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

Welcome to the engcon Q4 2022 Report Presentation. [Operator Instructions] Now I will hand the conference over to the speakers. Please, go ahead.

Hello, everyone, and warm welcome to engcon's presentation of the fourth quarter. My name is Anne Vagstrom and I'm Head of IR here at engcon. With me today, I have our CEO, Krister Blomgren; and our CFO, Jens Blom. Krister and Jens will take you through the highlights of the quarter and some full year figures, and then we will also move on to the Q&A session. With that said, I will hand over the word to Krister.

Thank you, Anne, and hi, and welcome to engcon's Q4 report presentation. I will make a short recap of engcon for you that haven't been following us before. Engcon is the global market leader in tiltrotators. Tiltrotators is a small niche within the construction industry. And engcon was found in 1990 by Stig Engstrom and Monica Engstrom, and we are currently active in 16 markets where we're having an plan -- active plan for how to grow the market, and we have boots on the ground. And these 16 markets are the ones that marked with yellow in the map that you can see. And we are approximately 400 or 400-plus employees, and our net sales in 2022 was SEK 1.9 billion. And then, if you're looking into the net sales split per region for 2022, we can see that the Nordic is still the dominating part with 53%, but it's going down compared to last year when it was 57%, even if the Nordic had a really, really good year this year with good growth. We can see that Europe is growing from 30% last year up to 32% this year. And U.S. or -- sorry, Americas is growing from 8% up to 9%, and Asia seeing -- growing from 5% to 6%. So it's good to see the good solid growth in the growth markets and making us less and less dependent on the Nordics, that we will also come back to later on in the presentation. Looking on the Q4 business highlights then. We're having a record net sales with strong contribution from all regions, with a significant EBIT increase. We have a better supply chain and more people in assembling that have increased our production capacity. We have a strong order book that provides comfort for stable earnings, higher order activity in Americas and Asia-Oceania and lower order intake on Nordic and European markets, as expected for Q4. We also started to invest in our sales organization on strategic growth markets. We can continue to grow if the Nordic market will drop, because of the cyclic excavator [ system ]. And now over to a statistic of how we have performed this quarter. The fourth quarter ends with a record high in net sales and showed 38% organic growth. The order intake from end of 2021 and first 6 months in 2022 have been anything but normal. The pre-order effect because of lead times is now over, and we expected a lower order intake in Q4. So the decrease of the order intake is 33% in the quarter. Our gross margin is on a good level, on 44%, and that since the price increases are now in full effect. EBIT margin is on 22%. That's a strong level reached because of the strong net sales and the high gross margin. We also made strategic investments in the sales organization, as I mentioned, on the growth markets. And we also have the ERP implementation costs on SEK 8.4 million in this quarter, that have reduced the EBIT margin then. All in all, resulting in a high growth above our financial targets and a strong quarter with a record high net sales and stable profitability. And then we will talk more about the business and financial development. I will keep talking about the business, and then I will hand over to Jens Blom, our CFO, for the financial development. If we look in little deeper to net sales and order intake for the last 9 quarters since our first 6 months as a listed company, hasn't been business as normal. We'll show a little bit longer period of net sales and order intake for you to get a better understanding for our business then. The net sales were on record high levels, as we said, and our strongest quarter ever. It was mainly driven by strong increases in the European and American region, which is very positive for us and getting us less dependent on the Nordic markets. Order intake shows an organic decline of 33% compared to previous year. 2022 was, by no means, as mentioned earlier, a normal year. 2021 ended with extreme order intake fueled by pre-ordering effect and long lead times. This was strong incentive for customers to place order around Q4 2021 and the beginning of 2022, but tiltrotators expected to be delivered during the second half of 2022. Because of that, the order intake was expected to be lower in Q3 and Q4. The Nordic markets are still predominant for pre-orders. It's more or less only Netherlands that plays any larger pre-orders outside the Nordics. The now reduced lead times and the less dramatic price increase of 5% communicated for 2023, provide a weaker incentive for customers to place pre-orders, this, combined with a more careful purchasing behaviors as the customers await the uncertainties with the economic situation right now then. With this background, the order intake for Q4 2022 show a strong level compared to other quarters, and a strong order book provides conditions for stable earnings for coming quarter. Our improved production capacity makes the order book more normal again, and we expect the order intake to adapt to that also. And now we'll come over to a slide where we're breaking down the net sales and order intake on each geographic region for Q4. And if we're starting then with the Nordics, we have a good increase in net sales. Nordic is up 13%. We're having a drop in order intake, as we talked about, that was expected already. But compared to normal years, as you saw on the slide before, we have a good order intake in Q4 2022. Europe, a little bit similar explanation as the Nordics, especially in the Netherlands. That's the only country in Europe, as I mentioned earlier, also placing the larger pre-orders. Now when we have more normal lead times, we believe that the European market will have a stable growth. Net sales is up really high than in Q4, with 78% in Europe. Order intake is down with 29%. Americas, we have a strong demand for our products, and our cooperation with [ there ] helps us increase our penetration rate from a low level. We will also have the biggest exhibition, Conexpo, in North America in March, that will increase the knowledge of tiltrotators. We have also invested in more boots on the ground to build up the market and be able to serve our customer better. And our increased production capacity have not only made it possible to reach a record high net sales, but we've also been able to ship inventory to our distant markets for Q1 sales. So in the Americas, the net sales is up 58%, and the order intake is up really good, 105%, that we will be able to use for Q1 sales then. Asia-Oceania, we see a strong interest for our products in Asia, especially in Korea, where they have the biggest rate of wheel excavator compared to any other country. Wheel excavator is our sweet spot for tiltitators, Oceania have been working hard on -- to not only be a niche product for [ railroad ] and be able to get into the civil side. And we can see that the interest are increasing on the civil side, and we have big hopes for Australia, for coming year then. Net sales up 14%. Order intake up 6%. And if we're looking on a similar slide, but for the full year 2022, we can see a big increase in net sales in Nordics with 18% organic growth. That is very good for being on a mature market. And the good thing is also the growth is both that we have increased the value of our tiltrotators and also increased the number of tiltrotators. Order intake is lower because of the huge order intake in Q4 2021. Europe had a strong growth in net sales with 36% organic growth for the year. More or less, all markets are showing strong numbers and start to come up to a significant share of our revenue. Order intake is up with 10%. Americas good growth in net sales, 34%, and even better in order intake with 69%. The interest in North America for a more efficient and flexible machine in the growing construction industry, makes the North American market exciting to follow. Asia-Oceania, solid growth in net sales with 29% and also solid growth in order intake with 34%. I was in Korea a few weeks ago, and it's really interesting market that already used rotation couplers, a lot of different tools. The key thing is to make them switch to our quick coupler system to have a fast pace of the growth in Korea. And last picture before I hand over to Jens is a picture there. Since we earlier talked about our dependence for the cyclic Nordic market, we want to show you this slide. You can see the Nordic region had a great growth on 18% in net sales and are still above 50% of our revenue, even if the growth markets are catching up. But we can see a historical breaking point on the order intake when the growth markets reached 53% of our total order intake. This is really important since this will make us less dependent on cyclic excavator sales for the coming years then. Then I will hand over to Jens and he will guide you through the financial numbers.

Thank you, Krister. We start with EBIT and EBIT margin. The record high EBIT has improved from SEK 77 million to SEK 121 million. It's an increase by 57%. The EBIT margin has gone from 20.8% to 22.4%, and it's driven by high net sales and full effect from the price increase that Krister mentioned. We have a solid and strong EBIT margin despite the challenge that we have had with supply chain, cost inflation and the investment in the sales organization. And we're going to look a little bit closer on the profit and loss. The net sales has gone from SEK 370 million to SEK 541 million. We have a strong gross margin, 44% compared to 39.7% in the quarter, and we're ending up for the full year on 43%. The higher cost for the goods sold is offset by the gradual increase of the price, which reached a full effect in Q4. We're looking a little bit further down. We can see that the sales expenses have increased, and that's due to our investment in sales organization in the growth market. And if you look on the bottom line, we can see that we reached SEK 121 million pre-IPO compared to SEK 81 million. And for the full-year, we reached SEK 432 million compared to SEK 329 million. And we're going to look a little bit closer on the capital structure and the cash flow. The net working capital as part of net sales is 32.5% compared to 27.4%. The increase is due to a higher level of inventories. And that is why -- the reason for that is we need to securely deliver for the continuing growth, the more geographic distant markets. But even though we are tying up more capital, we are improving the operating cash flow, which goes from SEK 45 million to SEK 56 million. And for the full-year, we're ending up on SEK 216 million compared to SEK 175 million. And then we start looking on the return on capital employed. We have 56.4% for the full year and 47.8% 2021. If we look at the charter, we see an impressive development for the full years. This gives us a solid foundation to meet the upcoming quarters. And then I will hand it over to Krister, who will take us through the financial targets and summarize this presentation.

Thank you, Jens. Let's take a look on our financial targets, as Jens said then. Looking -- starting with the growth target. Our target is to exceed the growth in existing markets through organic growth. Estimated growth for the market is 19% in average over a business cycle, and our growth is 24%. Looking on the target profitability, our target is to have an EBIT margin in excess of 20% of our business cycle. We have [ above ] 21%. If we exclude IPO costs, we are about 22%. And we're also having cost then for SEK 24 million in total for this year, for the ERP costs. Looking on the capital efficiency, we're having an amazing high ROCE with 56%, way above our target of 40%. Capital structure. Our target is to have an equity to asset ratio above 35%, and we're having 42%. So we exceed all our financial targets. And if you're looking into the dividend policy, our dividend policy is to pay approximately 50% of net profit in dividends. Dividend proposal will consider engcon's long-term potential financial position and investment needs, and we continue to invest for growth in sales organization, production capacity in Poland and third-generation tiltrotator system. And with that as a background, the Board has suggested a dividend on SEK 0.85 per share, and that's a little bit less than 50%. But we believe that, with the long-term perspective, that's best for the company's growth and value. Then we'll come into the summary and outlook, and a strong end to a challenging year that have been anything, but normal. I'm proud of what we have -- we all at engcon have achieved and looking forward to keep changing the world of digging. We also have improved production capacity with shorter lead times, enabling stock for distant growth markets in Q4 that we will have use of in Q1 sales. Solid order book with increased share from Americas provides good conditions for stable earnings and margins coming quarter. With already high interest for tiltrotators in North America and Conexpo, the biggest construction exhibition in the U.S. coming up in Las Vegas in March, it's likely that the interest continues to grow, as more contractors and operators becoming aware of the benefits of our system. We at engcon, as I mentioned earlier, wants to invest in a potential downturn as we have done before and come out even stronger from that. So we continue to invest for growth in sales organization, production capacity in Poland and third-generation tiltrotators system then. We have also ended our agreement with our distributor in Norway and started our own subsidiary. We believe we can do a better job on selling our full system and also increase our market share there. But there is also a potential for the Nordic market to keep growing, both on getting higher revenue per unit, that's -- [ we talked on] we had done, and also getting more units out. Then if we're ending up with talking a little bit more about long-term key market drivers for the construction equipment sector. We consider us to have a strong product offering that supports customers' productivity gains and cost savings that will maybe be even more in focus in today's economy and in the future. And then, if you're looking into the construction equipment sectors' transformation, we see excavators becoming tool carriers. That's the fastest-growing segment in the yellow industry, increasing demand for connected and integrated construction equipment, electric excavators. And if you're looking on some key drivers like labor shortage, we see a shortage of construction workers in developed markets and aging labor force, like in the Nordics, U.S., Japan and more or less in the Western world. We see a structural need to compensate the lack of labor with the productivity and efficiency of machinery. And another key driver where we also see -- is the productivity demand and cost savings. With the material price, machine cost, fuel cost, labor cost, all of them increasing, that leads to increase the productivity demand. And we also see some end users that maybe wants to scale down or invest less, and getting more flexible machines, so they still can take on all different types of jobs, and that's what we provide eith our tiltrotator and quick coupler system. They still can take on all these different type of jobs with less machines. But we're also helping the excavator owners to become more sustainable. They need fewer machines and equipment for the same work, leads to less emission from fuel transportation and wear and tear. We also improved their safety on the job sites. And overall, the world of digging is changing rapidly, and new technologies and innovations are making it more efficient, precise and sustainable than ever before. As technology continues to advance, we can expect to see even more changes in this important industry in the years to come, and we at engcon are read as being forefront of this change. And I will hand it over to Anne. That will finish up.

Yes. Thank you, Krister, for a great presentation. We will now open up for questions that can be asked in the telephone conference. So operator, please go ahead with the first question.

[Operator Instructions] The next question comes from Agnieszka Vilela from Nordea.

So starting with the order intake. It was actually -- I consider it quite good in Q4 against tough comparable, obviously. And you mentioned there was not that much pre-ordering. Can you help us with how should we think now kind of from that level, about the quarterly seasonality of orders? Do you think that this kind of SEK 500 million level per quarter, is this something that you would expect in 2023? Or will there be any kind of seasonality that could affect that? That's my first question.

Yes, that's probably the billion-dollar question. But we see still a good order intake. We have a very solid order book, so that makes us comfortable for the near future. The order intake are still coming in, and we hope it will increase even more when you're coming into March, April and so on. That's the normal seasonal part of it when we're getting the most orders normally when we're looking on historical.

And with regards to more muted construction market, do you think that these could affect order activity mainly in the Nordics or do you think that even Europe could be affected?

I mean, it depends on -- when we're listening to the OEMs or excavator manufacturers, they don't believe there will be a big drop. Of course, still depending on a lot of different things that, with interest rates and with inflation, everything like that can affect it. But there will be a drop. And in the Nordics, that will absolutely affect us. In Europe, we still have the opportunity to grow, as I talked about earlier on with France as an example where we're only having a 10% penetration rate. And even if they're dropping then 20%, they're going maybe then from 18,000 excavators dropping down to 15,000 or something like that. And we're still having huge chance to grow, maybe not as fast as we have been growing before, but still we're having a really good, solid chance to keep on growing.

And then maybe zooming in a bit more on Europe. I mean, as I say, the market is in early days, yet you have seen rather weak orders in Q4, specifically down 30%. Is it a reflection of more or kind of difficult comparable or are the customers really more hesitant because of the construction markets?

No. Since then mainly, it's only one country more or less that we're standing for the pre-orders last year. That was the Benelux or Netherlands. And since there were not the same incentives for them to place and taking -- because the pre-orders are orders made by the dealers where they gamble a little bit on getting it. And last year, it was much more incentives for them with long lead times and a much bigger price increase. So then they were willing to take more risks with that. And we had a hopes on that we would get more pre-orders from more countries, but that hasn't happened yet. It's still mainly then the Netherlands that have been placing pre-orders, and they've been placing less than what they did last year because of those incentives that we tried to explain about in the presentation also -- were much, much higher last year compared to this year. And of course, the uncertainties in the economic situation makes them less willing to take risks.

I have one more question before I get back into the line. And again, on Europe, actually. You did have very good sales in the region. Have you prioritized this market specifically? And maybe if you can also tell us a bit more about your production capacity right now, how the production ramp-up is going? And whether you, for example, maybe prioritize a bit more the Nordics, given the still relatively high order backlog there?

It was more like that the European market woke up a little bit later, I would say, because they didn't place the pre-orders, except the Netherlands. And so they placed the orders in late Q1 or early Q2. And with the long lead time we had last year, those orders ended up coming into Q4. So that's why we also have a big growth in net sales on -- in Europe. And regarding our production capacity, as I mentioned, we are able to have a record high net sales, and still able to deliver to our long distant markets for -- so they're making sure that they're having units also for the Q1 sales. So I'm very proud of purchase and production what they have done and being able to get us up to this level. And I don't think -- if we don't getting any specific problems with the supply chain, I don't think we will be close to having these problems we had last year with long lead times. And yes, so you can order more normal right now. You're getting almost in normal times right now from replacing the one standard products.

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

Okay. Thank you Agnieszka for your questions. And if there are any other further questions out there, please don't hesitate to reach out to any of us. We are more than happy to help you. So thank you for listening in today, and we hope to see you all soon again.

Thank you very much. Thank you.