for your participation. You may now disconnect.