engcon AB (publ) (ENGCONB) Earnings Call Transcript & Summary

Good morning, everyone, and warm welcome to engcon's presentation of the second quarter 2022 and our first results presentation as a listed company. My name is Anne Vagstrom, and I'm Head of Communications and Investor Relations here at engcon. With me today, I have our CEO, Krister Blomgren, and our CFO, Jens Blom, who will present our Q2 report. After the presentation, we will open up for questions. And you can ask questions in the telephone conference or by posting them on the web. So with that said, I will hand over the word to Krister.

Thank you, Anne. Since this is our first reported presentation, I will guide you through a couple of slides with some background information about engcon before we start with the Q2 presentation. Engcon is the global market leader in the tiltrotator industry. We have 45% market share. Engcon was founded in 1990 by Stig Engström and Monica Engström. Stig Engström is still active in the company within R&D and is still the biggest shareholder of the company. If you're looking on the map there, you see countries that is yellow marked. Those are countries where we have an active sales plan where we have boots on the ground and working on penetrating the market with salespeople and technical guys to support that. It's a total 16 markets from America to Australia. On the other markets, we have a more opportunistic approach to it where we sell if people ask for the product and so on, and we might have somebody that are pushing our products there, but not employed by us, for instance, like in South America and Eastern Europe. And also for your information, then we have never sold any large volumes to Russia. So the sales stop towards Russia didn't affect us that much at all. And our net revenue for 2021 was SEK 1.5 billion. The Nordic region is still the dominating region with more than 50% of our sales. But the rest of the world is growing fast, as you will also see in the Q2 report later on. And if we're going then to our vision, our vision is to change the world of digging. And right now, it's -- we still have 98% left that we can penetrate and convinced of this change. As you see in the upper left corner there, this is how the 98% of all the excavators in the world is looking with the bucket direct mounted to the excavator then only 2% have the tiltrotator and the possibilities that give. But the penetration rate in the Nordic countries are approximately 90%, and that's what we aim for, for the rest of the world too to get up to that level in the range that we have for the tiltrotators. And how will we change the world of digging. We will increase the productivity and efficiency within average of 25% and all these numbers is from the IPO market study conducted by PwC, the numbers of increased efficiency and so on. And we will also make the excavator much more flexible. We make the excavator to a tool carrier with a tiltrotator and our EC-Oil system. And the EC-Oil system is a fully hydraulic quick coupler system. With that, you can switch tools without leaving the cabin or anything like that, and the excavator becomes the tool carrier. And with that, it can replace 2.2 other machines like skid-steer or compactor plates and so on. We also have a big focus on the sustainability. The more efficient machines you have, the less fuel you need for. For example, a 30-ton excavator saves approximately 6,000 liter fuel per year with a tiltrotator on it compared to the ones that doesn't have it. And 6,000 liters that's a lot of money and it's a lot of CO2 that you get out in there in a waste. But we also have a big focus on safety, where the tiltrotators makes the work sites safer but we also have safety system to reduce the human errors. And what are we selling them? We have a full range product suite. We have tiltrotators. We have 8 different sizes of tiltrotators from excavators from 0.5 metric tons (sic ) [ 1.5 metric tons ] up to 33 metric tons. We have a quick coupler systems also for all these sizes that are fully hydraulic quick coupler system, as I mentioned, where we can switch tools without leaving the cab. And we, of course, then have tools, advanced hydraulic tools, but also mechanical attachments to that. And as extra, we're selling control system for our tiltrotators and also safety system to reduce the human errors. And if we're looking on our approach to the market and so on, we have - and can see ourselves as an innovation and marketing company to be able to focus on innovation and marketing, our business model is to buy components from suppliers and assemble it in our production facilities. We also have centralized most of our support organization to keep our sales companies as slim as possible and easy to scale up and also easy to add more markets with a low cost. So that's why we easily can go into new markets since we're having all the supporting tasks more centralized, so we can have just salespeople and technical people in our sales companies then. And we -- it's easy to focus on innovation and marketing than when we're only doing the assemble part. Distribution channel then, all marketing and sales effort is towards the end user. We use social media, phone calls, meetings, demo days, trade shows to educate the end users about our products. But we sell everything through dealers. So we use the dealers' network for that and also the way of financing our products there. With OEM, we focus on R&D cooperation to prepare the machine for tiltrotators for shorten the installation time and also get promotion from the manufacturers about that they are tiltrotator already. This gives us a credibility and awareness of new markets. And that makes it much easier when it's not only us talking about tiltrotators and the benefits we have, and we can also get that from the OEMs. So that helps us a lot on developing new markets. And then we're going over to our production facilities. We're having in one in Sweden, Strömsund, where we're also having our headquarters. This is our biggest facility, 80% of our revenue, our net sales coming from this facility. Here, we're still having a lot of capacity left. We are only utilizing approximately 50% of our facility there. The focus here in Strömsund, Sweden, is on tiltrotators and quick couplers. That's what we produced there. And our other production facilities in Poland, Niepruszewo close to Poznan, where we're having approximately 20% of our total net sales from this production site. Here, we focus on more on attachment, hydraulic attachment and mechanical attachment. Here, we are closer to our maximum capacity, and we also see a big growth, especially in new markets for attachment. So we're having a plan for an extension in 2023 in Poland. If we're looking on our supplier base geographics, 93% of our suppliers is from the Nordic region. And we only indirectly affected of the war in Ukraine with that our some of our suppliers in Poland were buying steel from Ukraine. Now we will shift the focus to the Q2, that is a strong first quarter for us as a listed company. And as you can see on the picture, we reached a milestone and became a listed company on Nasdaq Stockholm in June. And if we're going then to some other business highlights, we can see a strong demand despite the uncertain macro environment for our products, more or less in all regions, we'll talk a little bit more about that later on. Order intake is higher on less mature markets outside the Nordic region. The Nordic region dropped a little bit in Q2. One reason for the drop is the high order intake in Q4 and Q1 in the Nordics then. We also see an improved access to majority of components, still some limitation of certain components that caps our delivery capacity. But -- it's a good trend that we see there at least. Our additional price increase to customers that we announced in April will reach its full effect in Q3 and Q4. And so also the one that we did in Q1 also. We also have launched our third generation of tiltrotators on trade shows in Norway and Sweden. And the biggest show will be in Bauma in October. Production is planned to start early 2023. And as I mentioned, we are listed on Nasdaq Stockholm. And if we go into some Q2 figures here. I'm really proud of our good stable figures in this -- in stable environment. Everybody within engcon have made a great job to achieve this. Order intake a bit lower this quarter because of big order intake in Q4 and Q1, especially in the Nordic countries. And we're having a big order book. So it's still long lead times on our products then so a lot of orders coming in for 2023. Organic growth of 31% is really impressing with this challenge we have had on the supply chain. So everybody has been doing a really good job on getting all these products out. We can see on the gross margin that we're having an increase on the or during Q2, thanks that our price increases have started to kick in, but the full effect will be on the upcoming quarters. EBIT level, a little bit lower because of IPO and also the start of the ERP system change and also that the majority of our revenue was still 2021 year's price list in Q2. And I think ROCE speaks for itself. It's really, really good number with 58% return on capital employed. And we received a lawsuit from one of our competitors in June, and I will try to give you an update on the status on this. Rototilt group filed a lawsuit regarding alleged infringement of patented sensor technology with a claim of approximately SEK 120 million. The technology relates to our Q-safe quick coupler and the usage of multiple sensors. Lawsuit is not related to the sensor technology used in the tiltrotator that's our main product. Engcon has, of course, contested the claim of the patent and together with consultants within patent law and experts and legal advisers, no provision has been made in Q2. We also, in April 2022, appealed the decision to grant the patent to the European Patent Office. The process is ongoing and it's expected to be ongoing for at least 1 to 2 more years before any decision can be made in this. We also, as we mentioned, launched the third generation of tiltrotator system and the third generation tiltrotator system from engcon is the solution for people looking for lower fuel consumption, energy consumption and service cost and also want more responsive digging, better position and better support. We are ahead of our competitors in product development, with the third-generation tiltrotator, we are at least 1 level of technology above existing products on the market. And what is new with the new third-generation tiltrotator system then? The control system is new. It's a smarter control system that can control a lot more things like valves and so on. And what's the main new thing in the tiltrotor is the hydraulics that are much smoother and much more efficient. And with the efficiency we're getting the less fuel consumption or less energy consumption there. So the load sensing technology that makes the machine or the tiltrotator ready for electrification with the fully electric machines where the problem is to get enough energy, and we need to reduce the energy used in that way. And so we're getting much more smarter and efficient in that way. And we also are prepared for full autonomic machines because then you need to have much more smoother machines. You can't have any hacking or anything like that when you're running those autonomic machines together with the Trimble or Topcon machine control system. And we're also having a user-friendly and personalized system with our app, you can set your personal settings, where if you want to drive you're titling faster or rotation slower or whatever your settings want to be, you get your own ID like when you're sitting in your car, you push your name and you're getting all your settings in the way you want to have it. And in the same way we're doing it in the app, so you can move from a machine to machine and have your personal settings in that way. And we're also getting connectivity so we can do over-the-air updates and over-the-air support. And in that way, we can make the product better. After a couple of years, you actually have an embedded product than you bought from the beginning. We're doing a soft launch on this at trade shows. As mentioned earlier, in Sweden and Norway already, we've been having it. And Bauma in Munich, Germany, is the biggest show within our industry. That is -- it's in the end of October. And there, we also promote a lot and show it for everybody, and people have the chance to test it. Production start is planned to be, as I mentioned earlier, early 2023. We had a successful IPO in a turbulent time. I'm proud of all the investors we managed to commit to income and that they want to be part of the movement to change the world of digging. We have a really good cornerstone shareholder group that shares the same beliefs and values us with the focus on organic growth. And we've been having a good start, even if it's been a little bit nervous before the report. We're going into a little bit more regarding financial development, and I will continue a couple of slides. Then I will hand over to Jens Blom, our CFO, that will take a deeper dive into the numbers. If looking into the order intake then, we see continued high investment activity among our customers despite uncertain environment, as we mentioned earlier. Order intake increased 20%, 16% if you take away the currency effect. Net sales increased 35%, 31% if you take away the currency effect and we have a really strong order book that provides good conditions for stable earnings in coming quarters. We also have an extraordinary high order intake in Q4 2021. And as you can see there. And this is not normal. It's a lot about that we made a big price increase for 1st of January 2022, on 10% that ended up like all the Nordic companies starting order preorders and the longer lead time we got to more the orders. So there was a really high order intake, both in Q4 but also in Q1, but especially in Q4. And we don't expect it to look the same this Q4 2022. Then if you're going into each region then and to see how it's looking there, it's a stable growth, more or less in all geographic markets. Nordic have a decrease in order intake. But that's expected since the huge order intake Q4 and Q1. If you're looking for the 6 months period, it's still an increase of 10% in the Nordic region. And as you can see, the net sales are increasing 25% (sic) [ 35% ] and that's really, really good on the mature market as the Nordic region are. So looking into Europe then, Europe have a big growth in Q2, both in order intake and net sales, more or less strong performance from all markets in Europe. So a growth of 43%. That's also outperforming a lot of expectations. Americas have an incredible strong order intake. We can see that our investment with more boots on the ground, both in Central U.S. and West Coast, not only on the East Coast as we were before, start to pay off. We have a much better coverage of U.S. now and also our cooperation with John Deere starts to give us orders and credibility in North America. And so a 96% growth on order intake and 41% on net sales, that's really a strong number for Americas. Looking into Asia and Oceania, they also show a good order intake and net sales growth. And this shows that it will go faster and faster with the penetration on new markets because we started 2020 right before the pandemics in both Korea and Australia. And the reason why it's going faster and faster is that's the knowledge about the tiltrotators is spread, thanks to social media, trade shows and that OEMs are preparing their machines for tiltrotators. And then that way promotes tiltrotators also on those new markets that we haven't been yet. With that, I will hand it over to Jens Blom that will take you into more details regarding the financial numbers.

Thank you, Krister. We're going to start to look a little bit about EBIT. We are ending up on SEK 99 million in the second quarter compares to SEK 83 million, and that's an increase by 19%. The EBIT margin was 18.5% compared to 21%. And then we have an impact of IPO cost of SEK 11 million. We also have started to implement a group business system, which costs SEK 6 million. This affected the quarter. If we go a little bit deeper and in more details, we can look on the gross margin is really stable. It's 42.5% compared to 42.3%. So the higher cost for materials and components is being compensated by the [indiscernible] now price increases that have been made in January and in April. And as Krister mentioned, we are expecting the full effect of those increases in the Q3 and Q4. We also have an effect of the fair value of the derivatives ending up at SEK 16 million. So if we look at the bottom line, we have an EBIT margin pre IPO on SEK 110 million and where the EBIT margin pre IPO is 19.5%. And if we go and look at the rolling 12-month period, we have EBIT margin pre IPO of 22%. And this is really strong if we take in consideration the challenge we've had with the supply chain and long lead times. We are taking a close look on our capital structure. And as you can see, we are trying a little bit more capital and that's due to a higher volume in the inventories. And that's the main 2 effects, one that we need to secure vital components for our production and also a strategy that allowed the more remote markets like America and Australia to have a higher volume in their stock. But even though we are tying up more capital, our operating cash flow is really strong, and we are ending up on SEK 92 million for the quarter compared to SEK 53 million. If we go to the next slide, and we can see there on the return on capital employed, and this is like more of a consequence with an efficient handling of our capital and high profitability. We are ending up at impressive 57.5%. And I think this gives us a solid foundation to meet the upcoming quarters. And now I will hand over to Krister and he will summarize the second quarter.

Thank you, Jens. We'll go in and look at how we've been performing towards our financial targets. As Jens mentioned, we had a strong quarter where the growth goal is to exceed the growth in existing markets through organic growth and what we can compare to since we don't have anybody competitors within the tiltrotator industry that are listed. We can compare to the IPO market study conducted by PwC and their expected growth was 19%, and our growth is 31%. So that's a really good strong number for us. EBIT margin or profitability, where our goal is to exceed 20% measured over a business cycle. EBIT margin is slightly lower because of the huge preorder book that we had. So we're [ selling ] a lot to 2021 year's price list, but also ERP system change and IPO. But it's still on 19%. And capital efficiency, as Jens mentioned, really high. Our goal is to exceed 40% and we are on 58%. Capital structure. Our goal is the equity-to-asset ratio to be above 35%, and we are at 32%. And then if we do a little bit of summary and short outlook. We have a strong order book that provides good conditions for stable earnings in the coming quarters. We'll receive full effect from the price increase to customers in Q3 and Q4. We see that it's improved access to components that shorten delivery times, but we still have some limitation. But this improvement on the access to components will also help us on the -- to reduce the inventory needs, especially in our production facilities. But as Jens mentioned, we need to have stock in especially North America, Korea and Australia. But also what we see as a cloud is potential record high energy prices and a consequence of -- that may affect customers' demand. But we feel that we are a company that having a track record of handling changes by adapting costs and organization while still be able to focusing on innovation and product development. So we feel that we are ready for whatever the future brings to us. And then coming into summarizing a little bit more, we feel that we are well positioned for global growth. We are the global market leader with 45% in attractive and fast-growing niche market. And the market is driven by structural transformation like you have labor shortage, you have sustainability requirements. You need to change the construction equipment sector transformation. You're going where the excavator's becoming tool carriers, similar as agriculture have done before, and you're having demand for productivity and cost savings. And we also having, as I mentioned earlier, we have a superior value proposition where we are one step ahead of our competitors, where we -- innovation through partnership with OEMs and end user helps us to anticipate the need of the end users before they even see the needs a little bit like I used to say that if Henry Ford would have asked about what type of transportation his customers needed, he would say a bigger, stronger horse, but he was building a car. Our end user focus will continue with that go-to-market strategy, working -- building up the market from a bottom up and also with that easy to scale up and take on new markets, we can easily go into new markets without taking any bigger cost on it. We have a long track record of high profitability and capital efficient growth. And we're having a clear strategy for continued -- for growth on globally based. And so we are really looking forward but also, of course, not immune to any downturn in the global economy or anything like that. But we see we're having a strong quarter behind us and looking forward for the future. And with that, I hand over to Anne.

Thank you, Krister and Jens, for a good presentation. So we will now open up for questions. [Operator Instructions] So let's start with the questions from the telephone conference. Operator, please go ahead with the first question.

[Operator Instructions] Our first question is from the line of Agnieszka Vilela from Nordea.

I have a few questions. Starting with your orders development in the quarter, it was plus 16% organic. Can you tell us how much was volumes growth? And how much was price mix out of that number?

We can't say exactly how much was each, but it's a mix of price and volume, of course, even though that we know that we are only around 25% in Q2 that was on new price list of the revenue. But it's a mix but we're also selling different sizes. So that's why it's a little bit hard for us to calculate it.

Do you get the feeling that the price increases, which were quite substantial, there are sticking? And maybe if you could tell us what competitors are doing with prices as well?

Yes. The competitors have followed on most of the markets. There were some markets where they waited a little bit, but -- we can't say that we have seen that we have lost anything because of our price increases. It's been a high demand on the products and long lead times. So they are as it looks like right now then with energy prices going up, and that probably means that steel and so on might keep going up, they're probably there to stay.

All right. And then regarding the 7% organic orders decline in the Nordics. I understand the fact that the comps were quite difficult to have very strong quarters prior to Q2. But I would just like to know if you get the feeling from the customers that they are becoming a bit more hesitant because of the construction markets? Or do you still see good demand for your products in the Nordics.

We still see the -- if you're looking on, starting with the order intake from the beginning, then we see that we're more or less filled what we can sell to Nordic without taking a huge number of market share. So the orders that are coming in right now from the Nordic market, they are for 2023, more or less all of them. We can hear that some people are, of course, thinking about what will happen and so on with house building and these type of things. But we can't see yet a clear path that it's going down because of that or anything like that. But we are trying to follow this as closely as possible all the time by talking both the end customers and to construction companies and dealers and so on.

So the deceleration so far, it's mainly due to the strong order intake in Q4/Q1, in your opinion?

That's the only thing that I really can see clear that, that it is like that, but the rest would be only guesstimates or guessing from my side.

Great. And then you had a very solid gross margin in Q2, and you say that's partly due to the price increases biting and you also expect even more price realization going forward. So my question is should we expect even better or even stronger margin profile through the year?

That, of course, depends on what happens with the component prices and so on. We see that the energy price is going up, and that probably means that the steel price is going up and then our components price might go up there also. But it depends a little bit what happens and if it's become a downturn, then the demand will be lower and then we will -- if we can keep our demand in our products, then it's absolutely a possibility. But again, it's hard to say. It depends a lot on what's happening on the macro level.

I understand. But assuming that the input costs remain stable, would you think that with the price increase, you could improve your margins further?

That's -- if you're only looking at mathematics, it should look like that.

Okay. And then just last one from me. Looking at your quarterly figures, some of them you released in the report, we can see that Q3 last year was very strong on the profitability level with gross margin of 44%. EBIT margin, 25%. So I just wanted to know if there were any kind of special items in [indiscernible] clean base? And also, should the kind of seasonality in profitability look like that?

Yes, I can answer that. Last year, we had a slight lower cost due to the implementation of our group business systems. So -- and also we have a little bit higher cost for consultants at the beginning of Q2. So I think last year was more like some -- not ordinary, but maybe we can see some improvements in the Q3, but that's -- I don't think you can look and copy last year write-off there.

You can also see maybe some trends that we are normally having a higher net sales towards the Nordic region in the first 6 months and then and then the rest of the world is a little bit stronger in the last 6 months because they're having a longer digging season in that way. And that also boost a little bit on the gross margin level.

The next question is from the line of Kenneth Toll from Carnegie.

Yes. First, to follow on, on Agnieszka's discussion. I was wondering if you're adding sales people in the second half of this year, or if you are sort of planning for a slowdown in demand ahead?

Both yes and no. We are adding people in those countries where we see a big potential and where we can get a fast kickback on the investment, if you're saying like that. And like North America, for instance, where we -- as I mentioned, we've been getting more boots on the ground in Central and on the West Coast and that will continue. And also in some regions in Europe, we will also add more people in. But, of course, otherwise, we are a little bit hesitant and looking on the market, what's happening then in the rest of the world more or less.

Okay. makes sense. And then you talked about this third-generation tiltrotator that you have showed to customers in trade shows in Sweden and Norway. What has the response been? Has it been more like, well, it looks great and then not much more? Or has it been more like, wow, I would really like to have one of those.

It's been a positive response. Yes, it's been a positive response. We had people trying it in the Swedish exhibition that we had. And they feel that they can feel the difference, it's smoother and so on. Of course, they need to see -- they can't see on that short test that it's more efficient regarding fuel and energy and so on. But that's -- things that we need to show how it's much more efficient regarding that. They like the app, they like those things where you can personalize your settings and so on. So those things are really positive. We haven't made it able to book orders on it yet. So in that way, we can't say how big a positive response it's been. But we will start up that with the possibility of placing orders after Bauma or during Bauma actually, I mean. So that's the plan we're having. But when we're talking to the OEMs, they feel really positive regarding with their fully electric machine that we're doing these things to reduce the consumption and so on because that's the challenge they're having to make those machines last for a full day.