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

Good morning, and welcome to engcon's Q3 report presentation. My name is Krister Blomgren, and I'm the CEO here at engcon. And with me today, as usual, I have our CFO, Marcus Asplund. We will guide you through our Q3 report and also answer questions in the Q&A afterwards. With that, we jump into the presentation. This was a good quarter for us. In fact, our order intake reached record levels. We have never seen this kind of performance in the third quarter before, which is fantastic. Europe really stood out, matching its own peak at SEK 206 million. What is great is that it wasn't just one country driving the results. Several of our key markets performed well at the same time, which shows the strength of our overall position in the region. Asia-Oceania also had a really strong quarter. We secured major orders in Japan and the overall momentum in the region continues to look very encouraging. And even though the big orders will be delivered into the market in 2026 and therefore, impact the early 2026 order intake in Japan, we still expect demand to strengthen further as the government incentive programs get underway after the turn of the year. On the operations side, we faced some challenges with scaling our output and managing supply chains. We held back a bit our delivery potential, especially in Europe. However, we have made a solid progress, and we are now fully focused on strengthening our operations, so we can turn our growing order backlog into actual sales and keep our customers happy. Strategically, we made some really important moves this quarter. We entered into a partnership with 2 major excavator manufacturers, Hitachi Construction Machinery and Develon. With Hitachi, we are now one of the preferred suppliers in the European dealer network, which is a big step for us. And with Develon, the 9 series excavators will come out tiltrotator-ready right from the factory, which will really improve efficiency and make installations much faster. Finally, an updated market study conducted by Strategy& confirms we have strengthened our market position and continue to gain market share. Even more exciting, there's still huge untapped potential out there in the tiltrotator market. So now I will show you some highlights from the market study that Strategy& have updated for us until 2030. This slide shows how market shares have shifted among the key players in our industry over the past few years. What really stands out is that engcon isn't just holding the #1 position, we are strengthening it. Since 2019, we have expanded our lead by roughly 5 percentage points. In other words, we are clearly the winner in this market landscape. At the same time, we see that not everyone has been able to keep up with the overall growth in the market, and that's why our lead continues to increase. Of course, market dynamics vary from country to country, but the overall direction is unmistakable. We are growing faster than the market, and we are widening the gap to the competition. We are really proud of this development. It proves that our strategy is working and that we are growing faster than the market, which is exactly what we have set out to do. So, on this slide, Strategy& have forecasted the growth for tiltrotators and even with everything we have achieved so far, it's clear that the biggest opportunities are still ahead of us. The tiltrotator market continues to show incredible strong growth potential. It's expected to expand by around 20% per year all the way through 2030. By then, the market is projected to exceed SEK 6 billion, and that's just the tiltrotator segment alone, not counting in the broader attachments or aftermarket opportunities that come with it. This shows just how much room there still is for us to grow, both by increasing our penetration in existing markets and by expanding into new regions. So, while we are proud of how far we have come, we are even more excited about what lies ahead. The long-term outlook for engcon and for the entire tiltrotator industry remains extremely strong. This slide from the market study takes a closer look at the market penetration, how tiltrotators are adopted in the regions where we are active and how that's expected to develop through 2030. What's really exciting here is that there is still a huge potential ahead even in the markets where we already have a strong footprint. The biggest expected growth will come from Europe outside the Nordics then, which is projected to account for about 60% of total unit growth between 2024 and 2030. Germany and UK stand out as the 2 largest excavator markets in Europe, both showing strong expected penetration growth. By 2030, we also expect France and Germany to reach the tipping point, where the tiltrotator starts to be seen as a standard piece of equipment, not just an optional add-on. What's less visible in the chart are the smaller percentage increases in large markets like North America and Japan. Both those movements are extremely important. Even a small shift, say, from below 1% to around 4% will have a massive impact on total tiltrotator sales. Japan, in particular, is moving quickly. The adoption there is really standing out, helped by strong government incentives. Altogether, this journey will almost triple the size of the tiltrotator market by 2030, which is fantastic news for us and as the clear market leader. But what's even more remarkable is that even at that point, year 2030, about 93% of the global excavator market will still be unpenetrated. So, our journey doesn't stop there, in 2030. We are still really just at the beginning. Our growth story will continue for many, many more years to come then. If we're moving back into the report then and taking a look at the key figures for the quarter. Net sales were roughly flat compared to last year. We are seeing a very strong demand, especially in Europe, but some of those orders have been held up in production. We haven't reached our full delivery potential in Europe yet, partly because some of our capacity has been tied up in the Nordics and for overseas markets. Those markets tend to plan further ahead, while Europe typically has more short notice on-demand orders, which makes production planning more challenging. On top of that, we have had some disturbance with component availability, which reduced our capacity slightly during the quarter. At the same time, we have been ramping up inventory and focusing on deliveries to overseas markets, which has also put some short-term pressure on Europe. The good news is that the order intake remains strong across all the regions, up 31%, in fact, this was our best third quarter ever, and Europe matched its all-time high for the quarter. Our gross margin came in at a solid 43%, a level we are comfortable maintaining over long-term. EBIT margin landed at 17% and ROCE at 40%, which shows that we are continuing to deliver strong profitability and efficiency. And Marcus will guide you through the financial in more detail shortly. So now when we have been covering the KPIs, let's take a step back and look at the bigger picture, how our order intake and net sales are developing. Order intake came in at SEK 467 million, which is actually the strongest third quarter we have ever had, as I said. Demand remains very solid across all regions. Net sales landed at SEK 450 million, so essentially flat compared to the previous year. And if we look at the graph, it's clear that we are not yet seeing the full impact in deliveries. Some of the order intake, particularly from Europe, is still sitting in the order book, waiting to be delivered, and we are now fully focused on ramping up operations to turn our growing order backlog into actual sales and to keep our customers happy, as I mentioned earlier. So, with that, let's dive into the regional performance and see what's behind these numbers. Let's start with the Nordics, which continued to perform strongly in the third quarter, both in terms of order intake and deliveries. We are seeing a clear improvement compared to last year, driven by a few positive factors. It's lower interest rates that are boosting investment appetite. The excavator market is recovering, something we can also see reflected in Volvo CE's report. And among dealers, inventory levels have now returned to more normal levels. On top of that, we have had some individual deals and slightly higher volumes spread across the region, which have added to the momentum. That said, the higher volumes are coming from markets with slightly lower average margin, which gives us a bit of negative mix effect compared to last year. Marcus will guide you more regarding that later on. Looking ahead, we expect the Nordics to grow in line with the excavator market. Turning to Europe. We had a really strong quarter in terms of order intake, matching our previous record of SEK 200 million for a quarter. What's encouraging is that this strength is broad-based. We are seeing solid performance across most of our key markets, even though the construction sector remains relatively weak, and there are some political instability in parts of the region. Despite that, demand for our products continues to grow. During the quarter, we have been very active, participating in several local trade fairs and visiting customers, and we are clearly seeing the result of that. As our market penetration increases, demand continues to build. Europe's order intake is very strong, but net sales are slightly behind. That mainly comes down to timing. In the Nordics, customers plan early ahead of the season. In overseas market, we build inventory first before those products reach end customers. But in Europe, orders come on much shorter notice, which is great for demand, but harder to plan capacity for in short-term. And the rise for our largest region, as we talked about in the beginning of the year, is still very much on. Looking at the rolling 12-month order intake, Europe has now overtaken the Nordics as our biggest region. Given our strong position in Europe and the fact that this is where the greatest growth is expected through 2030, we feel very confident about the long-term outlook for Europe. If you take a look at the Americas, we are seeing an increase in order intake from low levels. The levels are partly boosted by the tariffs imposed on the price. Challenges in the market persists. As things stand, there's a significant uncertainty, primarily related to tariffs, but also concerning the broader economic outlook. This creates a cautious market and as a result, of slower demand for construction equipment. It's a wait and see, both for our customers and us right now. But we are ready when the market turns around. We have strong confidence in this market long-term. It's a large excavator market with low current penetration, and that gives us significant growth potential ahead. Now over to Asia-Oceania. And here, we are seeing a very strong order growth in the quarter. This region naturally shows bigger swings from quarter-to-quarter simply because of the baseline is still relatively small. That means individual deals can really move the needle, and that's exactly what we have seen this time with large block orders in Japan driving the performance. We feel confident about the Japanese market. There are strong government support in place for investments in productivity through the MLIT and SME programs as we talked about on earlier calls. The update here is that the program starts has been pushed to January 2026. Japan is the world's third largest excavator market. So even a small penetration gain translates into meaningful growth for us. We expect the market to develop in line with our long-term company targets, though not at the exceptional level we saw this quarter. With this, I will hand it over to Marcus that will guide us through the financial development.

Thank you, Krister. Looking at an overview of the profitability trend. EBIT amounts to SEK 70 million for the quarter, corresponding to an operating margin of 16.9%. This is below our financial targets, and profitability, is mainly held back by net sales not reaching its full potential in Europe, as Krister described earlier. We are also facing a tough comparison against Q3 previous year when results were boosted by a very high gross profit. Having a closer look at the income statement to give a sense of how profitability has evolved during the quarter and what's driving the numbers. Starting at the top line, we are seeing a relatively flat development in net sales compared to last year. Naturally, the stronger Swedish krona plays a role here, but more importantly, deliveries to Europe haven't quite reached their full potential, as mentioned before. Moving down to the gross margin, that lands on 42.6%. A margin around 43% is generally a healthy level, one we aim to maintain over time. That said, it does look a bit pale in comparison to 2024 when we were on a significantly higher level. Those who listened in last year remember that I mentioned back then that the stars were aligned. Today, the stars have shifted into new positions. As an example, the currency tailwind last year has shifted to a headwind and building on what Krister mentioned on in the regions, we have seen a shift towards the Nordics as a share of revenue, which gives us a slightly weaker market mix from a margin perspective. The limitations in volume to Europe, thereby has a bit of a negative impact on margins. If we go further down and look at the cost, we are in line with last year and according to our scalable business model, we adjust our cost to match volume. One thing worth noting is the increase in R&D expenses. This is tied to us nearing the final phase of the third-generation development project, meaning we are capitalizing less R&D spend, hence, expensing a larger share directly. The total R&D spend is amounting to SEK 14 million, the exact same amount as Q3 last year. And finally, the result drops down to -- the EBIT line lands at SEK 70 million, corresponding to the margin of 16.9%, driven by lower gross margin and R&D expenses. So, if the stars were aligned Q3 last year, they have been knocked somewhat out of place this year. Let's review cash movements and cash flow from our operating activities for the quarter. When we look at the movement of cash, 2 factors dominate EBIT and inventory. Starting at the top, lower EBIT had a direct negative impact on the cash flow and naturally acts as a drag on our operating -- operational cash generation. Regarding the working capital, the inventory buildup is twofold. It involves necessary stock replenishment, but crucially, it's also supporting our overseas sales pipeline. In contrast, our accounts receivables remain stable, consistent with our flat revenue disciplined collection efforts. The net result of this from EBIT and the decision to invest in inventory to fuel future growth brings our final cash flow from operating activities to SEK 42 million. ROCE comes down slightly, mainly driven by EBIT and increased inventory levels. However, it has improved compared to last year and is in line with our financial targets. To summarize, looking at our financial targets. Due to the reason Krister went through, the net sales growth is not where we want to be nor where we expect to be, neither is the EBIT level. Capital efficiency and capital structure, however, continues to be at the satisfactory level. And with that, I hand it back to Krister to summarize it all.

Thank you, Marcus, for guiding us through the financials. I will try to wrap it up then and starting with the summary and update. So, starting with our order intake, it continues to be strong across all regions confirming the high demand we are seeing globally. In Europe, in particular, both the strong order intake and our solid order book signal a really promising development ahead. Our updated market study also gives us even more confidence. It shows that the potential is still huge with 93% of the market yet to be penetrated even after 2030. So, there's a lot of room for growth. So, when we take a step back and look at the full picture, our strengthened market position, the enormous growth potential ahead and the clear trends in adoption, it's obvious we are in a great position. We have proven that we can grow faster than the market, and we have done it by staying true to what makes engcon special, innovation, quality and a genuine understanding of our customers' needs. But we are not slowing down. The opportunities in front of us are bigger than ever, and we are ready to seize them by continuing to lead the way, developing smarter solutions and expanding into new markets. And the best part, we are still just getting started. Our journey ahead is full of possibilities. And together, we will keep driving change in this industry, one tiltrotator at the time. And before we move on, I also want to highlight something we are especially proud of Stig Engstrom, our founder and majority shareholder being named Arets foretagare i Sverige 2025, Entrepreneur of the Year in Sweden 2025. It's a fantastic recognition that reflects not just his vision, but the innovation and commitment that define engcon as a company. And if we're moving over to the last slide in the presentation, where we're looking ahead to next quarter, we're expecting a stable demand, mainly driven by the Nordics and Europe. In the Nordics, we are now seeing a return to normal seasonal buying behavior. Customers are placing orders earlier again to prepare for the digging season. That gives us a better forward visibility and more efficient planning. In Europe, demand remains strong. That's supported by mainly 2 things: continued market penetration. We are winning more customers quarter-by-quarter. And we also have a solid order book that we're carrying over from recent quarters. So overall, the outlook is stable, steady demand and good underlying momentum in our 2 most important regions. So that was everything we had for today's presentation. Now we are happy to open up for your questions. So, feel free to jump in.

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

Maybe I can start with the momentum that you see in order intake in October, if you can elaborate on that. And I think also, Krister, you mentioned some prebuying. So how should we think about that happening? And if you look at the prebuy orders, can you tell us what is usually the timing of delivering on such orders?

Yes. We still have a good momentum in -- right now then. And we're talking about prebuy. We expect it to be some prebuy effects this year. We didn't expect it last year, but we got some prebuying then in December. And since the Nordics are more coming back to normal behavior of purchasing, we expect them to place orders in November, December for being delivered in Q1 and Q2 then. We are having -- we might see some from the European region also especially the Netherlands that have been coming higher up on the tipping point and know that a lot of machines will be equipped with tiltrotators. And also, maybe because of that, we have seen a bit longer lead times that they are seeing the need of putting the preorders in. I don't know if I answered all your questions there Agnieszka.

Yes, that Sounds good. Thank you for the color. And then a question maybe to Marcus on profitability. And I understand the fact that Q3 last year was very strong. But still, when I look at your gross and EBIT margins, they did decline by 3 to 5 percentage points in the quarter year-on-year. Can you elaborate on the primary drivers behind the margin compression? And also, are you taking any specific own actions to restore margins towards your targets? Or do you believe that the margin will recover once we see better deliveries and volumes?

Yes. I truly believe that it will recover. But if we go back to last year, then exceptional gross margin started that. As I said, the stars were aligned. There was the tailwind from currency, for example, that has shifted into a headwind that took a knock off 1% or roughly. And then the market mix was more favorable at that time with less to lower margin markets at that point, which we have now more to in this quarter. So I believe that we see now also when we said that we squeezed Europe a little bit in this quarter that I expect it to come up from where we are right now.

And then the last question for me. I appreciate the fact that you shared with us the market study. But with that said, I was a bit surprised on the expectations for Japan given all the subsidies and projects that are in place. So only 4% penetration by 2030. Do you see that there could be any upside to that? And why don't you think that the market could move towards higher penetration faster?

This is a study that they have made. And I mean, 4% of 55,000 units, it's a lot of tiltrotators then coming into the market. So, it's always hard to predict how fast it will go. Some people, when we talk to them in Japan saying that when they start realizing these things, it moves fast, and some saying that they are slower in that way. So, I think there's still some -- the OEMs are on the train, but some of them still want to stand there and watch a little bit. So, there's still some resistance from the OEMs also to join forces on this because it will, of course, affect a little bit how many machines they will sell in Japan and so on in that way. So, a little bit too early to say. If we're sitting here next year, we may be there to be more optimistic or maybe pessimistic, but I hope we will be more optimistic.

The next question comes from Anna Widstrom from DNB Carnegie.

So firstly, I just want to start on the block orders in Japan. So given the solid block orders, what does that mean timing-wise for deliveries?

Yes. That's -- all the bets are on that right now. It's sold to our old distributor then in Japan. So as soon as it arrives and passes custom in Japan, it will be revenue for us in that way. So, it will be hard for us to know exactly. It will be a border line then in that way if it will be Q4 or if it will be Q1. It depends on the wins and everything like that on the sea then.

And given that we have a very solid order intake in Japan, how much of group orders does Japan stand for now in this quarter?

I don't have that percentage. It's, of course, still low numbers we're starting on in Japan, but we can take a look on that later on and see how it looks like. But we're starting from really low numbers, but it's a big increase there then.

The next question on the less favorable market mix for margins. How does this look for the order intake? Should we have a similar assumption that the market mix will be less favorable looking on how the order intake is looking?

Normally, like Europe is a better mix for us. The more we can have, as you could see from last year on the deliveries, we had pretty good deliveries then in Europe. So, for us, that's one key. Americas have normally been good, but it's slowed down. And then in the Nordics, it's not as easy to say the whole Nordics because it's a little bit different within the Nordics also on the margins and so on. And for this quarter, we had a stronger deliveries to our 2 weaker countries or markets in the Nordics then. So, it's hard to predict just by reading the order intake in that way exactly if you don't know exactly how the orders are looking.

So finally, from my side, just looking on the Americas, the ordering was positive, sharp shift from Q2. Could you just give us some sense of the underlying volume growth and how much your sense is that order has been delayed into Q3 from Q2?

Sorry there. Was it Europe you talked about there or?

No, the Americas, given that the order intake has taken a sharp shift from Q2. So firstly, how the underlying volume growth is as you have price increases? And if you think that part of the order intake is delayed orders from Q2?

I mean Q2 was like a wet blanket over that in total. So yes, maybe a few delayed orders, but I don't think it's that much. It was more like business were starting to happen again and those that have been thinking about it decided to go for it. And it's not a big order increase compared to last year since we have been putting out the tariffs in the price in that way.

So, volumes are rather flat year-over-year in the order intake. Is that how I should understand?

On Q3 level, at least, then I think order intake might be a little bit down in total.

The next question comes from Zino Engdalen Ricciuti from Handelsbanken.

Starting off with the strong order book you highlight, particularly in Europe. How do you expect it to convert in Q4 if you feel that you have both the capacity and also the supply chain to convert it?

European orders are -- normally, they want to have it as fast as possible, as I mentioned earlier. So, our expectation is that what we have in the order book for Europe should be delivered in Q4. There is some orders in the Nordics that are for after the end of the year, but the majority of that is also wanted to go out in Q4.

Very clear. And also, you mentioned Volvo Construction Equipment briefly, and they highlighted particularly order intake for excavators in Europe, given that their order book is a bit longer than yours. How do you feel the setup for 2026 from an underlying market point of view?

We see it's a market recovery. In that way, Volvo is -- if you're looking on the Volvo's reports that they're having a much higher order intake, and they also had higher deliveries in Europe now in Q3. So, with that, it feels like we've been in the bottom regarding excavator sales. We've also seen that U.K. that was probably hit the hardest last year, have also seen a recovery this year on approximately 9% up on year to September -- for the full year until September. So, we started seeing a small market recovery in excavator sales.

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

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

Thank you.