Systemair AB (publ)

Welcome to Systemera Q120 and 2627's report presentation. For the first part of the presentation, participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing pound key 5 on their telephone keypad. Now I will hand the conference over to the President and CEO Robert Larson and CFO Anders Ulf. Please go ahead.

Thank you very much. So this is Robert Larsson speaking and with me I have Anders Ulf, of course. We are very pleased to have you here and we look forward to first making our presentation and then opening up for the questions and answers. So we are now on slide number three. Many of you already know Systema very well. The company was established in Skinskatteberg in 1974 by Mr. Gerald Engström, who is today remains as the main owner and vice chairman of the board. And during these many years, the company has grown and has now achieved annual net sales of 1.3 billion euros. Our core values, simplicity and reliability. We develop, manufacture and market energy efficient, high quality ventilation products. We are proud of our wide product portfolio and we're determined to meet our customers' expectations on reliability, availability, sustainability and quality. Today, we run our own sales companies in 51 countries and our products are available in totally 135 countries. 27 factories in 19 countries and 7,600 employees. Slide four, please. Oh, it has changed. Yes. Sorry. Sorry. In Q1, we are pleased to see continuing growth and improved profitability. This happens in an environment with uncertain geopolitical situation. There is some cost inflation for commodities and freights. and markets that can be described as mixed or in some cases I would say even weak. However, we are more and more often receiving signals that may lead to improved market demand in the future. Continuing on financials, in Q1 we reported adjusted operating margin of 9.9%, or up 0.6 percentage points compared with the same quarter last year. This makes us firmly believe that we have the long-term financial target of 10%, well within reach. Organic growth is of course always appreciated, but it is a bit extra pleasing with double-digit growth in North America and Eastern Europe. Our target to strengthen our presence in North America is built on organic growth, well above the average for Systemair Group. And then, if possible, add acquisitions on top of that. And in Q1, we were very happy welcoming Temspec employees and customers to Systemair. Today, we also sent out a press release about an order for a data center project in Finland, just like we should do for all larger orders. We see the global and diverse customer base of systemers as a key strength, and data center business adds to this. The major product release in Q1 was the new Geniox with integrated heat pump running with a natural refrigerant, making it a future-proof alternative for our customers. We believe the timing came out quite right for this product. Slide six, please. From quarter to quarter, we don't expect to see much shift in share between regions. Western Europe is continuing as our largest region with 44%. With the other four regions fairly equal in size, Anders will share more details about the development in each region later. It deserves to be repeated. One strength of Systemair is this global and diversified customer base. This gives us a solid foundation for profitable growth and also high resilience. With that, I hand over to you, Anders.

Thank you, Robert, and a very good day to everyone. Our first quarter of the fiscal year 26-27 is covering the months of May, June and July. Q1 and especially Q2 are, from a seasonality perspective, our strongest quarters of the year. As indicated in our last couple of quarter reports, we can still notice a bit of volatility between the individual months. The quarter started off a little bit slow in May, strong in June, and then more normal in July. Total net sales amounted to 3.28 billion compared to 3.09 billion last year. This corresponds to an increase in sales by 6%. The currency conversion effects were minor during the quarter. We can conclude that for the eighth consecutive quarter, we are reporting organic growth in a relatively slow market as Robert indicated. Next slide, please. A bit more details on the net sales development. We are happy to conclude on organic growth in all regions during the quarter. We completed the acquisition of Temspec in Canada on 23rd of July, but it will impact the income statement of the group. It starts from August. The acquisition of Nadi one year ago contributed 1% to net sales for the quarter. And then finally, currency effects. The strengthened Swedish krona resulted in a negative effect on sales by minus 1%. These effects come from several currencies, but the major part relates to the conversion of Turkish lira, Canadian dollars, and Indian rupees. Next slide, please. Then we come to the geographical breakdown, and I'll comment on the organic growth rates here for each region, starting with the Nordics, where we are happy to conclude on 8% growth in the quarter. Sales in Sweden saw the greatest improvement, but all countries in that region had positive development in the quarter. Western Europe, our single largest region, had an organic growth of 3% for the quarter. Within the region, we experienced a positive development, especially in Italy, Greece, and Ireland. In Eastern Europe, we had again a very strong organic growth of 11%. Sales were especially strong in Czech Republic, Poland, Azerbaijan, and Serbia. Then we come to North America, where we saw the highest organic growth rate of 15%. We have experienced several changes in the tariffs between Canada and US recently, leading to price increases, which explains part of this increase. From the beginning of April, the tariffs were increased to 25% of the total product value, but start of June, they were revised to 15% for most products. Our conclusion is that the latest change here from Section 338 will have a minor impact on our sales. Our ambition is still to forward any additional tariffs further on. The acquisition of Temspec will affect the group accounts starting from 1st of August. In Middle East, Asia, Australia and Africa, we had an organic growth in sales of 4%. We experienced a quarter with good sales development in Australia and Malaysia but slower in Turkey and Saudi. All in all, the total organic growth amounted to 6%. Next slide. Our gross margin showed a slight improvement up to 36.5%. We see this as a sign of strength, considering the recent price increases on several components and freight. As earlier communicated, we have introduced a price increase from 1 June. Overall, we are happy to see yet another quarter with strong gross margin. Our adjusted operating profit amounted to 324 million or an operating margin of 9.9%, which is 0.6% above Q1 last year. The adjustments in this quarter relates to our US operation and amounts to minus 13 million. Selling and admin expenses in comparable units increased by 5%. Next slide. Profit after tax amounted to 229 million compared to 193 last year. Net financial items for the quarter were negative by minus 5 million. Currency effects on bank balances and loans were positive and amounted to 7 million and interest expenses were minus 9 million compared to 12 million the last year. The tax rate for the quarter came in at 25.2 compared to 27.3 last year, same quarter. And then slide number 11, cash flow development for the quarter. We achieved a free cash flow of 69 million compared to 108 last year. Within the working capital, there was a significant increase in trade receivables of 173 million due to the increased sales, especially at the end of the quarter. Also our inventory increased affecting working capital negatively with 113. The increase of inventory is due to higher safety stock of certain components. Net investments of 114 million relates to production capacity investment made in Slovakia and Sweden. Our net debts increased to 1.1 billion which is 270 million higher than one year ago and the reason being is the acquisition of Temspec that has increased the debts. The leverage left up to adjusted EBITDA amounts to 0.65, and we have a strong balance sheet that enables us to further invest in organic and acquired growth. And then slide number 12, sustainability targets. On scope one and two emissions, we are aiming for a reduction of 42% by April 2031, compared to the starting point in April 24. In Q1 we achieved a reduction of 11% compared to the base year. We have continued to install solar panels and in this quarter we achieved a record solar power generation with an increase of 17%. Our actions to reduce work-related injuries are continuing to be successful and we achieved a 6% reduction in the quarter. And then finally, our target to achieve a minimum of 25% female leaders. We are currently on 23.2, and we will continue to launch different activities to improve this KPI. One example is the female mentorship program that was just finalized before summer, and the new one is planned for the fall. And by that, I hand over to you, Robert, and to finalize the presentation.

Thank you. I switched to slide 13. Systemare acquired Temspec Incorporated on July 23rd and on the picture you see Steve who is to the left who is running our North American business and Mark who is on the right side and of course who is the Temspec president and second generation owner. TempSpec is a leading manufacturer of decentralized ventilation solutions for multifamily residential buildings and schools. And just like Systemair, the company has a strong company culture based on customer focus and entrepreneurial spirit. The product portfolio is focused on energy efficiency and low noise performance, addressing two key market trends in indoor environment quality. This is a well-established business founded in 1971, headquartered and manufacturing location in Mississauga, close to Toronto in Canada. The company has about 90 employees and an annual sales of approximately 200 million and with the EBIT margin above system group average. At Systemair, we have lately proved how we operate our sales and marketing in North America, and the 10-spec acquisition is now benefiting from this, and there are plenty of growth opportunities as we see it. Next slide, please. The launch in June of the GeneX Air Handling Unit with integrated heat pump running with propane, or R290 as it's called, as a refrigerant is a step up in value for our customers. It continues to be a product that is easy to configure and buy, easy to install, easy to operate and maintain. And now, in addition, It is future-proof for our customers since it contains a natural refrigerant, it is PFAS-free and it is also an improvement in efficiency. We also changed how we introduced the new products to the local markets. It is now more orchestrated. Our local sales organization is receiving better support. And with this orchestrated approach, they can better share learnings and experiences and ultimately create more of tailwind for each other. Slide 15. Our opportunities in Saudi have continued to materialize after expanding our manufacturing presence. CER is a fairly new electric car brand in Saudi, and they are well-funded and very determined to build a strong position in the region. Currently, we are winning business due to the made in Saudi status we have now, and it helps a lot. At the same time, we are facing challenges with logistics due to the war continuing in the region. Slide 16, please. As already mentioned, we today sent out this press release about an order for a data center project in Finland, just like we should do for all larger orders. We see the global and diverse customer base as a key strength for Systemair. You heard this already. And a bit more of data center business would be a welcome addition. This project demonstrates that we can develop relationships with global and very demanding customers and that the products we offer are competitive. In our product portfolio, we have a lot of ventilation products that are needed also in data centers. We have also some derivative products intended for data centers, but we have not seen that we should invest in very specific technologies or products only for use in data center applications. With this, we conclude our presentation and look forward to answering your questions.

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

Good afternoon, Robert and Anders. You gave a monthly split for queue one, slow May, strong June.

That we didn't say really and I don't think we do not have as a strategy to disclose that at this point. So I don't have any comment on August figures.

And then on the margin, May was the one month without the price increases in place. Should we expect that to show maybe or are input costs still moving?

Yeah, I think input costs are still moving and also when we announced the price increase from 1st of June there's a bit of lag in that implementation also before it reaches all customers also depending on what kind of agreements and what kind of products we are talking about and so it's a bit of a lag there as well.

Okay. And just a bit on the market. Western Europe, you still reported positive organic growth, but it slowed a bit to 3% this quarter. Germany wasn't mentioned as a stronger geography or recovering geography this quarter. You were cautiously positive last quarter. Would you say that the German market has turned, or is it maybe the sales and service restructuring that is maybe weighing the momentum here?

Thank you. No, this is Robert here. Well, I don't feel worried about the German market. I think we are receiving a lot of, let's say, interest from our customers also going forward. From sometimes, let's say, I think there is a bit of up and down in the markets and so on. But to repeat, I don't see any concerns. And I don't for going forward. I don't think that restructuring has had an impact on these numbers. Would you comment any more on that one, Anders?

I think a little bit the message we wanted to send through here, really, with the months being a little bit up and down, really, and that also goes for a single quarter then, so... I think what you see here in Q1 is maybe not a shift in trend. We see the same signals as before in the market and we have a fairly good demand in the market where we are present.

And also you mentioned Finland and you said there's a bit more data center business that would be a welcome addition. You may be opportunity for us and maybe just quantify how large a part of the revenues data center is standing for today.

I can start and then maybe you add to the comments later on.

Well, today, let's say data center is not a significant business in system, I would say, from a size point of view. But, you know, having a broad customer base and being exposed to many different industries, it's healthy for us. So we are happy to see that we are competitive. We have something interesting to offer. And then of course, we may have more kind of, there might be more, or you may see more of these orders going forward, but I still think it's going to not go, it's not a change in strategy that we intend to make this a significant portion of system. That's not what we try to communicate. Would you add something Anders?

I think that's spot on. I mean, we have sold products now and then into the data center industry for 10 years or so. But we have not really developed a new part of product portfolio, especially for that purpose outside of our core of ventilation, I would say.

And Robert, you said that you're more and more often receiving signals that may lead to improved market demand. Could you maybe just be a bit more concrete about what these signals actually are? Is it maybe quotation activity or project pipelines? And maybe just talk a bit about which regions or segments that you see these developments?

I don't want to quantify this in a way, but it is kind of clear that in some of the markets where we have seen very low or even very low market activities, We have the opinion that the actors that are early in the value chain, that could be consultants or architects, they seem to be working a bit more organized and firm on projects now than before. Still, it will take time before that materializes. So that would be my comment.

That was very clear and that's all from my end. Thank you very much.

Thank you.

The next question comes from Jakob Marken from SEB. Please go ahead.

Yes, hello guys, and thank you for taking my questions. So firstly, you mentioned some negative effects on the cash flow from building safety stock, and I'm wondering in general, how do you see the current component situation, and can you elaborate a bit more on how you see it in the different geographies?

I didn't really catch the final part of your question there. There was something with the...

If you can also say differences in the different geographies.

In general, we have, let's say, from time to time, we experience that we have, let's say, we have to do replanning and so on. I think it is at the level, let's say, component supply, it is causing some irritation, but I wouldn't say that it is damaging. could be that things kind of get more challenges ahead of us. We don't know that. I'm really happy to see how the organization is managing this because our ultimate target is to provide excellent service to our customers. I don't see that we really have a regional perspective on this. It's certain components that there is a shortage of. And of course, Prices for aluminum and copper has been very volatile lately. That has been kind of a bit challenging to manage, but seems to be, I wouldn't say under control because it's not under our control, but we're managing it quite well. So I'm happy with how the organization is responding.

Okay, perfect. And then I'm just wondering about the recent acquisition that you also mentioned here, if you can just Tell us if there's any large seasonality that we should know about.

Would you start commenting on that Anders?

Seasonality related to Temspec? Yeah. Well, a significant part of the products relates to where we are already present and meaning ventilation for schools. So indoor ventilation units and there is a seasonality in that because most of them are installed during the summer period. lower season when it comes to December, January, and then ramping up production for installation during summer months.

Okay, perfect. That's very clear. And then my last question, I'm just wondering, quite large shift here in organic growth in the Nordics. and you mentioned Sweden of course as the standard but can you give any more examples of specific end markets that have turned and what you see from Q4 here in Q1 and what's been the big drivers for the positive numbers?

Do you mean specifically for the Nordics or? Yeah for the Nordics. No, I think I'm happy with how the organization is performing across the Nordics, all our sales organizations. And I think Anders phrased it well. We are seeing kind of very good development in Sweden. But you also know that we have made some efforts in changing how we operate and also leadership there. So I think to some extent, What we see is the impact from our own activities.

Okay, so would you say it's a variable-based recovery in the Nordics? I would say so. Okay, perfect. Thank you. That was all from me. I'll get back in line.

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

Good afternoon, gentlemen. Just a few for me as well. If we go back to the data center topic and the order that you received, or maybe if we could start with the commentary around not wanting to, I guess, invest heavily into expanding your capabilities beyond what you already have in the data center space. How comprehensive is the current product offering? very much show or the air handler based or can you also go into I guess you would say the next gen data centers and become more liquid cooling compliance

Okay, thank you for that question. Let's say we are very proud of our broad product portfolio targeting ventilation. Some of these are very useful for data center applications also. And I said also before that we have a few derivative product that is a bit tweaked towards what data center applications and customers expect. But we do not have specific technologies. We have selected not to develop specific technologies, so on. So I think we stick with that one. We believe that this is a healthy expansion of our, let's say, it's a healthy part of our product portfolio. And we are happy to announce larger orders whenever we get them. And for us, 60 million SEK is a fairly large order. So it's not a change in strategy.

Thanks for that. But are you able to be a bit more specific here? When you say ventilation products, are you able to dive into liquid cooling at all, or is that not really something that complies with your focus?

I would say liquid cooling is not really a ventilation product.

Yeah, that's what I was thinking. Great. Moving on to North America or US versus Canada, the current debate. Appreciate the comments here about often tariffs with price increases and expectations of this happening or the recent topics having a minor effect going forward. But could you please remind us of your current production footprint in that region specifically?

Production footprint in North America was the question, or?

Correct, because I believe you do have production both in the U.S. and Canada and you do use both for deliveries in either.

Yeah, actually now we have three factories in Canada with Temspec edition but also a factory in Kansas City in the U.S. also and I think we commented on that already in the past that we have moved and smaller volumes of production into U.S. also. And that was planned already before the implementation of the TARVIS. But we are considering, you know, if we should move more or not, really. But we don't take any hasty decisions here. We would like to see how this develops. And, you know, things are changing quite quick in this area right now. But we have the possibility. But you need to build up the competence and you need to have the Yeah, the production capacity there, but the factory is there and we are able to do it.

Okay, so you're quite well there. That's good to hear. And then lastly, you commented more specifically about the cash flow development in the quarter and the component situation and and the buildup of safety stock, do you think this is more a one-off in this current quarter, or do you feel the need to continue this strategy, I guess, in the coming quarters?

When it comes to trade receivables, I see that we peaked at the end or the second half of the quarter, so that's more related to the volatility, I would say, on the inventories and the safety stocks. That's a little bit harder to say right now because it's a difficult situation, what's happening to the freight situation in general and the prices of products and so on. I would say in general for the more important components like fence and so on for us the delivery time is very long right now so the planning horizon is long so it's hard to have a visibility on where this will go from here really and also we have seen some individual problems for separate suppliers and so on so we we need to just monitor the situation and try to we don't have a huge problem building up a little bit safety stock for a while I guess that's the conclusion I guess that was going to be a follow-up to that question and you mentioned here that you we are facing delivery challenges with the

Is there any other area that you're seeing shortages at this point?

Yeah, no, I think Anders correctly put it the way kind of the planning horizon is really long. And sometimes we need to do replanning. But I wouldn't say that we are facing kind of we are still, let's say, happy, kind of happy. It's a strong word, but kind of, we still put focus on servicing our customers. I think that's very, that is our top priority. And I think we will, I hope that really that we will continue to do that. And yes, sure, there are other components also, but it goes very far and into very small details.

And when you say the planning horizon is longer, are we talking about weekly delays, monthly delays? What does it look like at this stage?

I didn't specifically mention the delays. The lead times has increased a lot. So that means that the planning horizon is long also.

All right. Thanks.

The next question comes from Anders Akerblom from Nordia. Please go ahead.

Yeah. Hi, Robert and Anders. Thanks for the presentation. It's Anders here. I first wanted to ask about, so the other week we got this announcement about ABMPops being acquired by... I know it's early stage, but do you have any sort of view on what the potential impact on, say, supplier availability and market will be as a result of that?

Okay, that's a good question. We know ABM as a competent and long-term provider. supplier to us. I think we have both benefited from this long-term relationship. We have also heard from EBM that they will continue to operate the company and serving customer and cost customers agreements and all these things. So we're very happy with that. Of course, we have many suppliers, but EBM is definitely an important one. The rest, let's say, we have still almost six months to go before the deal would close. And a lot can happen, of course, but this is what we know for now.

Okay. No, that makes sense. Thank you for the answer. The other question I wanted to ask, and not to challenge you on this, but I thought sort of the guidance seemed quite CONFIDENT ON THE 10% DEBIT MARKET SORT OF BEING WELL WITHIN REACH. I MEAN OBVIOUSLY TO SOME EXTENT YOU'VE INCORPORATED THE EXPECTATIONS OF SUPPLY CHAIN INFLATION AND POTENTIAL MARGIN COMPRESSION FROM THAT. OBVIOUSLY YOU'VE RAISED PRICES TO COMPENSATE BUT I MEAN IF THAT INFLATION DOESN'T COME THROUGH IN THE WAY YOU'RE SEEING NOW, also from sort of a tariff perspective. I mean, is it fair to say that there should be upside in that margin target then at 10%? If you get my question. Sorry for the long sort of elaboration. I hope you get my question.

This becomes about kind of discussing a new financial target, which you also know is a board decision. But let's say what we would like to do is to firmly claim that we have reached the financial target. And when we have done that, we are looking forward to a healthy and also inspiring discussion what would be the next target for us to achieve. But on top of that, I would like to kind of make further comments. I think you had all the variables in there. Yeah. You could easily make one calculation saying, well, you know, was it 9.3% adjusted operating margin last year? And now you add 0.6. Yes, there is a seasonality with some quarters being stronger and some are weaker. But it seems like 10% is where you are now. You could argue that. But then, of course, we should be able to deliver for a full year also. So it hasn't happened yet.

That makes sense.

But we think that the target is well within reach.

Yeah. Okay. Great. That's actually all for me. I'll stick to two questions. Thank you. Thank you very much for the answers. Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Anna Woodstrom from DNB Carnegie. Please go ahead.

Hi, Robert Hernandez. I will keep it very short. So I just have two sort of follow-up questions. So maybe to get some clarification from the component availability, has this impacted the backlog situation for you at all during the quarter?

Okay. Well, it depends on how you define backlog now. I don't want to be, but let's say it has, we have been a kind of, we have been kind of, I know from, from a factors that we are from time to time, we have to reshift and replan our orders. So doesn't bring us the ultimate efficiency. That's quite clear. This is what typically happens, but on a greater scale, has it really impacted us? minor, I would say. So that's why I said before irritating, but not really damaging yet.

Okay, perfect. That's very clear. And also just a follow up on America because I seem to find that there's some different trends noted in America for like different peers and sub segments, etc. So could you maybe highlight what's the overall most impactful trends for you for your business in the quarter?

I think our business performance in the US, yes, there seems to be a kind of healthy demand, all other things equal, but We are also, just like in Sweden, we have done changes in how we address the market, how we present ourselves, how we serve our customers, and all of these things. And also there was a leadership change a year ago, something like that. I think most from what we see is due to these actions. So it's not really the external environment changing.

Okay, perfect. That was all for me. Thank you so much.

The next question comes from Anders Jafs from SB1 Markets. Please go ahead.

Yes, hi Robert, and also a quick one from my side here. Obviously you touched upon the Western European markets, but maybe you could give some extra color on how you view the German market currently. Obviously you have commented in our previous quarters that you at least see some kind of flattish market over there, but how do you view that currently and looking at maybe for next quarter?

Once again, we don't make forecasts. But let's say, I don't see any major shift in market dynamics in Germany. It's still a fairly slow market, a bit kind of on and off and so on. But I think our organization has demonstrated that they know how to operate. So I look forward to the next visit when I go there. So I don't have these concerns. It's... There is always a certain volatility in some ups and downs, but I know that our sales team is confident, so nothing very much has changed, I would say.

Understood, understood. Get some color on how you view Middle East currently and how that has developed since the very turbulent spring we had over there.

So let's make sure that we define the Middle East into the Gulf region, which I think is the most affected one. It seems like business is continuing in the region because we are getting orders and these things, but we do have challenges in deliveries, bringing components in and also for some kind of complementary products. Shipping is a big topic, really big topic. And I really hope that these... The freights and the shipping can start again in a proper way and we get the normalization. I think that would be really nice for us. The other comment is that it has been beneficial for us to expand our manufacturing operations in Saudi. It has helped a lot. Still some challenges. As you know, we have not been able to have the official inauguration because of all these tragic events in the region. We're looking forward to that one. But all in all, I think there is business continuing in spite of having this sort of a bit of, it's a terrible situation for many people there, but I hope it will be resolved.

Okay, understood. Thank you, Robert. That's all for me.

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

We got also two questions in the chat here and the first question is regarding to naming competitors in the different regions and also from China and so forth. I think that's a little bit too wide for this forum so I would encourage you to contact us separately on these issues and we can go through that because it's a very wide question. The third one or second one here is regarding the multipliers for acquisition of Temspec and if they have any export into US. Do you want to comment on that, Robert?

The multipliers.

Indication of range.

No, let's say we haven't disclosed the transaction price. So that means that we don't disclose the multipliers either.

We can say under 10 at least. Okay, that's fine. Because they indicate something. Export into the U.S.

Yes, they have exports into the U.S. Okay.

All right, I think that was all the questions that came through the chat and by that I think we are done.

So thank you very much for your time and attention. Looking forward to seeing you soon again.

Yeah, absolutely. Q2, one of our most important quarters from a seasonality perspective. So I think we need to prove ourselves here in the coming quarter. It will be really, really interesting.

Thanks for calling in and now we go for our annual general meeting. Yes, thank you very much. See you soon.