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

Hello, and warm welcome to Engcon's Presentation for the First Quarter of 2025. Thanks for joining us today. I'm Krister Blomgren, CEO at engcon, and with me today is our CFO, Marcus Asplund. We're excited to share some highlights and key numbers from our Q1 report. And after that, we'll jump into a Q&A where you can fire away with your questions. We're really happy to say that we kicked off the year with a strong order intake, mainly driven by growing demand in the Nordics as everyone gears up for the upcoming digging season. Order intake was up by 28% and as I mentioned earlier, a big part of that comes from the strong momentum in the Nordics. Net sales for the quarter also grew nicely with a 14% increase compared to last year. And Europe continues to be a real bright spot for us. The awareness around tiltrotators just keeps growing, and Bauma made that crystal clear. Tiltrotators were everywhere at Bauma. Every major excavator manufacturer had machines equipped with tiltrotators on display. It's clear that tiltrotators have truly arrived in Europe. They are not just a new idea anymore. They are becoming the standard. There's a really strong momentum in the European market right now. Our operating profit increased by an impressive 40% with some offset from the strengthening of the Swedish krona. And we also had some good news on the legal side. The Swedish Patent and Market Court of Appeal upheld the earlier ruling in the patent case with Rototilt. The claim was dismissed again and the court confirmed that no patent infringement had occurred. Since the ruling can't be appealed, the matter is now fully settled in Sweden. But just to clarify, Rototil still retains the patent. It just wasn't infringed by us. If we take a look at some of the key numbers for the first quarter, net sales were up 14%, with most of that growth coming from our 2 biggest regions, the Nordics and Europe. Order intake kept its strong momentum going into 2025, climbing 28%. The Nordics really stood out this quarter and leading the way. Our gross margin came in at 46%, helped by higher production volumes and a real good mix of products and markets. EBIT also had a strong lift, up 40% to SEK84 million, giving us an operating margin of 19% compared to 15% last year. And ROCE continues to move in the right direction, steadily climbing towards our target of 40%. If we're taking a closer look at the progress we have made in order intake and net sales. Order intake came in at SEK524 million. That's actually the highest we have seen in more than 2 years, mainly thanks to strong demand in the Nordics ahead of the upcoming digging season. The past few years have been a bit turbulent, but now we're starting to see a more normal seasonal pattern taking shape again. Typically, we build up the order book during Q4 and Q1, and then we see deliveries pick up in Q2 when the digging season really gets going. With the Nordic market coming back strong, this pattern is becoming much clearer. Net sales landed at SEK446 million. And given the order intake we've seen, it's clear that we've been building up the order book during Q4 and Q1. And okay, with that, let's move on and talk a bit about how things are looking in the different regions. The Nordics had the strongest start of all our regions this year. We're seeing a much more positive outlook from our end customers and with low inventory levels at our dealers, it's creating even stronger demand. Order intake came in at SEK231 million. That's a massive organic growth of 49%. Net sales also grew nicely, reaching SEK190 million, which is 21% up. What's even better is that the market and product mix in the Nordics turn out to be more positive than we expected. So it didn't hurt our gross margin in the way we had predicted earlier. And you can see in the chart, we have built up a really strong order book in the Nordics. This is starting to look like the traditional season pattern we know. Strong order intake around the year-end continuing into Q1 and then higher deliveries in Q2 as the digging season kicks off. All in all, we are really happy to see the Nordics bouncing back in 2025, and it's going to be exciting to see whether the Nordics or Europe ends up being our biggest region this year. And speaking of Europe then, in Europe, the tiltrotator just keeps gaining ground. Order intake grew organically by 20% compared to Q1 last year. Net sales were up to increasing by 17% to SEK182 million. The awareness of our products and their benefits is definitely on the rise and Baum in Munich really made that clear. At the world's biggest and busiest trade show, tiltrotators were everywhere. All the major excavator manufacturers had them on display. Germany, in particular, has been a real highlight for us. We're seeing a strong uptick in the demand there. The trend is clear. More and more users are moving from just tilt or rotation couplers, which have been the norm for a long time in Germany to full tiltrotator solutions. We're seeing good momentum across several key markets in Europe, and we believe a lot of that is thanks to growing penetration rate, which I will dive deeper into a bit later on. At the same time, competition is heating up, but interestingly, the big 3, ourselves included, are only getting stronger. Every major OEM at Bauma had all 3 brands represented in their booth. And honestly, that's a good sign. It shows that the manufacturers get it. They understand how important Tiltrussatus have become and that they need to let the end customers choose. Otherwise, the risk is that they're losing machine sales. If we take a look at the Americas then, despite the turbulent situation in the U.S., order intake in the Americas rose by 19%. However, net sales decreased by 14% due to low inventory levels limiting our deliveries. We are now adjusting inventory levels to meet the regional demand. We are continuing to build up the organization, but the tariff situation has caused a few bumps along the way. We have chosen to pass the extra tariff costs on to the customers. We also see the currency shifts are having some impact on our margins, but since the U.S. is a smaller part of our overall business, the effect is limited. At this stage, it's difficult to predict how the announced tariffs might affect future growth in the Americas. Either way, we're staying focused, working closely with our end customer and showing them how our products can boost their business. That's how we are changing the world of digging. Then we're moving over to our smallest region, Asia/Oceania. And the order intake in Asia/Oceania dropped by 10%, but it's worth noting that's also the smallest region, and we're normally having a lot of fluctuations in that region. And the drop was a lot affected by Australia. And in Australia, the market it's a bit cautious ahead of the election in May. But we are confident that things will pick up once the election is behind us. Our Japanese sales company is off to a strong start, showing good growth compared to previous years when we work to a distributor. And if we're taking a closer look at how market penetration has been developing because that's really the key to driving future sales. In 2024, Europe made a huge leap and actually overtook the Nordics as our biggest region in terms of revenue. It's also where we are seeing the biggest shifts when it comes to penetration rates. I want to highlight a few markets that really stands out. And of course, it's a little tricky to measure penetration exactly. But based on our estimates, here's what we are seeing then. In Netherlands, we believe penetration has gone from 27% to 33%. And according to the theory, that means we have likely passed the tipping point. Once you hit that tipping point, sales, both for new excavators and the existing market really tend to take off because the tiltrotator becomes more of a standard rather than something new or optional. And we are definitely seeing that in the Netherlands. Sales are starting to feel almost self-playing and we're getting more interest from different customer segments. Sales are growing steadily, even though the competition is pretty tough now in the Netherlands. In Germany, which is the biggest excavator market in Europe, we estimate the penetration has moved from 6% to 9%. Here, we're noticing that more customers who used to only buy tilting or rotating quick couplers are now seriously considering full tiltrotator solutions. Our partnership with [indiscernible] have really helped us to get the product on the map over there. In both Netherlands and Germany, we have been successful by offering a tiltrotators with the local coupler brands. One key takeaway from this is clear. If a local coupler has a big market share, we need to have an entry-level tiltrotator ready that fits into that ecosystem. We are tiltrotators deliver major productivity gains -- as labor becomes harder to find and efficiency demands grow, more contractors are adopting tiltrotators, and this will fuel the rapid global expansion of tiltrotators. With that, I will hand it over to Marcus, and he will guide you through the financial development. So please go ahead, Marcus.

Thank you, Krister. Let's have a look at the financial development. In the quarter, we delivered an EBIT of SEK84 million, which is 40% better than in Q1 2024. This corresponds to an EBIT margin of just under 19%, which is to compare with 15% in the corresponding quarter 2024. Digging into the income statement to see what's driving the results. Net sales increased by 14%, and the increase is fairly balanced between the Nordics and the Europe regions. In the first quarter, the Nordics takes the lead and represent the largest region in terms of net sales and order intake. On a negative note, we have seen that net sales is starting to take a hit from a stronger SEK. This has mainly occurred during the latter part of Q1 and may continue going forward. In the quarter, the effect on top line is, however, limited to SEK2 million. The gross margin amounts to 46.1% in the quarter compared to 42% in Q1 2024. We see that the margin is positively impacted by high volumes and utilization in the production system, combined with favorable underlying product and market mix. When volumes increase, we get leverage and we generate higher absorption. From a product mix perspective, we can see that we have a favorable product mix supports the margin and the market mix is distributed to markets with slightly higher margins than average. Positive market mix is not necessarily connected to our regions. It can also occur between -- both between regions, but also arise within regions between different markets. Selling expenses amounted to SEK66 million in the quarter and also shows leverage as share of revenue decreases by 1.4 percentage points compared to -- looking at the administrative expenses. Admin expenses increased by SEK6 million, mainly driven by costs related to the Rototilt lawsuit. And as Krister pointed out, it has now been settled. Other operating income and expenses is mainly affected by currency fluctuations related to the revaluation of balance sheet items, along with the offsetting impact of changes in derivative values. The net effect in the quarter amounts to minus SEK10 million, including a positive value change of derivatives amounting to SEK4 million. All-in-all, this boils down to an EBIT of SEK84 million or 18.8%, an absolute increase of 40%, along with a margin improvement of 3.6 percentage points. We are pleased with the improvement compared to last year, although it remains below our financial target of 20%. The main reason for not hitting this target is the negative currency effect we have seen in the quarter, which weighs down the result in an otherwise strong income statement. A higher operating cash flow driven by higher operating profit and paid income tax is partly offset by higher net working capital connected to the ramp-up effects in the system. The unutilized liquidity totaling at SEK412 million will come in handy in upcoming buyout of minorities and the record dividend payout in Q2. The return of capital employed continues its journey upwards for the fifth consecutive quarter towards our target. This trend is expected to continue in the coming quarter. Summarizing by going through our financial targets, a solid net sales growth in uncertain times. EBIT comes in under our target. However, excluding currency effects, EBIT shows strength and above target. ROCE is just shy of our target and continues to improve. And regarding the capital structure, the equity-to-asset ratio is currently on a high level, which continues to provide comfort to act on opportunities moving forward. And with that, I leave the word back to Krister to sum up and give us an update on what's ahead.

All right. Thank you, Marcus. Let's wrap up the first quarter then. It's really encouraging to see that the strong trend in order intake is carrying on into 2025. And even better, it's starting to follow the seasonal patterns we have seen historically. Demand has been solid, especially in the Nordics, where customers are gearing up for the busy digging season. We're also keeping the momentum going in Europe with growth coming from several key markets. On top of that, we delivered strong net sales while at the same time building up inventory and ramping up the production to meet future demand. Looking at the bottom line, we posted a strong underlying result, finishing the quarter with a 19% operating margin. If we adjust for currency effects, we would actually have passed our 20% financial target, which feels great. Engcon is also strengthening its position by acquiring the remaining shares in the 3 of its subsidiaries in Finland, France and Denmark. Until now, we have owned 80% of the shares in each of these companies with local country manager holding the rest to help align their interest with Engcon's shareholders. Now to simplify the group structure while keeping that strong sense of shared commitment, we have signed agreements to buy out the local country managers becoming the sole owner of all 3 subsidiaries. The total purchase price is about SEK126 million, split evenly between cash and newly issued B shares in Engcon. As part of the deal, the sellers have agreed not to sell the Engcon B shares they received for at least 60 days starting from May 20, 2025. We're taking a look on Bauma and the experience from there, Bauma 2025 was truly something special for us and honestly for the entire industry. Walking around exhibition this year, it was impossible not to feel the shift. Tiltrotators weren't just a niche product anymore. They were everywhere. All the major excavator manufacturers had tiltrotators on display, and it was clear that what we have been working towards for years is now becoming the new standard. For us at Engcon, it was a proud moment, seeing our technology embraced like this across brands and across markets shows that the hard work we have put into education, innovation and customer relationships is paying off. It wasn't just about showcasing products. It was about showing the future of digging live right there on the ground at Bauma. The energy, the interest, the number of conversations we had, it all made it clear. The world is waking up to the tiltrotator revolution, and we are leading the way. We are changing the world of digging. It's moments like Bauma that remind us why we do what we do, and it push us to aim even higher. And let's talk a bit about what we are seeing as we look ahead. The market outlook is still pretty unpredictable, especially with all the talk about tariffs and what impact it could have on the global economy. It's not so much the direct effect on the U.S. market that I'm thinking about, but more how it could ripple out and affect global demand overall. We have also seen the Swedish krona strengthened quite a bit during the quarter. Since we are heavily export driven, that does affect us when we translate our revenues back into SEK. And of course, future currency movements will continue to have an impact. Now looking at the positives. We expect continued strong sales growth in the Nordic as we head into the digging season. We are back to the usual seasonal patterns, and we have built up a solid order book going into the Q2, which feels great. That said, we have had a few minor disruptions into the supply chain recently. If that continues, it could cause some delivery delays in the coming quarter, which make it a bit harder to predict exactly how net sales will land. Even so, when we take a step back, we are really proud of what we have achieved this quarter, strong financials, growing demand and an even stronger market position. The launch of our third generation has further cemented our place as the technical leader in the industry. Bauma, it was a massive success, and now we're keeping the momentum going with our European roadshow, Engcon Dig Days 2025. It's a fantastic opportunity to reconnect with all the new contacts we have made at Bauma and show even more end customer how our products boost efficiency and profitability. And that's how we are keep changing the world of digging. Okay. That was everything we had for today's presentation. Now we're happy to open up for your questions and feel free to jump in through the telephone conference. Operator, whenever you're ready, please bring in the first question.

The next question comes from Zino Engdalen Ricciuti from Handelsbanken.

Just starting off where you finished on the supply chain disruptions. Was this only affected in the Americas? Or were there other regions as well?

No, the disruption in Americas were more that we had a too low stock in there, and we have produced for sending it over to the U.S. So that was a different type of problem. There's more the ramping up that we have been having some suppliers that have been having some different type of problems and so on. So there have been smaller hiccups so far. But of course, if we keep ramping it up in Q2 and so on, we might see new challenges. But we have ramped it up already pretty good in Q1. So hopefully, there will not be any major problems in Q2.

Then I understand which part of the supply chain it is. And coming back to the seasonality on orders, just to be clear, when we're looking on the seasonality on the order conversion in the Nordics and Europe in the past 2 years, of course, they have been a bit special. Q2 sales has been higher than the Q1 order intake. I expect then given your comments and backlog that you expect that to continue as well. Is that fair?

We normally, as we're saying here, the best order intake quarters are normally like Q4 and Q1. And then the delivery season is like Q2 and Q3 more. So order intake can be a little bit different. But the more, the better or stronger we get in Europe and other regions than the Nordics, it's even out more then. But now when the Nordics is bouncing back, we're seeing more the historically pattern that we normally have with Q4 and Q1 that are stronger in order intake. So it depends a little bit on which regions we are strong and where you're having winter or not having a winter where you're not digging 12 months a year in that way. But historically, it's been more Q4 and Q1 that's been strong order intake and a little bit less order intake in Q2 and Q3 and so on, but higher deliveries then.

And coming back to what we spoke about in the last quarter that March and April are important months and set the tone. And given that a lot of the turbulence started in April, can you shed some light into how the beginning of April has progressed?

We can see that we had a really strong order intake in the Nordics, maybe a bit stronger than what we expected with the 49% increase. And that maybe have been taking a little bit of the order intake that comes in Q2 then. And also the turbulence have may be affected a little bit like that. So we are not continuing on that strong pace that we've been in Q1. We are not up 9%.

And you mentioned in the Netherlands where you've passed the tipping point that competition has increased. Could you say how that -- if you have seen any impact on margins through competition, in the Netherlands?

A little bit early to say that, but we definitely see that the competition are trying to price themselves in. So it might be a little bit margins that could be affected at least in the future then. So far, we have been doing a terrific job on getting these orders in a good way anyway. But of course, it might be -- the tougher the competition is, the better we have to be. And Netherlands is a market that is still mixed where we're having a lot of the simpler tiltrotators where it's harder to specify the unique things for us. We are more or less the only one that's selling the S coupler and fully solution. And there, we're still having easier to keep a good margin and so on. So it's a little bit mixed in that way for Netherlands.

And my last question on the gross margin. In Q3, we were around the 46% level as well. And I think you said that it was a bit of stars were aligned in a good way in that quarter. How do you feel about it? And now we are here again, how do you feel about it going forward?

Hopefully, stars are aligned all the time then, but I'll pass it on to Marcus then to get a little bit more.

Yes. As we said, we are ramping up now and we get higher absorption. And also, I mean, regarding that, it gives us -- can we keep a certain level of revenues, we will be able -- or it will be easier for us to keep on this level. But once again, also, there's a lot of other things that could bring it down going forward. I mean, we're talking about the turbulence now and so forth in both in supply chains, not only for the U.S. we talk about here. I mean there are secondary effects in the whole supply chain in the world. I see maybe too early to call, but definitely something on the horizon here. But yes, if we keep a higher level of revenues in this sense, now in the ramp-up, we say we can keep that new level throughout the year, then we would be, yes, north of the 43% that we say as a long-term sustainable one. But then again, as we know, it can hit us on currencies and so forth. We haven't seen the end of that yet also. So we're a bit cautious here. But yes, we had, as we said, maybe stars aligned in Q1 as well now, but a little bit different stars, but still aligned. But yes, a lot of moving parts, but we should be between 43% and 46% as -- if we have this kind of yes, sentiment or climate and the volumes that we're having right now.

No, I think that's the biggest difference compared to Q3, the volume that we're having right now, then that's -- as we saw earlier also when we're having high volumes, we're getting higher gross margins. So the volume is an important key in it, absolutely.

The next question comes from Anna Widstrom from Carnegie.

So my first question is on, we've seen some increase in number of employees. So is there any other scale up that you've seen as necessary to sort of handle the current sales volume increase going forward?

The increase of staff is mainly in production then to -- for the ramping up and so on. So that's the majority of the people is coming there. I don't know if you have anything more to add there, Marcus, regarding.

No, no. I mean you're absolutely right. We have a very flexible system in that sense in the assembly. And when we have to ramp up to meet demand, we do so mainly with assembly people in production, which is then a good flexibility for us to have. So I would say that this is where it lies now and don't see any other different things that needs to be in the short to midterm here on these levels.

And just a follow-up on the previous comment. Could you in any way quantify how much of the deliveries in Q1 that was negatively impacted by supply chain issues? Is it like very minor or a couple of percentage points on the top line?

I think it's 2 things. If you're looking that we were below the consensus and so on net sales. One part is also that we've been sending a lot to our countries far away. So they have been in transit in that way. So that's why we're also having higher hopes on deliveries in Q2. So production capacity was pretty good, but we ended up in the end of the quarter with some issues with a couple of suppliers, different reasons for it. But I would say it was a smaller hiccup on our net sales, but it was more like for giving a little bit like heads up for Q2 that we can get disturbance regarding that. But that was in the end of the quarter we got them. So I would say it was minor. I think it's hard to quantify it.

But the supply chain issues as such has not -- has a very minor impact on the -- it's more of longer delivery times due to the market mix or deliveries to different markets in Q1 or the end of Q1.

And just a final one. As you said, it's very, very difficult to sort of predict how this tariff impact is going to be. So could you maybe tell us a bit on how you're working with it currently and if you're like talking about price increases towards customers in the U.S. and such?

We have the possibility of making price increases and so on according to our agreements then. But so far, we haven't done it. We are trying to wait to see a little bit where we're going to end up. It's a lot of turbulences right now. We don't like to making too fast moves regarding that. We prefer to make one when we know a little bit where it are going and see if we need to make the change right there then. But regarding the tariffs, we've been pushing them to the customers directly because that we don't think is something that we can control in any way. It's like a taxi has been putting it on. We need to take that out. But we are following the currency and see where it's going to go, but we haven't done anything yet.

And we're very much following especially the U.S. dollar now, of course, as in the presentation as well. It's a small part of it, but also we know that other -- I mean, there is a secondary effect and also different currencies pegged to the dollar and so forth. So of course, yes, we are monitoring this very intensely. And yes, we will move according to when we believe that something is there for -- to stay, so to say.

Good part is with the dollar that we're having the biggest differences that we're also getting lower costs in that way on it. So it's even out a little bit and they're a small part of the total revenue and also they're having a lot of cost there. So in that way, we can use the dollars for dollars in that way. So it's not that big impact with dollars on it. The key currency for us is more the euros.

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

Thanks so much, everyone, for all the great questions. And if anything else pops up, don't hesitate to reach out to us. We're always happy to help. Thanks again for tuning in today, and we really look forward to seeing you all again soon. Take care, and thank you.

Thank you.