Q4 20/21

Jun 10, 2021

Welcome to the Systemair Q4 reports conference call. Throughout the call, all participants will be in listen-only mode, and afterwards there'll 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. Please begin your meeting. Good morning, everyone. Anders Ulff here and Roland Kasper. Good morning. Morning. We would like to remind you that you can find the presentation of today on our website group.systemair.com. Roland, let's get started with our Q4 report. Perfectly. Let's do that. Good morning, everyone. Our Q4 Report 2021. Let's directly jump to page number 1. As you all know, our company was started and established here in Kristinehamn, Sweden in 1974 by our founder and Chairman, Gerald Engström. Last year, we had a turnover in annual net sales of around about EUR 850 million, and we're listed on the Nasdaq Nordic stock exchange market since October 2007. Today, we have 54 sales companies all over the world, and we have 27 factories in 20 countries. All in all, we have around about 6,400 employees, and we have a constant export to 135 countries in the last year. Slide number 3, directly into our Q4 report. In our Q4 in 2021, we had a total turnover of SEK 2.2 billion. This corresponds to the growth of 8.7%, whereof organic 17.1%. On the right side of the slide, you see the graph, and you of course, also see the development over the last quarters, which is a quite nice one. It's 17.1%. Going to break down the growth into growth analyzed in slide 4. Organic. We had good organic growth, especially in Asia, North America, but also partly in Western Europe. The contribution by acquisitions is rather small impact here of the acquisition of the company, DB, Servicepool August, and Sico A/S Denmark, which is 0.5%. We have the biggest correction here due to the strengthened Swedish krona, the currency effect of -8.9%, bringing us to a total of growth of 8.7%. Slide 5, the operating profit in Quarter 4. Our gross margin increased to 35.7% compared to 34.6% the corresponding year before. During the quarter, we made an impairment of goodwill related to the acquisition of Menerga in Germany and made a write-down of SEK 35.5 million due to the relocation of parts of production to Slovenia. That decision was taken and the impairment done. The SG&A expenses for the quarter decreased to 3% for comparable units. The resulting operating profit for the fourth quarter amounted to SEK 173 million compared to SEK 56 million the quarter the year before. Adjusted, though, for this impairment, the EBIT amounted to SEK 209 million, or 9.4% for the fourth quarter. Going to next slide number 6, profit after tax in Quarter 4. The net financial items ended in the fourth quarter at SEK 15.1 million negatively compared to SEK 46.6 million. The effect of the foreign exchange on long-term receivables, loans, and bank balances were calculated SEK 8.66 million. The interest expense for the quarter totals in SEK 6.6 million. The estimated tax for the quarter amounted to SEK 41.7 million. All amounting into profit after tax of SEK 160 million for the Q4 compared to negative SEK 2 million in Q4 the year before. Next slide 7, the cash flow analysis for the Q4. The cash flow from the operating activities in Q4 2021 amounted to SEK 272.3 million compared to SEK 94 million the quarter the year before. Change in working capital amounted to SEK 43.0 million, which is mainly due to the increased trade receivables. The net investment, excluding acquisitions, amounted to SEK 123 million, which is mainly due to the new production site investments in both Russia and Czech Republic. Thereby, the total amount of free cash flow is SEK 106.3 million compared to SEK 5.3 million in the year before. Also to mention, our net indebtedness is SEK 1.5 billion compared to almost SEK 2 billion, SEK 1.98 billion in the same quarter the year before. Switching to slide 8, cash flow from operating activities. Just to follow up that I just presented those figures. You also see it here in the graph, and you see the development over the last years, and also the measures taken during the years 2017, 2018, 2019 now showing the results. Going to slide 9 and jumping a little bit into looking at very, very brief only into the different markets, starting with the Nordics. Sales in the Nordic countries here this quarter increased by 9.1% in the fourth quarter. Adjusted for foreign exchange effect and acquisitions, the organic growth was 8.4%. Especially Swedish and Norwegian markets showed good growth during the quarter. Sales in Denmark and Finland decreased slightly. Looking at slide 10, Western Europe. Sales in Western Europe market were 6.6% above corresponding period last year. Here, adjusted for foreign exchange effects and acquisitions, it's an organic growth of 13.2%. Most countries actually in the region, including Italy, France, Germany, show good growth in the period, while Netherlands, Belgium, and Portugal decreased slightly. Next slide, Eastern Europe and CIS. Sales in Eastern Europe and CIS decreased by 10.6% during the quarter. Here, though, adjusted for foreign exchange effects and acquisitions, the sales increased by 0.5%. Organic growth, 0.5%. The sales in Russia, though, increased 5% compared with the previous tech period. The Russian markets now account for roundabout 30% of sales in this region, Eastern Europe and CIS. Other major markets that showed a slight decline in the region were Czech Republic and Poland due to the pandemic situation, while Lithuania and Slovenia showed good growth. Slide number 12. North and South America. Sales in North and South America region increased by 7.8% during the quarter, and here, adjusted for currency effects and acquisitions, sales increased by 20.9% organically in this region. Here, North America, above all the sales of residential units and also classroom units for schools, is the one that continues to develop very well in this region. The next slide number 13, I'm giving you an insight about the Middle East, Asia, Australia, and Africa. Sales in this region increased by 51.8% compared with the same period last year. Here, adjusted for currency effects and acquisitions, it's a whopping 80.4% increase organically. Here, of course, I have to mention it's due to the low comparable numbers, as last year in this period, this area of the world was hit really severe by the pandemic, and we had these close downs by governmental decrees. Very nice comparables, but an organic growth versus last year of 80.4%. Malaysia, South Africa, and India showed strong recovery during the period, and as mentioned, it's last year's shutdowns. Going to next slide number 14. Here you then have the summary of the market in our year 2021. All in all, Eastern Europe and the CIS countries, 14% today of our total turnover. North and South America has increased slightly to be 11% of our total turnover. Nordic region, stable at 20%, Western Europe, slightly increased to 43%, and the other markets are 12%, also here a slight increase. This is total picture of our markets. As this is the report of the Q4, the next slide 15, is then the summary of the sales for full year of Systemair. In the year 2021, starting from 1st of May last year to last of April this year, we had a total turnover of SEK 8.5 billion, which contributes to a growth negatively of -4.4%. Organically, 2.1% growth. Looking here at the growth analyzed on the next slide 16, shows that the good organic growth was the development in North America, Morocco, India, and Turkey. A slight contribution due to acquisitions of small acquisitions, Pacific Ventilation Australia and New Zealand, Systemair Maroc, Polirec in Croatia, Frico in Denmark, TV and Service Logik in Sweden, 0.6% contribution. We have the big part here, which is the strengthened Swedish krona, the currency effect that contributed negatively with -7.1% on the growth side, which then brings us to a total of -4.4% in growth on an annual basis. Looking at the next slide, the operating profit for the full year. The operating profit for the financial year, May 2020 to April 2021, amounted to in total SEK 676 million compared to SEK 625 million the year before. The operating profit under the item other operating income includes also COVID-19 related government grants totaling of SEK 29 million. The total operating margin was 7.9% compared to 7%, adjusted for impairment of goodwill both in Traydus in Brazil and Menerga in Germany, the operating margin is 8.5%. Sales and admin expenses for the year decreased by SEK 148.9 million or 600% of comparable units. The selling expenses have been charged with SEK 18 million for estimated customer losses. Next slide to conclude. Here we can clearly and gladly state that our Rahul Koladerahana, who is our Director of Business Development and Manufacturing Sites, has been elected to President of the EVIA. He will have this leadership position within the association from 2021 to 2024. This fact to have our employee, Rahul, here be elected to President is, for us, a very strategic break to have the focus on the building bridges and breaking trade barriers and represent the interest of all the European members, which will drive a positive change in EVIA. Why we're doing this is, of course, that what we see in coming here is a lot of local new certifications and also governmental initiatives of making energy certifications on local and national levels. This needs to be somehow, though and work together on a European level to not create trade barriers. That is what we will work for here. In the same time, we are today also sitting here with our technical director, Matt Sommer, being the president of AMCA in the U.S. and also our managing director in India, Mr. Ashok, who is then also in the board of AMCA in Asia, and our Morten Schmelzer, who is today also sitting on the board of EVIA, European Ventilation Industry Association. Systemair is contributing and also working hard to really be a good player for the European and the international ventilation business. Looking at the next slide to show you a reference on our slide number 19. We have got the order to deliver to Yekaterinburg in Russia for the water sports palace for the 2023 Summer World University Games. This is a total construction with a floor area of 60,000 sq m. Here you have stands for the spectators of around about 5,000 seats. The construction work will be completed by the end of this year. Here we have the opportunity to deliver some Thermocomp units for the preheaters for the pools and AQUA units for the spectator area. Here the rating is that the heat recovery rates are more than 90%. The unique reason for getting access to this project is our heat exchanger capabilities. Total order value here for Systemair is around about EUR 1 million. As a summary of this presentation on the slide number 20. What we are facing today is supply of components is troublesome and delivery times are increasing. We have a strong organic growth in quarter four, driven by several regions. Eastern Europe still not recovered yet. The adjusted EBIT margin is 9.4% compared to 4.6% in quarter 4 and 8.5% for the full year 2021 compared to 7.4%. This is another step for us in the right direction towards our profitability targets despite COVID-19, and we also continuing with investments in production capacity. The dividend suggested by the board is 3 SEK per share. By that, I switch over to the last slide, say thank you and open up for questions. Thank you. If you wish to ask a question, please dial 01 on your telephone keypad now to enter the queue. Once your name is been announced, you can ask your question. If you find this answered before it's your turn to speak, you can dial 02 to cancel. Our first question comes from the line of Karl Aknestam of Nordea. Please go ahead. Your line is open. Hi, it's Karl from Nordea. A couple of questions from my side. Firstly, on the organic growth, obviously very impressive with the 17% organic growth. Could you say anything if there's anything of a non-recurring nature in it fueling the numbers in Q4? Also on North America, obviously standing out on the positive side. Is it fair to assume a continued high organic growth pace the coming quarters, given a good demand from the classroom ventilations and so on when people are returning from after the pandemic? Yes. Hello, Karl. Okay, to the organic growth, something non-reoccurring. I think, first of all, we had quite nice comparables given where we were, what situation we had last year in the same period. As also reported, we had just for Asia, for example, 80% organic growth, which of course, just to come back to normalized volumes. What we see in the pipeline is that it's coming back with some hurdles maybe just now in Malaysia and India, there's still restrictions, as you know, from the newspapers. The pandemic is still quite severe in that region. All over the other markets and regions, we see a good recovery. Talking about North America, here the organic growth is continuing. It's hard to predict the path or how to say how well it will continue, but we see positive continuation. It's mainly driven by residential and also the classrooms. It's not that much about coming back to work. It's more about upgrading existing residential and new builds and on the school and classroom investments is to really upgrade of existing. Okay, perfect. On the order intake side during Q4, is it still looking as well as the organic growth in Q4? How should we look at the organic growth number in Q4, and how much could we possibly extrapolate from that? It's hard to say for us for the moment. Of course, it's partly a catch-up effect, we believe that included in this also. Still, we are quite optimistic in many regions. We can see underlying drivers in the market that really give us potential for further growth. We believe that we are going back towards at least 6%-8% organic growth here going forward. Maybe, part of the extreme growth this quarter is some kind of catch-up effect as well. Also to just complete what Anders is saying here, Karl, it's of course, yes, we think that the organic growth that we normally historically have between 6% and 8% is, going forward, absolutely possible. The troublesome part of the outlook, I would say, is just now the material situation. It's not the cost increase, it's the availability. Order intake has been very good in quarter four, as you can see in the figures, but we have a problem with the material availability and some of the suppliers not even confirming orders anymore because material is not available for them. Still, we can balance it, but the situation would need to stabilize. Okay, perfect. I guess slight on the negative side for Q1 on the component side then compared to Q4, I guess. As I said, for the time being, we can balance it. It's just the outlook. We need to see sometime down the road how this, on midterm or long term, how it will stabilize. There are some good points that we can see on the horizon, but also some negatives. We'll see how that ends up. At least we are not the only supplier in the industry that have this kind of problem. It's the same for our competitors as well at the moment. Okay, perfect. On that note, raw material prices, especially on the steel side, the prices are continuing up. Could you elaborate a bit on where you are in terms of pricing and if you see a risk of facing more headwinds the coming quarters compared to Q4, how should we look at that? We have, of course, been following that very close. We have done our price adjustments to the markets. In some markets, for some products, we have done it twice. We are seeing in some areas we see the need, but also a push from other suppliers to us that we will need, it might be, to have some more price adjustments in summertime. That is, for us, easier to handle at the market acceptance. Everyone has the same position, everyone has the same situation. The acceptance level also at our customer base is very good. It is more about material availability, which is a bigger headache than the price increase. Okay, perfect. The final one, looking at the margin uplift in the quarter, it's pretty clear that it's partly or the majority driven by SG&A, but of course also positively impacted by the gross margin increase. Firstly, on the SG&A side, would you say that the current level is somewhat long-term sustainable, or did you need to do a ramp up here in the coming quarters due to more traveling fairs or to meet the demand? That's the first one. On the gross margin side, what would you say is the main driver behind the increase year-over-year? I think you will see that sales and admin expenses will normalize maybe not 100% back to where it used to be. I think we will challenge the need of certain sales activities going forward, since we have seen that in some areas it works pretty well without participating in fairs. There are other ways of doing product launches and so on. That's part of it. Going to the gross margin, and of course it's different reasons, but of course the improvement is partly due to the nice increase for the month, the growth, the organic growth, and also the mix of which factories or so that are growing the most at the moment and what kind of products. For us, it's very positive, for example, when we see a growth in residential ventilation. That's just one example. Okay, perfect. That's all for me. Thank you. Thank you, Karl. Thank you. Next question comes from the line of Hjalmar Jansson of Erik Penser Bank. Please go ahead. Your line is open. Good morning. Hjalmar here with Erik Penser Bank. I was wondering, could you elaborate a bit on the pace of the growth? Was there an even recovery or even growth, or was the growth, for example, focused towards particular months? In that quarter, sorry, all the 3 months were particularly good. I would say it started a bit slow with a good growth, quite impressive growth for the last 2 months. At the end of the last month, we started to see this material availability problem. This is a bit of the conclusion of that. All right. Thank you. Also you mentioned the material availability and the price levels. Has this any effect on the inventory levels of your customers? Could there be a potential hamstring effect on quarter? Yeah. At least we saw it. We also launched here during the period the internal price increase. We saw also internally that there was some kind of hamstring before the price increase. It's a little bit more hard to measure how much of that was built up to the end customer, really. We don't think it's a big effect really from that. That's not it. All right. Thank you. Also 1 final question. You mentioned previously that you estimate that the 47% of your revenue is taxonomy eligible, if I recall correctly. Is this still your assessment or do you have a more recent number available? No, we're still on that number. We are working on this and following really all the updates coming on. The latest was that the actual reporting will not be due hereby for the quantitative amounts, we don't see due here end of year. It will be delayed one. It will be more qualitative reporting done by the end of this year. We are working on it and we will come back as soon as we have some updated figures here. All right. Thank you very much. Thank you. Thank you. We currently have 1 further question in the queue. Just as a reminder to participants, if you do wish to ask a question, please dial 081 on your telephone keypads now. That next question comes from the line of Henrik Alveskog of Redeye. Please go ahead. Your line is open. All right. Hello, this is Henrik. Hello. Hi. Going back briefly to the gross margin discussion. Should we understand it as in order for you to reach the 10% EBIT margin target, you will need to increase your gross margins a little bit further? Is that what you're aiming at? I think looking at what has happened during the last one and a half years is, of course, also as announced on our Capital Market Day in 2019. We have done several areas or several projects where we have been working towards streamlining our internal processes and different things to be able to bring the company to the stated level. I think we were in a good situation when the pandemic hit because we were working a lot of internal things to be much better internal to be able to achieve it by our own power, so to say. What we have seen now is that, of course, what has been missing for us to come there in a faster pace has been volume. Now it's more volume driven. What we would need now is not that we maybe would expect that we need 2% or 3% more on the gross margin. What we need now is more volume. All right. More specifically, could you comment on your outlook for the AC segment? The AC segment was 1 of the areas that we're working on also in industry structuring, as you know, Henrik. During the pandemic, they have been suffering volumes, but actually the profitability was quite okay compared to what the outlook was. I would say that the measures done on the AC have been very successful. Here is also again that now we're going into the season and we see that these effects are quite positive for us. I would say that the situation AC is much less troublesome than it has been before. Absolutely. What about your pipeline, order pipeline and the outlook for the demand for those products? I think it's quite positive because what has been done, of course, during pandemic we have not stopped the product development and all that. In the pipeline is also partly already launched. We have some products that are quite ahead technical like our SYSAQUA BLUE with the Global One potential only 3, but also a total renewed product portfolio when it comes to rooftops, when it comes to the heat pumps and that are all brought to the highest standards now when it comes to refrigerants, to efficiencies. We are just now, I would say, on the product more competitive than ever before. I would say we're coming into a situation where we can really take the benefits of the things that have been invested in today AC before. Okay, great. Thanks. Finally, a while ago, you mentioned that you're making a push for Frico in the U.S. or maybe Canada also. You had some quite ambitious goals there for growing your sales. Could you just briefly comment how that is progressing and also maybe comment on heating products for the total group if that was a significant impact on the product mix in this quarter? First in North America our Frico partner is continuing to develop really well. We meanwhile, I know we're going to say before but we had the opportunity now to open the local warehouse to employ some more people because it's developing very positively for us. Has been mainly driven by markets in Canada, some in U.S. and some key customers as also reported before. That is continuing quite well. As you know the funding into the market in North America has been quite well. This is continuing the same pace but for the time being I would say that the pace is more positive on residential. As we have reported it's really nice growth in residential which maybe gives a little bit of a shade on the Frico business in North America which is also developing really well. When it comes to the Frico development overall in the group, the development in the, let's call it the cold season, has been better than expected. Now we are going into the warm season, which normally is not the high volume season for Frico. I would say overall in the last year for us, Frico has been developing a little bit better than the years before. Also to mention that we have a new member of the group management who will be responsible for the Frico business globally, and he has good experience from Frico, for example, in Norway and U.K. and so on. We hope he will bring in some fresh ideas and also a boost of sales for Frico, so we're optimistic in that area. Right. Thank you. Thank you. Our next question comes from the line of Karl Aknestam of Nordea. Please go ahead. Your line is open. Hi, just one more from my side. You mentioned in the report that you're taking impairments related to Menerga, and as you're moving part of the production to Maribor. What is the rationale behind that? Should we see it as you, over time, will reallocate the vast majority of the production to more low-cost countries, or how should we look at that? It's more about, how to say, refining what we have. We are actually moving, let's call them the absolute standardized units for private pools and smaller units. We're moving to Maribor. 2 years ago, we acquired a company in Croatia, which is quite close to the border there, that is producing that type of heat recovery unit in polypropylene to be supplied to that factory there. It's a, I would say, strategic move to do that. Offloading and decomplicating the situation at Menerga and giving them the opportunity to focus on the core, which is the bigger, more complex pool units. We're taking out some of the units that are troublesome for the existing manufacturing and also being able to, by that, of course, reduce the total cost for staffing. It's a step to make the Menerga business for us easier in Germany. Okay, perfect. Thank you. Thank you. We have one further question in the queue. That's from the line of Douglas Lindahl of Kepler Cheuvreux. Please go ahead. Your line is open. Yes, good morning. Hello, Anders. Just a clarification question from my side. Roland, when talking about the 10% EBIT margin target, you came back to the CMD efforts that you presented back in 2019. Did I get that correctly that you now assume that all of these efforts have been materialized, meaning the IT and the AHU casing platforms, the pricing and margin focus, the manufacturing efficiency, and the Menerga issues, and you said that you're missing the volumes. Did I get that right? That's question number 1. Just going back to the 2019 CMD efforts, the ones mentioned just now, which of these have been more difficult to execute than you thought? Obviously, I realize that COVID-19 was not in the expectations at the time, but just trying to adjust for that, if that's possible. Thank you. Coming back to the Capital Market Day, the five main activities or four that we presented there, we said that we were in a lucky position that all of them were on the way when we were moving into the pandemic situation because they strengthened us. They are not all done, but they all have progressed according to plan through the pandemic. They gave us an advantage internally that we were working on the right things already. They are not done, but they're progressing according to plan, and not being slowed down by the pandemic. That has helped us. Some of them are not contributing as they should. We had four major, we also have one which was to work more proactively with certain things at the customers, with them and out on the field, on the market, which has of course, been the one that we couldn't do in a planned way during the Pandemic. Also as mentioned here by Anders for some other questions, we have through the Pandemic also, of course, been able to establish a working process in sales and together with customers on a more digital basis that we think will prevail also after the Pandemic and maybe make the sales efforts a little bit different than they have been before. That will still be a little more unclear one. Okay, thank you. Just coming back to your answer, the first question, what is the main lever left? You mentioned not everything is fully executed. Which one is the main one that we haven't yet seen, would you say? I would say it's a little bit in all the four, but the one being not problematic, but which is working quite hard just now that one of them was sourcing excellence, that we have built up a sourcing organization. Of course, they have had quite a troublesome year when it comes to not only raw material price increases and renegotiations, but now also the availability that was mentioned before. They, of course, have a lot of work to do. Of course, one big problem for us is COVID-19, and it has affected the volumes especially for AC, but also for Menerga. I think in order to realize the full potential there, we need more volumes, but that's purely related to COVID-19. Underlying, this year has also given us the possibility to focus on internal work and investments and so on. We have done a lot of the work that we presented here. Okay. I understand it's a difficult question given COVID. I missed part of the call, but did you give any sort of comment now on Q1 current trading, what you've seen so far in May and then in June in terms of overall demand? No, we didn't give any outlook really. Okay. We normally don't do that. During the quarter, the order intake has been really good, and of course that's visible through the sales. Also we have a nice backlog going forward. Okay, thank you. That's it from me. Thank you. Once again, if there are any final questions, please dial 01 on your telephone keypad now. Okay, there seem to be no further questions coming through at this time, so I'll hand back to our speakers for the closing comments. Okay. Ladies and gentlemen, thank you very much. Looking forward to the next reports, and maybe take this as the opportunity to wish all of you a very nice summer. Yeah, we will present the next report, our Q1 report in connection to our AGM annual general meeting on the 26th of August at, I think it's 2:00 P.M. Correct. 1:00 P.M. it is, we present the report. All right. Thank you very much for today and for calling in. Thank you. Goodbye. Have a great day. Bye.