Systemair AB (publ)

Thank you very much and good morning, everybody. And you are all most welcome to the presentation of our third quarter results, which is covering the period from November until January. On a personal note, I'm really happy to be part of the Systemair organization. And this is my first quarter as CEO for the Systemair. Really happy to be here. So starting with a brief description of Systemair, we are a company operating from our core values of simplicity and reliability. And what we do is that we develop manufacturing market, energy efficient and high quality ventilation products. We're a company founded in 1974 in Skinskatteberg, which is still our headquarters. We have today 51 countries with our own sales companies. And in total, the products are marketed in 135 countries. We are now having production facilities in 19 countries, and we are about 7,200 people, where of 1,000 in India. So that is a brief description of us. Looking into our third quarter, what we could see is that we had an organic growth of 1%. Compared with our previous quarter, ending in October, where we have a bit of a more mixed market picture. We had previously, in the second quarter, robust organic growth across all regions, while we are now seeing a bit of a more diverse picture. We're very happy to see that we, in both Western and Eastern Europe, have continued with robust positive growth. Why we're seeing a bit more of challenges or negative development in the Nordics, in North America, and also what we label a bit simplistic as the other markets. We have some reasons behind that, and we will provide a more granular picture later on. What's really important for us is that we're continuing the trend of improving our gross margin. Quite a tick up in this quarter. It was about plus one percentage point. And later on, I will also share with you a bit of my first impressions as CEO. That will be at the end of the presentation. so in the quarter we also suck we completely successfully completed our largest ever it project and me kind of joining the company fairly recently i'm impressed how well planned and how it has been and also about the excellent execution i'm really happy to see this Still, there was some work to be done, that's very true, and we were shutting down the system for roughly 60 out of 80 companies during the Christmas and New Year's. We are working on improving or let's say kind of finding new ways and improve how to operate with our front end. We have at this point in time, we are changing the way how we're working and how we are organized in a few of our major markets like Sweden and North America and Germany. We strongly believe that this will bring us long-term benefits. We had System Days in Karachi, Pakistan, together with a local partner. That was really a highlight event for us. And in Las Vegas, at the huge fair for HVAC business in North America, we were able to attract around 700 partners to our hospitality event. That was really nice. As always, there are also a few product updates. We see now a launch of an upgraded Systemware Sense product and we have also launched the Polarix heat pump series. Now looking at the markets, not very much changing from quarter to quarter, but I think it's a good reminder to see that we have 45% of our business in Western Europe. And in the quarter, that was a bit of a step up. 16% in the Nordics, 13% in Eastern Europe, the 10 plus or 11% in North America, and then the other markets. We get back to the more of the details on the development in each of these regions. With this I hand over to you Anders.

Thank you Robert. Anders Ulf here.

We are now on the fifth slide.

Thank you. So third quarter then covering the months of November, December and January is from a seasonality point of view our smallest quarter of the year. This year it was a bit of a mixed plate when looking at the development in the different regions, especially bearing in mind that we're coming from a second quarter with a really strong organic growth as Robert pointed out here. We noted that especially that the start of January this year was slower than last year. Total net sales amounted to 2.86 billion compared to 3.04 billion last year. This corresponds to a decline in sales by 5.9%, but we have had continued high negative effects from currency conversion. So the organic growth was positive by 1.0%. We can conclude that for the sixth quarter in a row, we are reporting an organic growth in a relatively slow and sluggish market. Slide number six. To give you a bit more details behind the net sales development, we saw organic growth in Western and Eastern Europe during the quarter. We completed the acquisition of Nadi in India in August last year, and this contributes with 1.8% to the net sales for the quarter. And then finally, currency effect. The strengthened Swedish krona resulted in a negative effect on sales by minus 8.7%. The effect comes from several currencies since we have operations in many countries and fluctuations are quite big at the moment. Slide number seven. Geographical breakdown and here I will focus and commenting on the organic growth rate for each region. Starting with the Nordics where we had a negative organic sales development by minus 10.5%. Especially the Norwegian and Danish market are currently in a period of lower demand, but the Swedish market was on par with last year. In Western Europe, our single largest region, we saw an organic growth of 5.8% for the quarter. Within the region, we experienced a positive development in UK, Spain and France. We are also happy to see continued positive signals on our German market. In Eastern Europe, we had a very strong organic growth of 27.4%, partly due to weak comparables. Sales were especially strong in Azerbaijan, Poland and Slovenia. As pointed out in the past, our sales in this region is more sluggish due to a higher degree of project related business. In North America, the organic growth rate was minus 8.7%. It is the part of our North American operations focusing on school ventilation that are exposed to seasonality that experienced a quarter with low sales after a couple of years with high activity all year round. In Middle East, Asia, Australia and Africa, we had an organic decline in sales of 6.5%. We experienced a quarter with good sales in South Africa, Middle East and India, while the Turkish market is challenging currently. All in all, then, total organic growth amounted to 1.0% for the group. Slide number eight. We had a positive development of our gross margin, as Robert stated. In the quarter, we achieved 36.3% compared to 35.3% last year for the same quarter. We're happy to see this continued positive development that is due to contribution from implemented restructurings and cost reductions, but also a positive product and market mix. Our adjusted operating profit amounted to 199 million or an operating profit margin of 7.0%, which is in line with same quarter last year. Selling and admin expenses in comparable units increased by 0.4%. Slide number nine. Profit after tax amounted to 132 million compared to 135 last year. Net financial items for the quarter were negative by minus 34.1 million. Currency effects on bank balances and loans were negative and amounted to minus 15.1 million. We had interest expenses of minus 16.5 million compared to 15.8 last year. And then coming to the tax rate for the quarter, it was high on 30.7%. The tax rate was affected by a change in the tax legislation in Turkey, where inflation accounting is removed from the tax base. Adjusted for the Turkish runoff effect on the tax, it amounted to 25.1%. Going to slide number 10 and looking at the cash flow development for the quarter. We achieved a free cash flow of 328 million compared to 55 million last year. Within working capital, there were a significant decrease in trade receivables of 267 million. Net investments for the quarter of 90 million relates to production capacity investments in Czech Republic, Slovakia and Norway. Our net debt decreased down to 849 million, which is 133 million lower than one year ago. Adjusted net debt to EBITDA amounts to 0.52, and we have a strong balance sheet that enables us to pursue further strategic M&A and investments for organic growth. And by that, I hand back to you, Robert.

Thank you, Anders. a bit of what is going on. This is an example of a bit unusual projects or business that we have received. The normal situation is that most of our customers or almost all of them would be only in one country. But this one, we have an agreement with a fitness franchise or fitness company who is really appreciating the value we can provide and the performance of our products. So what happens is that during the next future, we are going to provide them with solutions or I would say products that is helping them to offer their clients better indoor air climate in their gyms. And also doing this offering with less energy and achieving low operational costs. So this is a fun one to see. And of course, one key aspect here on top of the performance of our products is our ability to serve them in several countries. Now, with the Olympics in fresh mind, still we are proud to present that we did provide an almost complete ventilation and safety system for the MSG arena where the hockey games were played during the Olympics. What's really special with this one is that the arena should be able to switch between freezing an ice hockey rink into a concert hall in just a few hours. And you can just imagine what this means for the indoor climate with massive humidity spikes and potential fog that being created. Really calls for high performance products and flawless performance in many dimensions. Also, during a concert, you want to listen to the music and not some noisy installations. Moving then to next slide, which will be the 13th, slide number 13. I would like to share with you two impressions or observations. Joining Systemair, the first thing that comes to my mind, and this is also after meeting a lot of people in the company, traveling around. It's really a fantastic, strong company culture. It is rebuilt around the entrepreneurial spirit and a lot of dedicated, or I would even say passionate people. I believe that we are operating on markets with strong and positive long-term drivers. The topic of indoor quality is gaining recognition and the combination with energy efficiency is also addressing one of the large needs that we have. And the combination of these two means that sustainability is really a built in natural part of our business. In general, we are also a company that has been during many years investing for the future, and we have today a very broad product portfolio and we are having a really strong manufacturing operations with factories that are in excellent shape. Having said this, it is now time for us to reach to the next level in our commercial operations. We have been very busy dealing with the effects from pandemics. We have had supply chain disruptions. There has been tariffs and what have you. Now also some restructuring work going on. But taking the commercial operations to the next level, sharpen our value propositions and sales execution, that is going to be vital for our future profitable growth. Today, we are implementing structural and organizational changes in key markets like North America, Sweden, and Germany. And this is to increase our customer focus And also, in the very long run, creating a more efficient organization. At the other end of the scale, so to say, in a company having many operational units located in many countries, there is always a few of them that we would like to see improvements. we are continuously evaluating our actions and strategic options to reverse any negative trends. So I think this is the direction going forward. And with this, we open up for Q&A.

If you wish to ask a question, please dial pound key 5 on your telephone keypad. To enter the queue, if you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Lara Motadi from ABG Sundal Collier. Please go ahead.

Hello, good morning. Just a couple of questions from my end. Firstly, on organic growth in the Middle East, Asia, Australia, and Africa, this was down 6.5% this quarter, and you already mentioned that the Middle East actually showed good organic growth, but Turkey continues to face difficulties. Could you maybe just unpack a little bit on this, how much of the drag is specifically from the Turkish market? And should we expect this to continue in the coming quarters?

I start answering this one. I will hand over to Anders later on for some further details. Yeah, let's say we are very proud of what kind of, or pleased to see the development in India. Turkey, I would say, is on the other side of the scale. We have had for many years now high inflation and we also see that the interest rates have been increasing. This has been causing a really challenging market situation in Turkey. So I think that is the biggest, bigger picture. Anders, what would you add to that?

Maybe that the Turkish factory that we have there is also quite dependent upon project related sales. It's a bit volatile there, but in general, the Turkish domestic market is not showing any good signs for the moment. So all in all, what do we do about it?

Yes, of course. We have a great factor in Turkey. I think we are looking for opportunities to use that capacity for other markets, if possible.

And if we just move on to the Nordic market, you mentioned that the Norwegian and Danish markets are also currently in a period of weaker demand. Could you maybe just provide some more color on what is driving this? Is it that you're seeing weakness across the board, or is it maybe concentrated in specific markets like residential, commercial, or maybe public infrastructure?

I think once again, I start and maybe Anders will add something. But I see that in general, the construction market in all these countries is very weak. This has been kind of a persistent pattern for not only this quarter, but for the last years. In Sweden, I would say we have seen some growth. much because of the changes that we are implementing. I think we have, let's say, there are really good signs from how the SAFEs organization is being energized and we expect to see good things coming out from there also going forward. Would you add to that Anders on some facts?

To comment then on specific product areas in Norway, half of our turnover relates to the residential market and that market is kind of slow right now, but on the commercial side it's okay. Denmark, we are more dependent upon the commercial market and there's also

not a booming market for the moment but overall i mean uh we have we came from a quarter that was quite positive so overall we are slightly positive i would say to the kind of for um let's say the market has as such has not changed i mean we and we believe in our capacity to create the long-term profitable growths

Okay, very clear. Thank you. And just a question on your gross margin. It will improve nicely to 36.3 despite low volumes and the week holiday activity. Do you see further room for gross margin expansion or do you see this 36% level sort of as a sustainable baseline going forward

Well, lower volumes is not quite accurate there. I mean, it's 1% organic growth, so I need to point that out. But what we have seen here for some quarters or a year or so, improved margin, and that is to a large extent due to the restructuring we have done with Minerga as one example, and also historic price increases that are having more effect as we go on. How far we can continue to develop the gross margin is really hard to say and predict. But it's something that we focus on, of course, constantly. And it's also a little bit dependent upon where we are growing also, geographically and product-wise.

Yes, and you also mentioned implementing these structural and organizational changes. Could you maybe elaborate a little bit on these and what they specifically maybe entail? And when can we expect to see some benefits from these initiatives?

So what we do is that we have found out that we or concluded that we will have a benefit from creating a bit more focused organizations. um and we are having we have been referring to this um with these major markets where we have things ongoing with focus we mean that we want to have organizations selling all our products into the markets and we want to have manufacturing units supplying products to let's say all markets Sorry, we got a visitor suddenly here. So I think that is the main intention here. So that is the purpose with this focused organization. When it comes to sales also, we are proud of what we do today. but revitalizing our kind of processes and tools and more or less how we do it we see we have opportunities to improve here so this is kind of the directions okay very very clear and that was all from my end thank you very much thank you thank you

The next question comes from Carl Ragnarstam from Nordia. Please go ahead.

Good morning. It's Carl here from Nordia. A couple of questions from my side. Firstly, you mentioned January was slower this year. Of course, we've seen that in some companies in the space, but could you give the factors behind it? Was it also related to the IEC migration you mentioned? And also, what have you seen so far in February, which is the first month of the Q4? Thanks.

Okay, thank you for your question, Karin. Well, you're correct saying that we did close down our ERP system for 60 out of the roughly 80 operation units we had. I'm really proud how this was planned and executed. Well, nothing is ever flawless, but this was as close as you could get. uh this means that visibility for end of the year is kind of weak but we saw also that we had there was some kind of a slow start you could look into the calendar but that easily comes into excuses and we don't do that but clearly business was kind of ramping up a bit slower than expected in the beginning of january what would you add on this

I think you're spot on there and we have not really commented anything on February in the report, just to say that, I mean, nothing with this quarterly report that has changed our slight positive outlook for the future.

OK, that is very clear. And in North America, the school ventilation is seemingly burning volumes. Can you help us understand what is defined as seasonality or normal seasonality reasoning? And also curious to hear a bit more about if you're planning to take out costs in Canada specifically, or if you keep costs at the current level, expecting at some point the volumes to pick up here?

um i think this is a bit of a story question uh anders could you could you help starting and i'll add later on yeah absolutely so what we have seen now for a couple of years regarding then specifically what we do in our canadian one of our canadian factories focusing on school ventilation is that they have had No longer any seasonality. Most of these units are installed during summertime when the school is closed. But we have in the last couple of years been producing them and selling them all year round quite stable due to different reasons. This year we are back to a more normal seasonality meaning here winter time it's really low activity and especially this year we have seen very low activity in that feed from a production point of view. We are entering now the high season more and we have not cut down on any costs there because we will need these people there in the production. We have a quite decent backlog and volumes will pick up more to the normal side here during the spring and summer.

Okay, that is very clear. And also on your first impression here, you mentioned that, or I interpreted it that you're maybe planning to change the operational footprint a bit. How many plants are you looking into potentially discontinuing and divesting the properties off in order for And also do you see that you could utilize the current size of the production in Green Scatter Bay or Lithuania in order to export into some of the smaller countries where you currently have a production that is obviously not utilized enough?

Thank you for that one, Carl. I think I'll start and maybe Anders add if needed. Let's say, I think we have a healthy habit of reviewing or continuously reviewing and trying to figure out what would be a more optimal setup when it comes to where we are present and how we operate. So that is a continuing effort. And then if we're going to close, let's say, a topic of closing, let's say, I think the history of Sistema is that future thinking and very persistent, but also decisive, I would say. So to me, that means that, let's say, if we think that we have a good plan, for getting kind of to make necessary improvements that will always be our preferred option. At the end of the day, if we would end up in the situation that we no longer believe that our efforts will pay the proper rewards, I think we will see that we are equally decisive to do something else about it. So that's the one. I will not comment on number or kind of entities or something. It's not the right way. Let's say we prefer not to think like that. So that's how I would comment on it. What would you add on this? I think that covers it. Okay. No more to add on that one. I hope it helps you with your question, Carl. Thank you.

No, it's very good. Thank you so much. It's clear.

Thank you.

The next question comes from Anna Woodstrom from DNB Carnegie. Please go ahead.

Good morning, Robert. Good morning, Anders. So just my first question is as a follow-up on the Nordic situation, because it is quite a drastic change in organic development in this quarter in comparison to the last one. So could you maybe give us some way of sort of understanding what has happened during this quarter, if it's something in the market or something how you've been working or differences in project volumes, et cetera?

Would you take that, Anders?

Yeah. I mean, we have commented a little bit on the different countries here in Sweden. I would say Outlook is still positive, and we have done several changes in the market, in the sales organizations. That's really positive. Norwegian side, I wouldn't say that anything has changed in Outlook compared to the previous quarter. We are installing a new machinery there, also interrupting a little bit the business right now, but... We are hoping to see a recovery in the residential market, but nothing really changed. The Danish market, I would say, maybe a little bit tougher than we have heard before. More competition, I guess, in a slow market right now. So maybe if we seek for something that has changed a little bit, so slightly more negative in Denmark than currently.

Okay, perfect. And then going into the IT project, which is now finished. How should we think about this from sort of a cost perspective or margin perspective? Is that something that should be good from a cost perspective already in Q4 or good for margins in some way?

Of course we do this with the ambition really to be more efficient in our work processes and we will also with this as a base we will continue to roll it out further on in our group so we have 62 entities covered by the same ERP globally and I think that makes us rather unique in the industry also and we have a minimum of adjustments in the system. So we try to run it quite standardized also. Regarding cost, pure cost, I mean, these IT companies right now, it's not like they are lowering costs, rather the opposite. So cost-wise, you won't see any huge effect from that. But of course, as we continue to standardize our ERP platform, of course, step by step, small decreases in cost.

I think one thing to point out is that, let's say, in this context, I would consider myself a bit new still to the company, but I'm impressed how much of internal resources has been used for doing this. And I think that's a great thing. creating internal capabilities that can be used for deployment and further improvement of how we use these systems. So I think that's a factor to include also.

Perfect, very clear. And then going into the ongoing investments that you have in several countries, What is your view on the current CAPEX level? It was down now a year over year. So how should we think about that going forward? Are there plans to invest further or less into facilities or projects as these ones are finished?

We constantly do capacity investments and machinery upgrades also which leads to more efficient energy efficient and equipment so that will continue. I think now we have last year was quite a record year when it comes to Capex so We have invested a lot in capacity. I wouldn't say that we have any clear need for factory extensions and so forth that we see currently. So we have a good base and we are investing both in any market really for the future. I think we are quite well invested currently, but so I would expect something that would be a little bit lower than it has been really.

Great. And if you could give us an update on the Menardie situation, how's the operation status and do you think that you're on track on the full year cost savings?

On the Menerga side I would say that things are going according to plan, step by step. We are doing improvements, the production has been moved and so on. We have scaled down our operations in Germany and we are building competence and hiring people in Slovenia where we are now doing the manufacturing. step by step still i think there are efficiency improvements to to be done also in in the production side here and and it will continue and it will come but i would say things are developing in in the right direction perfect and then this is the final one from my side to you robert um on mna what's your view of the pipeline that you've sort of taken over

Could you repeat? I think you said, what's my view on the pipeline? Yes, for some time.

Broadly, if you have anything else.

No, no, sorry. I just want to make sure that I answered the question you asked. I think, yeah, let's say we are quite active. I think we have a healthy pipeline. I think they're also, let's say, very relevant for system as a company. And then you, let's say, the big question is, of course, are we going to make all these ends meet? Meaning that kind of targets should be available. It has to be a strategic and cultural fit to System Air. And we will need to agree on a price. And, you know, this could be challenging. So time factor, I wouldn't say anything about that. But healthy... And we are active.

Perfect. That was all my questions. Thank you so much.

The next question comes from Adela Dashian from Jefferies. Please go ahead.

Good morning, gentlemen. Just two quick ones from me. A lot of my questions have already been answered. Could you speak about the price dynamics as we enter into the next season? Is it going to look very similar to last year or are there any changes in that front?

um i think i hand that one over to andres because it concerns a bit of about the history yeah and now we're not on mna i suppose this is all on uh no no no no the operational yeah all right good yes i understand you clearly i think right now since we see a lot of increases on the raw material side we are currently reviewing prices at the moment so i i would expect some price increases to be implemented going forward. So that's in the middle of the discussions right now, and nothing is really yet decided. But due to raw material price increases, we need to evaluate that.

But let's say this is what we do regularly, so nothing really exceptional.

No, no. Three to four times a year we are reviewing that.

Okay. Are we talking about low single digits?

Yes.

Higher than that?

No, I would say so. Low single digits.

I see. Okay, thank you. And then, and maybe you've already covered this, I was a bit late to the call, but is the situation in the Middle East affecting your business units over there at all?

Yeah, let's say, first of all, I think it's, we think about, first of all, whatever you see on TV, it's really, it's, let's say, we don't, nobody of us would like to have this kind of seeing these news coming at us. Our next thought is of course with all our employees, their families and also our long-term partners in the area. So that's my first thing. Looking at the system, we have a bit less than 100 people in the Middle East, meaning most of them in Saudi Arabia, and then some equal distributions between the Arab Emirates and Qatar. I think you also know, most of you, that we have a factory in Saudi. if you put the numbers together uh it will be like we have five percent of our net sales in in the area uh it's really a volatile situation um and we are continuously monitoring this one but it's really hard or uh let's say it's too early to say what would become what the outcome will be but we continue to monitor it and we really hope it will calm down soon I understand.

And I know it's a sensitive topic, but are your factories at this point in time, are they still fully operational or have there been any closures?

So we have one factory in Saudi and let's say it's located in Riyadh. We have, let's say, kind of calm still. So nothing to report on that one, I would say.

Okay, perfect. Thank you so much.

Thank you.

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

Alright, thank you very much. We have one written question here. It's regarding our operations or our acquisition in India. Robert, how will that impact future growth and profits?

Let's say the purpose of the acquisition was twofold. The first one would be to build a further presence in the local Indian market. And I think it was a meaningful addition from this point of view, because now we are like 1000 people in India, which is a long term growth market for us. So that's the first one. And then the other one is that we that we add capabilities as a group kind of with acquisition without capabilities of further developing our business that is targeting the industrial segments. We're really happy with that also. So these are the two dimensions. We were also happy that the starting point for this business is that they were operating um at a higher margin than uh system groups group system as a group um kind of as a whole so that's the starting point and of course we would like to see can we have ideas how to explore these opportunities going forward but typically we don't disclose any details around this uh anything to add to that one anders i think it's pretty clear it's a very interesting market yeah

So I don't think we have any further written questions in the chat either. So I guess it's time for us to conclude the conference and we hope to see you next quarter report 10th of June. Anything else to add here, Robert? No.

Just once again saying that I'm really happy being at Systemair. We believe that we have good opportunities for long-term profitable growth ahead of us. So thank you very much for your attention.

Thank you. Bye-bye.