Ladies and gentlemen, welcome to the Systemair Interim Report Q2 2023 conference call. I am Sandra, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Anders Ulff, CFO, and Roland Kasper, CEO. Please go ahead, gentlemen.
Thank you very much, and good morning to everyone. We are in a beautiful but crisp Stockholm here today, and we are here to report on the Q2 figures for today. As usual, you will find a presentation that we will run through here on our website under Investor Relations and Presentations. I think it's pretty clear by now, and by that, I hand over to Roland to run through the presentation.
Thank you very much, Anders, and good morning to all of you calling into our webcast here. So by that, let me directly move into our report and slide number one, just a little bit on the background of Systemair. As you know, we are founded in 1974 by our today chairman of the board, Gerald Engström. Our last fiscal year, we reported an annual turnover of EUR 1.1 billion, and we're listed on the Nasdaq OMX Nordic Exchange since October 2007. Today, we operate our own sales companies in 51 countries. We have 26 factories in 18 countries and round about 6,600 employees, and with their forces selling into 135 countries all over the world.
Moving directly into the report and slide 3, net sales in this reported Q2. The net sales in the Q2 amounted to SEK 3.186 billion, compared to SEK 3.03 billion, the same quarter the year before. This is a growth of 4.9%, whereof organic 5.1%. On the right side, you see the graph of the organic sales growth development, and having in mind that our historical development of the organic growth is somewhere between 4% and 8%, so we're back to the average continued organic growth. Moving to the next slide, slide 4. The growth analyzed for the Q2. Organic growth we actually had in all regions except the Nordic region.
There is a contribution by acquisitions, but the main impact here is, of course, the divestment of the air conditioning business, which contributes with a negative 3.4%. And then we have the weakened Swedish krona against both euro, U.S. dollar, and Canadian dollars, which contributes positively with 3.2%, which brings us in total of the 4.9% growth. Moving to slide number 5, the adjusted operating profit for the Q2. The gross margin improved to 33.9%, compared to 33.3%, the same quarter the year before, and the adjusted operating profit for the Q2 amounts to SEK 322 million, compared to SEK 288 million the year before. The operating margin amounts to 10.1% versus 9.5%.
Having in mind that the previous year's operating profit included write-downs of our Russian operations in the amount of SEK 168 million. The sales and admin expenses in the quarter increased by SEK 74.8 million on comparable units. So as said, Q2 operating profit amount of SEK 322 million, which is 10.1%, compared to SEK 288 million and 9.5% the same quarter the year before. Moving to slide number 6, the adjusted profit after tax for the Q2. The net financial items for the Q2 amounted to SEK 15.4 million, whereof the currency effect on the long-term receivables, the loans and bank balances, amounted to a net of SEK 17.9 million positively.
The interest expenses for the quarter amounts to SEK 32.2 million. By that net, the financials, the profit after tax for the Q2 amounts to SEK 246 million, compared to 208, the same quarter the year before. Moving to slide 7, looking into our cash flow analysis for the Q2. The cash flow from our operating activities amounted to SEK 317 million, compared to 275 the year before. Change in working capital is positively 115.7, compared to negatively 72.5 million SEK in the quarter the year before. This is mainly due to decreased inventories and increased operating payables.
Our net investments, excluding acquisitions, are 84.8 million, compared to 91 the year before, and this is primarily machine investments in Canada and the ongoing building activities for the expansions in our factory in North America and Lithuania. So at the end, then, by that, we have a free cash flow in the quarter of SEK 347.9 million, compared to 111 the year before, and also to mention that our net debts today amount to SEK 1.4 billion, compared to 2.79, almost 2.8 billion Swedish kronors, the same quarter the year before. Moving to next slide, slide number 8, just giving you a high-level breakdown of our different markets and their development, starting from the left, Eastern Europe and the CIS countries.
Here it looks stable, but I'll go a little bit more into depth in later because it's very positive development. North America, with a slight improvement from 11%-12% of our total shares. Other markets, I come back to that 14% positively. Western Europe with a slight increase to 46%, coming from 45%, and the Nordic region, as reported, with a slight decrease to 16%. Let's move into the details, and I'll start with next slide, slide 9, looking at the Nordic region. As stated in the report, sales in the Nordic region decreased during the Q2 by 3.2% compared to the previous year. Here I have to say that the Danish market showed a positive development during the quarter, while the turnover in the Swedish and Norwegian market decreased, mainly due to the impact on the residentials.
In Finland, the market was largely unchanged. Adjusted for those currency effects and acquisitions, sales decreased by 4.3% compared to the decrease of 9.3% in the Q1. So again, growth 3.2% negatively, where organic negatively 4.3%. Coming to Western Europe on slide 10. In Western Europe, the sales development continued to be good during the quarter, with an increase of 5.9% compared to the corresponding period last year. In particular, we have to say that U.K., Spain, France showed really good growth during the quarter, while the turnover in Germany and Italy decreased slightly. Sorry. Adjusted for the currency effect and acquisitions, sales increased by 3.4% organic. Going to next slide, slide 11.
Eastern Europe and CIS, and here it has to be pointed out that the growth within the region, excluding Russia, amounted to 30.7%. So some of the major markets within the region showed continued good growth, such as especially Hungary, Slovenia, Poland, and Lithuania. Sales in total in Eastern Europe and the CIS increased during the quarter by 22.2%. And here then, adjusted for the currency effect and acquisitions, sales increased by 23.2% organic. Next slide, slide number 12, North America. Sales in North America increased by 2.2% during the quarter compared to last year. And here it is, the Canadian market that shows good growth in the quarter, where while the American market was more or less unchanged.
Here, especially the commercial ventilation products and school ventilation products in North America and, of course, more in Canada, is still growing stronger. Adjusted for the currency effect, sales increased by 1.7% organically. Next slide, which is slide number 13, and here we have then the Middle East, Asia, Australia, and Africa. Sales in this region increased by 2.2% compared to the same period last year. Here it is, especially India and the Middle East region, that shows a really good growth during the period. Adjusted here for currency effects and acquisitions, sales increased by 12.2% in this region. Then looking in some of the projects closing.
As you saw, the Nordic region is declining, mainly due to the residential part, but the other parts of our applications, like, for example, in this one, which is in hospital building in Norway that we're supplying to in Narvik, it's really growing. So this new hospital in Narvik will bring together both physical and mental health services and substance abuse treatment in a single building. We have the honor to deliver 33 huge hygienic Geniox air handling units, both also the smoke extract fans and additional products for specific demand ventilation for this. So the air units for this application will supply to all the areas of the hospital, including all the surgery rooms, pharmacy, patient wards, kitchen, and so on. So just to show that there is a lot of other investments ongoing in the Nordic region.
Also in the Nordic region, in Finland, Systemair, we choose to show you this project, which is in Kokkola in Finland, and here is the nursing in Kokkola, west coast of Finland, that will be ready in autumn 2025. The really nice part here is this building complex won the 2023's Green Forerunner competition, thanks to its outstanding green solutions and energy efficiency. And here we have been selected due to that we, the selection is based on the area of energy efficiency and quality, which of course, are the key factors, for decision-making for such a project. We will deliver here our Topvex air handling units together with 15 Geniox units, to ventilate this building as efficient as possible.
And last but not least, on the next slide, slide number 16. Again, another project in the southern part of Europe.
Also, here, a hospital application in Albacete, Spain, where Systemair will supply 63 hygienic Geniox air handling units to this hospital. The units will be installed in surgery rooms and common ward areas, and we will deliver those between December and May next year. And, once this expansion and renovation of the hospital is done, the hospital will have almost 700 new beds and 29 new operating rooms. Also, here to mention that the building will get the new B Energy Certification, which is the mandatory in compliance with technical building codes regarding energy saving and thermal insulation, which is new in Spain. By that, I end, and, I hand over to the system, and we open up for questions. Thank you very much.
We will now begin the Q&A session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone with a question may press star and one at this time. Our first question comes from Adela Dashian from Jefferies. Please go ahead.
Good morning, gentlemen. My first question relates to if you're seeing any weakness outside of the Nordics, especially you mentioned that in Western Europe, some weaker turnover in Germany and Italy. What's driving this? And, current trading, is the situation improving or should we expect a worsening sentiment going forward?
Good morning, Adela. Thank you for the question. Yes, looking into Europe, as also reported in the quarter two report here, especially Germany and Italy, we saw a slight weakening. But in Germany, it's to be honest, the local German market is stable, but the export for certain projects out in Middle East have been redirected to other factories. So that is the main impact for us in Germany today. The German market overall is on the industrial side, still what we can see stable. What we would like to see more is, for example, there was an incentive program for schools in Germany that has slowed down, but expected to come back in January by governmental decree. I hope this really will come to pace, as they say.
In Italy, the impact for us has been, of course, the divestment of the air conditioning companies and the air distribution turnover that we had. The projects are more or less on a normal level, but the total volume for us is a bit weaker. The outlook in Europe still, we see that the industrial and also the investments on industrial and manufacturing side is still rather stable.
That makes total sense. Thanks a lot. And then, as we're looking into 2024, is there anything you can tell us about pricing and how discussions are evolving with your customers?
Yeah. Looking back, I would start with in 2023, of course, there has been much more discussions about pricing and price adjustments upwards. The last one that we did was of a rather modest character, just some smaller adjustments where we saw that components, as I reported, also have come back to more normal levels. I wouldn't expect that the more price hikes, at least, the prices going up. I would not expect them for the next three to six months as it looks today, at least.
And the last one you completed was it during this quarter or earlier in the year?
The last one we did was in September. We have one, another one scheduled then for first of January, but that's small on else here. So really on the modest side at the moment.
It's more correction. As we, in the past, once we had to compensate, for example, on the electronic side, where we were buying some components on the spot market, which you, of course, had to compensate out to the customers. But as it has normalized, those are being readjusted now.
All right. And then just finally, I saw that you mentioned in the report that the focus in the near term is mainly on organic growth. But with your financial position improving to these levels, would you say that your appetite for M&A has increased? And if you could tell us anything also about the pipeline today versus at the beginning of the year? Thanks a lot.
I would say that the pipeline is rather stable. I mean, if you compare here over the last year, and the appetite is still there. And as we say in the report also, we have a strong balance sheet still. We are happy to do acquisitions that fits our, ourselves well and that are bolt-on, and that we know really how to integrate in a good manner. But we will not do any acquisitions just without any reason for it. So, I mean, sometimes a lot of them happen simultaneously, and then from time to time, it could be a little bit more empty.
Just to stabilize this, I mean, we have a really good pipeline, and that our former Vice President M&A, Janni Weber, was building, and we are just now executing this and looking through this and working with specific projects, both under him in the meantime, until the new Vice President M&A is on board. And these are projects in all geographies, from North America to Europe to Asia. So we're quite active, but we have just not finalized any of those in this quarter.
Is your expectation that the purchase multiples will rationalize, given that market conditions have gone a bit more challenging?
What we see today, no. The expectations are still high.
Okay, thanks.
The next question comes from Carl Fagerström, from Nordea. Please go ahead.
Good morning. It's Carl from Nordea. A few questions from my side as well here, looking into Eastern Europe to start off with. I think it surprised me a bit on the organic side. You mentioned a high level of project, maybe completions or ongoing projects. Should we see a high number of completions entering Q3 as well, or was it sort of an isolated thing in the quarter? And also another question on Eastern Europe: Does the production move of Menerga to Maribor inflate the organic growth number the next time in Eastern Europe? I mean, the historical ones, obviously not the recently announced one, but the one you already completed.
If I start with the first part of your question here, Carl. Good morning, by the way. It is, we are finalizing some of the bigger, already mentioned in our Q1 report, e-mobility project in Eastern Europe, but there are other projects in the pipeline, and the factories supplying to Eastern Europe are rather well booked. So we're not concerned about the drop there in the near future. When it comes to the impact on our Slovenian factory in Maribor, it's hard to predict just now.
Yeah, but it doesn't really, I mean, this plan, the factory move, has no effect on the sales figures. I mean,
Oh.
So it's more, you know, where the customer is located is where we report the sales figures also. So it has really nothing to do with this factory move at the end.
It is really the production, the production entity is moving, but the customer is still on the same place, though, and that's where we're invoicing.
Okay, that's fine. And on the U.S., I mean, we saw a clear sequential slowdown there. I mean, is it mainly owing to the sort of a weaker resi market in the U.S., or do you also see sort of inventory corrections in the channel? I guess you, to some extent, at least in North America, you assess the distributors, right?
For us, it's more a stabilization of the, I mean, over the last three years, we, we have seen a really, I will not use the word crazy in, in that concept, but it has been a really steep increase in volumes on residential for us for the last two to three years in North America. It's stabilizing on high levels, and, and we see that the next steps are actually following the building codes in North America, especially in the U.S., and, for us also the, the further expansion geographically in Canada. So, so, we, we don't see that, that anything will drop. We, we do acknowledge what you say also, that some of the distributors have higher stocks.
They are, as they say, leading through their stocks, but we're not really impacted by that because we are delivering in many areas of North America, still on project directly from factory also. So it's not a huge impact for us.
Okay, that's good. And also, when I read the report here, you mentioned in the outlook sort of that you see the activity among ventilation contractors on the rise again. Could you give some flavor? Is it on orders? Is it actual orders that you see coming in, or is it more of a sort of quotation and discussion basis with them?
No, it's more on existing orders in-house. If you look at them even in the Nordics, not all of them, but those in the bigger areas where we are interested, where we see, like in Mälardalen here in Sweden, we see many of the bigger contractors, they are rather full. They are really well booked, and we see that the consultancies that they also have an increased level of activities, which is always really nice for us. It's a good indication.
Okay, so you believe that the market has maybe troughed out a bit and should start to pick up pace again? Is that how we should interpret it, or is it too early to say?
I would say it's too early to say. Consultants being really active is really good, but then the projects have to start, and then that's where we want to see. But already activities being on a high level is a really good starting number because someone has ordered them.
I totally agree. Okay, that's all for me. Thank you.
Thank you, Carl.
The next question comes from Lina Blumer, from Handelsbanken. Please go ahead.
Hi, Roland and Anders, and thank you for taking my questions, and also congrats on another good report. So, I would like to ask you if you could give some color on the regions in which you have experienced the most growth. Is there any specific types of projects or markets where you see an increased demand, and what is your outlook for these?
Yes. For us, the specific highest growth would be for us, Eastern Europe, and of course, also Asia. In Eastern Europe, we are delivering rather big projects on e-mobility, hospitals, and power plants. So, that will, as you can see today, be rather stable going further. Also, some data center projects that are in our Turkish factory for European market. Coming to Asia, we still see that there is no drop in any of the demands on any of the markets in Asia today. It's rather that we need to look into how to build capacity for certain other product areas that we don't have in-house today. But the Asian markets are really a good driver for us, for the Torca company.
Super, thank you. And then also on the discontinuation of the production in Germany, the press release mentioned that the restructuring is expected to generate annual cost savings of at least SEK 70 million, with full effect from the financial year 2025 to 2026. Is it possible to give some more details on how these cost savings will be achieved?
Yeah, it is dual folded, I would say. It is, of course, that we are changing the location of the manufacturing, going from Germany to Maribor, and Slovenia is one part of it. But I think the biggest gain is also that we're bringing the whole units and all the services on a new technical platform. Out of different several reasons, it wasn't possible to do that in a very efficient way in Germany, but with the move over to Slovenia, they will finally be on a new platform, new controls, and everything would, on a technical level, be much more efficient and easier to handle from an operation point of view for us.
One important part there is also that we are cleaning up a little bit in the product assortment as well. Of course, then we already have an air handling unit production in Slovenia today, so there are, of course, nice synergies to relocate when it comes to overheads and so on, and so building-wise, and...
Perfect. Thank you. That was all for me, so thank you a lot for taking my questions.
Thank you, Lina.
The next question comes from Hjalmar Jernström, from Carnegie. Please go ahead.
Good morning, Roland and Anders, and thanks for taking my questions. I guess the first one is on the adjusted operating margin and the year-over-year development here. Is this mainly relating then to the AC divestment, or what contribution do you see from, I guess, general manufacturing efficiency, pricing, and other items in this quarter, please?
Yeah, that's of course one quite big part of it, of the improvement, say. So, yeah, but there are other things also, and it is really hard to single out, you know, how much effect each of them have, really. But of course, the divestment of the AC business has quite the biggest impact. Biggest impact.
Okay, thank you. And then second, on the CapEx, could you just remind us of your full year expectations on the CapEx and whether you feel that you're on track on achieving this? Thank you.
Yeah. The expectations or the forecast is around SEK 380 million, I would say. So somewhere around that. And then what we are doing right now is that we are giving it a little bit a second thought also, checking really the investment needs. And, yeah.
I would say on the achievement of the full amount, I think we will be below that. It's because we are having delays in deliveries of the, for example, machinery, and we have also delayed the start of certain building expansions to delay them a little bit, to adjust them to local needs and the market demands.
All right. Thank you so much. That's all on my end.
Thank you, Hjalmar.
As a reminder, if you wish to register for a question, please press star followed by one. The next question comes from Henrik Alveskog from Redeye. Please go ahead.
Okay. Hello, thanks. Well, first of all, I have a few odd questions, but if you could maybe give us an idea of the price component in the organic growth number year-over-year.
Yeah, that would be an estimation then, because we don't have a clear answer of the magnitude there, but I would say currently it is not much really of the, the growth. It's, I would say around 1% or so.
Yeah, we tried to calculate it yesterday and today a little bit in the morning. So we're below 1%, but let's say up to 1%. It's not more than that because over the last, it's also reported there is not too much impact of all these components, Audity, and all that one.
Right. Okay, thanks. And then, on the restructuring cost, the SEK 125 million, how much of that do you think will be cash cost, and how much is related to well, write-offs?
Yeah. I think, it's around EUR 9 million that are cash related directly. That is from the redundancy payment that is expected, but it's a bit premature also to say that on a very detailed level, because it's negotiations that will start now. So the exact amount will come here up until summer.
Right. Yeah, but we get an idea.
Yeah.
Regarding the divestment of the AC units, you mentioned before that you will probably or you will be sourcing some of these products from Panasonic after the divestment. Could you give us an idea of to what extent you have been doing so?
Yeah. From, I mean, from our customer's perspective, it's business as usual for them. They have switched over to, I think, since, actually, since the December 1st, they will get the units branded Panasonic instead of Systemair. It's coming from the same factories, the same contact persons. For them, it's business as usual. It's just still on those companies where Systemair is selling the air conditioning products themselves, which are not too many. It's the business as usual, and the business relationship with Panasonic is stable and good, and we're contributing and developing for future together.
Okay. So, the volumes in this area, I mean, year- over- year, is it basically that now you have been sourcing the same volumes as you did last year, but you're - y eah.
Yeah, it's lower because with the divestment to Panasonic, we also divested some of the sales units to them. So that volume is per se of course then gone. But the sales volume in the remaining Systemair companies that are carrying air conditioning product is almost stable, yes.
Okay, great. And then just another question. I heard Lindab talking about recycled steel and also future fossil-free steel and the clients being interested in this. Just interested to hear your view and what you hear from your customers when it comes to these things.
Yeah, that is, of course, something that is coming all over the market as a request, if it's possible. Just to say that the availability is not great yet. We're also doing that. We, for example, have our AHU units coming off our Spanish factory because the proximity to a good supplier, they're also today in the same amount as Lindab, they are, they are fossil-free. So they're also coming from a such-like supplier. We can do that. But in other regions, the request has not been that strong yet, so we have not done a change that is, how to say, more hassle through. We are looking more long term, and we will come there, but in a more organized way for the rest of the operations.
Great. Okay, thanks. That was all for me.
Thank you, Henrik.
Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to the management for any closing comments. Please go ahead, gentlemen.
Yeah, thank you very much, everybody, for calling in this morning, and we are happy to take any call if you have any further questions. But other than that, we are happy to see you again, then the March 5th, when we release our Q3 report then.
Yes, and until then, I really hope that you will have a might be a little bit early, but I really wish you a merry Christmas, happy New Year. Hope to see you all well next time, and take care. Thank you very much.