Systemair AB

STO:SYSR

Earnings Call Transcript

[Operator]

Welcome to Systemair Q3 2024-2025 report presentation. [Operator Instructions]

Now I will hand the conference over to the President and CEO, Roland Kasper; and CFO, Anders Ulff. Please go ahead.

[Anders Ulff, executive]

Good morning, everyone, and very welcome to our presentation of our third quarter report for '24-'25. We intend to start off with a rather short summary of the third quarter in our 50th business year, and then we will open up for questions at the end. The presentation, you will find, as usual, then on our start page of our Investor Relations website.

And by that, I hand over to Roland to start off with the presentation.

[Roland Kasper, executive]

Thank you very much, and good morning, ladies and gentlemen. My name is Roland Kasper. I'm the CEO of Systemair. Let's directly go into Slide #2, which is then the agenda. I will start with a short brief summary of Systemair. Then we look, as Anders said, into the third quarter summary, we dive into some of the Q3 financials, and I'll conclude that with some sustainability highlights and some project highlights, followed by the Q&A.

Let's go directly into Systemair in brief. As you know, ladies and gentlemen, we are operating based on our core values of simplicity and reliability. We manufacture and market energy-efficient, high-quality ventilation products. With our customers in focus, our emphasis is always on delivery reliability, availability, sustainability and quality.

As you know, the company was established in Skinnskatteberg in 1974 by our Chairman and Founder, Mr. Gerald Engström. In our last fiscal year, we achieved a total turnover of around EUR 1.1 billion. And Systemair was listed on the Nasdaq Nordic Exchange market in October 2007.

Today, we currently operate our own sales company in 51 countries, together with 26 factories in 18 countries, with more than 350,000 square meters of production area and a total book value of more than SEK 1.3 billion. With our about 6,600 employees in Systemair, we are present and sell to more than 135 countries around the world.

Switching to next slide, Slide #4. Let's look at some recent highlights in the quarter and starting with a strategic update for the third quarter. In the quarter, we had organic growth in all reported regions except Eastern Europe. In India, we have finalized the preparations in our new facilities in Hyderabad, of total 19,000 square meters, where we'll start production actually next week.

In the quarter, we also finalized our machinery capacity investments in Canada and Italy, as well as some building projects in Norway and Germany. And we see ourselves now being really well prepared for further strengthened M&A activity.

On the public affairs side, in March this year, we have prepared for the last 6 months. But now in March, we're participating on ISH fair in Frankfurt in Germany. ISH is the leading international fair in the HVAC industry with more than 150,000 visitors coming. So we're looking forward to interact with our customers and partners here in 2 weeks.

In December, we also concluded in the Systemair North America, the full conversion to the new low-GDP refrigerants in our production, which is a little bit ahead of the local market, but according to our sustainability standards. And we are also participating on the -- all the Eurovent association meetings on the ISH, where Systemair is taking a leading part on trainings and educational parts on the, for example, EDP (sic) [ EPD ], the European declaration of the product.

And also in the quarter, we were awarded several strategic orders: retrofits in the U.K., for example, that was in the press release, infrastructure projects in Saudi and package ventilation systems in Italy. I'll come back to that later on in the presentation.

Next slide, Slide 5. Let's have a look at our markets in the quarter. As you know, we have a global and diversified customer base, which provides us with a solid foundation for profitable growth. Looking at the different regions, starting with the Nordic region, which represents 70% -- 17% of our total [ turnover ] in the quarter, same shares last year same quarter.

Western Europe has 43% share and is thereby compared to the same quarter last year and a slight decrease from 45% to 43%. Eastern Europe, stable, 12% share. And North America, same, 12% in the current quarter. Other markets, which, as you know, incorporate North Africa, Turkey, Middle East and Asia, is continuing its growth path and increases from 14% to 16% of our total sales in the quarter.

By that, we continue with a closer look at the financial outcome in the third quarter, and I hand over to Anders, and shifting to Slide #5 -- 6.

[Anders Ulff, executive]

Thank you very much, Roland. To start off with net sales, that amounted to SEK 3.042 billion compared to SEK 2.827 billion last year, an increase of 7.6%. Organic growth was also positive with 5.4%. And we conclude that we, for the second quarter in a row, are reporting organic growth with a positive ongoing trend in several of our markets.

Slide #7. To give you a bit more detail behind the net sales development, we saw organic growth in all regions, except for Eastern Europe. We will provide more details about the regions on the next slide, but the growth was especially good in our far-away markets as North America, Middle East, Asia, Australia and Africa.

The acquisition of PHEM in Malaysia had a minor effect and contributed to sales by 0.6%. And then finally, currency effects, smaller positive effect by 1.6% coming from several of our main currencies.

Slide #8. Then we come into the geographic breakdown, and I will focus on the organic growth rates for each region. Starting up with the Nordics then, where we saw a decline on the Norwegian market, but on the Danish, Finish and also, to some extent, the Swedish market, increase during the quarter. All in all, positive organic growth is this region also in the current quarter of 7.1%.

In Western Europe, we saw a smaller growth in the quarter of 3.4%. Within the region, we experienced positive development in Italy, Switzerland and Netherlands. Unfortunately, the German market is still struggling and the sales decreased in the quarter along with countries as France and Spain. We are although happy to yet again see a positive organic growth in the region of the 4 quarters with a negative outcome.

In Eastern Europe, the organic sales decline was minus 9.8%. Sales declined in Poland, Slovenia and Estonia, while growing in Czech, Slovakia and Lithuania. Some of you might recall that we had an organic growth of 8.2% in our Q2 report, but that nice growth then was mainly due to some large project deliveries in the region.

In North America, the organic growth rate was 12.8%, which was related to a considerable growth in Canada. U.S. sales contracted slightly in the period. The Canadian growth relates mainly to our residential products. Certainly, the implementation of tariffs is creating a volatile market situation in this region.

In Middle East, Asia, Australia and Africa, we had a good growth of 15.2% organically. This growth was mainly driven by market as India, Morocco and Australia. All in all, the organic growth then was total to 5.4%.

Slide #9. Our gross margin in the quarter was again strong and amounted to 35.3% compared to 33.9% in the previous year. We're happy to see this development, especially when we noted that December 2024 was a month with less working days than the previous year.

Overall, we can conclude that the positive trend in our gross margin continues. The positive effect is due to high utilization in several of our factories, but also the contribution from implemented cost reductions and efficiency measures in general.

Our adjusted operating profit amounted to SEK 213 million or an operating profit margin of 7.0%, which is exactly same with the previous year. Adjustments related to the impairment of goodwill in our operations in South Africa of SEK 11.8 million. In the previous year, you might recall that we had an adjustment of SEK 125 million coming from the relocation of the Menerga production to Slovenia.

Selling and admin expenses in comparable units increased by SEK 58.9 million, including a loss from bad debts of SEK 4.8 million.

Then we go to Slide #10. Profit after tax amounted to SEK 135 million compared to minus SEK 24 million last year. Big difference is mainly related to the adjustment just described. We had negative effects from net financials of minus SEK 17.3 million compared to minus EUR 62.3 million last year, where currency effects on loans and bank balances amounted to minus SEK 3.2 million and the interest expenses amounted to minus SEK 15.8 million.

Interest expenses for previous year amounted to minus SEK 20.8 million. Tax rate for the period amounted to 26.8%, [ compounding ] to SEK 49.4 million.

And then we head into Slide #11. Cash flow for the quarter. Our working capital increased, leading to the decrease in the cash flow by SEK 34.2 million, mainly due to decreased trade payables and increased inventory. Investments in the quarter was rather high at SEK 151.7 million due to finalizing the machinery investments that has been ongoing in Canada, Italy and Spain. This leads to a free cash flow of SEK 54.6 million compared to SEK 381.2 million last year.

The net debt are lower than last year and amounts to SEK 981 million compared to SEK 1.079 billion 1 year ago. And the net debt to EBITDA amounts to very low 0.62, and we have plenty of headroom for strategic M&A and continued investments.

And I hand over to you, Roland, again.

[Roland Kasper, executive]

Thank you very much, Anders. And shifting to Slide #12, sustainability. Some sustainability highlights. On the sustainability side, we are extra proud to see that our emissions in the scope 1 and 2, as you see on the right side of the slide, are continuing to decrease. We have, over the past years, continuously invested in energy efficiency measures such as, for example, solar panels and more efficient HVAC systems of our own products.

This has led to absolute emissions reductions of 10% compared to the last quarter last year. And all in all, minus 37% for the emission intensity compared to the base year of 2019-'20. Also proud here to see that, continuously, the work-related injuries, particularly with absence, is continuing to decrease, now with 12.9%, and that we are closer in to our target on the amount of female leaders, and now amounting to 24.3% in Systemair.

Switching over to Slide #13. Sustainability, we are constantly working towards reducing the emissions through efficient measures, and for example, just reported, investing in solar panels where it makes sense. To show some examples how we continuously develop our efforts, I'm showing you an investment in our manufacturing facilities that actually have led to lower energy use and more renewable energy compared to last quarter 3.

Our absolute emissions in scopes 1 and 2, just shown on the slide before, have reduced to 10%. What you can see here on the right side are installations of solar panels latest now in Ukmergé, Lithuania on the new build, and also on the roof of our recently upgraded factory in Kuala Lumpur in Malaysia, resulting in lower total energy consumption and reduced emissions.

Next slide, #14. Let me finally also show you some very nice projects that we have been awarded in the quarter. This is one of the largest, multipurpose area in Italy, the Arena Santa Giulia. This most modern sports and live entertainment arena in Italy will also play host to the 2026 Winter Olympics and will, afterwards, then be used for large concerts and festivals.

The ultimate part is that the arena was built following a plan to minimize carbon emissions and resource consumption for a climate-resilient development. Systemair will, here, gladly supply different products of fans, air distribution products, fire safety products and smoke evacuation dampers. Delivery for this arena will be completed in June 2025, and value for our package is about EUR 800,000.

Switching to the next slide. Here, Systemair has commitment to eco-friendly innovation transition. Systemair has earlier already integrated A2L refrigerants in Europe into our Geniox AHU line to align with evolving environmental standards. In our third quarter, we also finalized the transition in North America.

The A2L refrigerants are a class of mildly flammable refrigerants developed as part of the HVAC industry's transition to more environmental-friendly alternatives. This refrigerant, if I may just explain, fall under the A2L classification according to ASHRAE standards, where A indicates low toxicity and 2L signifies low flammability with limited flame propagation.

The adoption of these A2L refrigerants is driven by significant lower global warming potential, GWP. For us, this initiative is, of course, a part of the broader commitment to sustainability.

On the right side, I also wanted to give you some highlights. Of course, we continuously develop new products. And in the quarter, we launched our new Topvex FR, an updated version, for high energy efficiency solutions. The Topvex FR is a compact and versatile unit with double -- dual rotary heat exchangers which makes it ideal for offices, schools, shops and small commercial buildings.

With double heat exchangers, the Topvex delivers high energy efficiency resulting in low operating costs. And the compact design, of course, solves space problems and the insulated casing with magnesium zinc coating provides added protection against corrosion and very harsh environment if needed.

By that, ladies and gentlemen, I'll switch to Slide 16, open up for questions and answers. And thank you.

[Operator]

[Operator Instructions] The next question comes from Adela Dashian from Jefferies.

[Adela Dashian, analyst]

A few questions from me. If we start off with the sales development in Western Europe, and maybe specifically the German market, you mentioned here that it's still struggling. Can you remind us of what your sales exposure to that country is today?

And then also this week earlier, there was a big infrastructure fund announced, I'm sure you've seen that, with the particular focus on projects such as hospitals, transportation and so on. Could that be something that will fuel demand for your products in the coming quarters or maybe midterm?

[Roland Kasper, executive]

Adela, thank you for the question. Germany to us is, of course, a quite important market. It's today, our second or third biggest. The development on the German market per se is, as said also in the report, a little bit soft. And we are glad that out of our facility in Windischbuch, we don't have a quite nice developing export market, but the German market for us is soft. And especially to the comfort ventilation part that is not that lively as we would like it to have. But the infrastructure part is gone good.

Then to your second question. Yes, these kind of initiatives in infrastructural projects is something that is beneficial for us. But also keep on reminding that infrastructure projects have a tendency to be long prework. I will say that it's a long consultancy phase and the prework is also pretty long. Infrastructure projects have a tendency, from order to delivery, being somewhere between 6 to 12 months. So it's not a quick fix.

[Anders Ulff, executive]

Germany is about 11% of the total sales that we have.

[Adela Dashian, analyst]

Okay. Makes sense. And then if we switch to the U.S. You mentioned here the transition to the energy-efficient refrigerant. Could you see any type of price increases that could come as a result of this in the more short term?

[Roland Kasper, executive]

Actually, what we have seen is that we had a good business development in North America in December because they tried to finalize a lot of projects where we still could use the old style of refrigerants. But the outlook in the backlog is good for the new refrigerants that we are using.

Overall, I would say that the Canadian market is, for us, strong development just now, as I also mentioned in the report. U.S. is a little bit soft. I will not touch on the political climate, but it's a little bit unsecured in the market in terms of short-term investments in buildings. So it's a little bit soft, and we need to wait a little bit how this will continue.

[Adela Dashian, analyst]

And then you also mentioned here that you are somewhat reliant on Canada for the U.S. market. Can you be more specific in what types of measures you've already initiated on to offset maybe some of the tariff implications?

[Anders Ulff, executive]

Yes. We don't have that much in the [ sustainable ] business between U.S. and Canada. And we have 2 factories in Canada and one in the U.S. The biggest part for us would today be classroom units going from Canada to U.S. But those projects that we have in the pipeline, as you know, they are quite cyclical, so they are installing these classroom units when the schools are closed. So the projects that we have in the backlog, they are coming to summer. So we are patient and we can react.

If we see that our products and our services will really be part of these tariffs, which is not clear today because it's not outspoken what is actually in it, then we have a reaction time of 3 months to start production of a similar product in that, so we can offset that. And those products within fans of minor volumes that are going to Canada, we have already prestocked in our Canadian warehouses so that we can offload that also for some months. So we are pretty safe on that side for our from our view.

[Adela Dashian, analyst]

And you enough capacity in your U.S. factory to produce?

[Roland Kasper, executive]

Yes, we have today.

[Adela Dashian, analyst]

Okay. Then just lastly, and I'm sorry if you -- maybe you went into more depth about this in the presentation, but the selling and administrative expenses was quite elevated in the quarter, what drove that?

[Anders Ulff, executive]

I would say it's on the same level as previous year. If you put it in percentage to total net sales, I think on 27.8% both years. So -- and it could be a little bit up and down here on the selling between quarters. But there's nothing in particular, except -- I mean, I stated also here, we had the bad debt of close to SEK 5 million in the quarter. That's one thing. But other than that, there's nothing in particular that points out here.

[Adela Dashian, analyst]

And you feel comfortable with this level, even if organic growth accelerates further?

[Anders Ulff, executive]

Of course, we always try to look after our selling and admin expenses and try to be even more effective in our operations every day. So -- of course, we are a little bit afraid also about the inflation side and the salaries and so on, but we are working quite focused on seeing how we can make our operations more efficient. So I'm quite confident that we will manage that.

[Roland Kasper, executive]

That is the continuous work that we're doing. I mean we want to be optimized, but at the same time, we also want to be prepared for future growth. So we've tried to balance that all the time.

[Operator]

The next question comes from Anna Widström from Carnegie.

[Anna L. Widstrom, analyst]

So maybe if you can talk a bit about the Menerga situation, so both on how the ordering and delivery situation is from the new site today, and maybe some updates on your expectations on cost savings ahead.

[Roland Kasper, executive]

Yes. Thank you, Anna, for the question. Yes, on the Menerga side, we are quite happy that the ramp-up in Slovenia has progressed a little bit better than planned. We are today able to produce more than we had planned for January and February, which is a really nice result for the efforts done locally in Maribor. What we see on the order intake, it's more or less stable given the circumstances. .

We would, of course, now intensify -- now that we have stabilized the organization and build up the infrastructure in Slovenia, now we're focusing on switching over -- to have more focus on the sales side. In terms of the savings that we were given when we made this move, we said that we will, on an annual basis, have savings representing SEK 70 million on annual base. That is still the target, and we see that we can fulfill that.

[Anders Ulff, executive]

And also, we are doing several cost-saving projects on the products itself as well.

[Anna L. Widstrom, analyst]

Okay. Great. And just on these annual savings, should we expect it to be sort of a ramp-up during the year? Or should we see a similar effect in Q1 as in Q4?

[Roland Kasper, executive]

I think it's -- you will see a little bit distributed over the year. You call it a ramp up, but the total savings over the year would be representing the SEK 70 million. We -- it's a little bit, of course -- as Anders is indicating, the cost savings that we do is that we did not only move the factory, we also moved the whole Menerga range on a new technical platform. So that's why we are launching, as I said, now we're switching over focus on sales side. We are relaunching the models on new platforms constantly.

For those of you that have the opportunity to visit us on the ISH, for example, in Frankfurt, we'll see some new units with outstanding new technologies based on the new platforms. So now we're switching over to the sales side to bring that up so that it can be even more attractive for us on the bottom line, of course.

[Anna L. Widstrom, analyst]

Okay. And my last question is on the demand situation in the Nordics, because it's now 2 quarters in a row that you've reported solid organic growth. Is there any specific sectors that have showed relative strength or weakness? And what sort of positive signs have you seen for the market going forward?

[Roland Kasper, executive]

In particular, I would say that if you look a little bit market by market, Denmark is going strong. Still has grown as expected, which is good. Sweden, we have, I would say both in December and January, seen more activities coming back residential side. This is maybe not what you can read in newspapers, but we see more activity again, which is very nice to see. In Norway, the residential side is still a little bit low versus where it should be. But on the comfort ventilation and industrial side, we have a high level of activity. So it is -- all in all, the markets in Nordics are quite okay.

[Operator]

The next question comes from Lina Blume from Handelsbanken.

[Lina Blume, analyst]

Maybe a bit of a follow-up on the last question. Maybe you confirmed it a bit there, but would you say that you are now generally more positive regarding outlook for the Nordics than you have been in the previous quarters?

[Roland Kasper, executive]

Yes. That is, of course, a very good question. In the Nordics, overall, if we would only focus on one of the different applications that we serve, we might have a more crisp answer to that. But overall, we think that the activities are on a healthy level. Of course, they are lower than they were 2 years ago. But we see some, how to say, restarted interest. We see a lot more interactions with customers. We see the renovation market taking a little bit more pace.

In Norway, as I also mentioned here, we see more on the comfort ventilation side, a lot of huge projects. Overall, we're quite happy with the situation given the circumstances around and also given the inflation and where we're coming from with the interest rates. So it's more positive today, but it's not a full ramp-up with a direct direction just straight up, it's slow.

[Lina Blume, analyst]

Okay. Perfect. And then just one other question for me. You mentioned expectations of higher M&A activity, what should we expect when it comes to M&A, let's say, in the coming year?

[Roland Kasper, executive]

That is, of course, a little bit -- given the discussions and different meetings that are being held, it's very, very hard to, how to say, guesstimate the outcome. We are in several projects. We are very active. We have a very high load on that. If everything falls on the right side, we will see certainly several projects materialize in the year. But it also depends, of course, on expectations from the seller side and so on. So I will just say that we are very active and it's a more interesting market today than it was 12 months ago.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

[Unknown Executive]

And we have some written questions. Starting with Anders Knudsen from SEB. How much impact is Christmas closure have on your cost in the quarter? And can you talk about the demand, how it has trended in January?

[Roland Kasper, executive]

I mean a little bit -- without giving clear figures, but I think we answered partly on that before. But we saw a lot of mid-European and North European markets, more or less December was only 50%. There were -- 2 of the 4 weeks, most people were in vacation. And also, we saw similar activities in January where at least 1.5 we're taking vacation as we -- also, in the Nordics, we had the 6th of January in week 2, which is a bank holiday. So it was slower than normal, both in December and January for us.

The trend in January overall, but part also in December, as already described earlier, we saw an increase of activity with both consultants and installers. Not saying there's a huge increase in orders, but the activities have absolutely increased, which is very happy -- very good for us. So I would say that at least it's the first sign of more activities, which is very nice to see.

[Unknown Executive]

Okay. And one more question from Anders Knudsen from SEB. If when we get peace in Ukraine, would you expect to see orders on like the needed rebuilding?

[Roland Kasper, executive]

So we are taking part in some of these local meetings and exhibitions for this Rebuild Ukraine, mainly from our Polish entity. So we are quite well situated there already. We also have -- still our sales office in Ukraine is active. We think we are in a good position to, at least at the start, what we have been focusing on, it's a little bit on infrastructure, but mostly our hospitals.

That there would be a demand and that we could serve that, absolutely. When and what volumes, as you understand, I cannot predict. But absolutely interesting, and we already are in contact, and we're delivering to those projects that are live today.

[Unknown Executive]

Okay. Going on with -- moving on with a question from Henrik from Redeye. Do you think the mild winter in Europe has had a negative impact on Frico?

[Roland Kasper, executive]

The clear answer is, so far, not. We see rather a normal activity on the Frico, on the airborne heating side. So no, not yet. Not at all.

[Unknown Executive]

Okay. And the last one then from Henrik. Do you think the threat of tariffs may have boosted sales in North America ahead of potential tariffs?

[Roland Kasper, executive]

We do not see anything like that. The only thing that we saw that they were, how to say, taking in some business ahead was due to this change of refrigerants, the A2L change. That was something that we saw a little bit of in U.S. in December.

The tariffs side, as also mentioned shortly in the call here, I think the main thing is that there is a kind of volatility in terms of knowledge what is in these tariffs and what is not in the scope. Is everything or is parts exempted? No one knows. And even if you look on the tax homepages, both in U.S. and Canada by yesterday, there were no clear descriptions of what is covered actually. So it's -- people are sitting and waiting to have clarity. And that's what the customers, of course, are doing.

[Unknown Executive]

Okay. That was the last question from the chat. Over to you to close.

[Anders Ulff, executive]

All right. Thanks a lot and -- for calling in. And you're, of course, very welcome to contact us if you have any further questions or need any clarifications. And by that, I think we can close this and hope to see you again then in the beginning of June for our Q4 annual report.

[Roland Kasper, executive]

Yes, also from my side, thank you very much for listening in. I hope you could clarify those questions you had. And if not, we're happy to answer if you reach out to us. Thanks a lot and hope to listening and have contact with you in June. Take care, and goodbye.