engcon AB (publ) (ENGCONB) Q4 FY2025 Earnings Call Transcript & Summary

Good morning, and welcome to engcon's Q4 report presentation. We're also going to have a short review of 2025. 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 Q4 report and 2025 review also, and also answer questions in the Q&A afterwards. Let's go into the presentation. 2025 has been a year of clear highs and lows across the global economy, and engcon has experienced a similar dynamic, navigating market volatility while continuing to strengthen its strategic position, operational efficiency and long-term growth potential for shareholders. If we take a look at the bigger developments for engcon during the year, it's clear that 2025 has brought both ups and downs. So let's take a review of 2025. We launched engcon's Generation 3 that brings faster hydraulics, smoother precision and smarter efficiency to make every excavator job feel easier and more controlled. Engcon also took the step into the large cap segment, an important milestone that strengthens our visibility, broadens our investor base and supports our continued growth journey. And we established our sales company in Japan during the year and supported by government subsidies, we have achieved a solid start, laying a strong foundation for long-term growth in an important strategic market. The so-called Liberation Day led to a period of more cautious behavior across the global markets. And during the year, we also faced challenges from tariffs and strengthening Swedish krona, factors that have influenced demand and currency dynamics. Our participation in Bauma, the world's leading construction exhibition, where tiltrotators were visible everywhere, and engcon stood out as a clear reference brand. The strong presence confirms that OEMs are accelerating their integration efforts, and we see a growing interest and traction in the German market as awareness and adoption continue to build. We are now beginning to see the results of the long-term work we have done together with OEMs as more excavators are being prepared for tiltrotators from the factory, an encouraging sign that our efforts are translating into real market progress. We have also started to establish a presence in Italy, the third largest excavator market in Europe, through a collaboration with TM Benne, an important first step that allows us to enter the market in a focused and capital-efficient way while building a long-term growth opportunities. Stig Engstrom, Founder of engcon, was honored with an Entrepreneur of the Year award during the year, well-deserved recognition of the long-term vision and entrepreneurial drive that laid the foundation for the company's success and still continues to inspire its development today. We also won in the second instance in our patent dispute with Rototilt during the spring regarding alleged patent infringement. But however, we were later subject to a new lawsuit in the autumn concerning the same patent. So it's an ongoing matter that we continue to handle with confidence and a structured legal approach. Recent market study by Strategy& show that engcon has increased its market share by 5 percentage points, reaching now 49% market share. That's a strong indication that our long-term investments and focused execution continue to strengthen our leading position in the market. With this broader review of 2025 in mind, we will now turn our attention to the fourth quarter and take a closer look at the developments during the final part of the year. The fourth quarter was characterized by strong growth with support from all regions. Net sales for the quarter amounted to SEK 498 million, an organic increase of 34% compared with the same period last year. Order intake increased organically by 12% from SEK 506 million to SEK 539 million, with the Swedish market making a particularly strong contribution, driven in part by a significant share of preorders. And we also saw some preorders from European markets like Netherlands and France. Gross margin in the quarter amounted to 40%, down from 43% last year. This was mainly due to negative currency effects and a less favorable market mix. The operating margin was 15%, slightly lower than the previous year, impacted by the lower gross margin, a stronger Swedish krona and increased administrative costs related to IT and legal services. Over the last couple of years, we have taken an important step in how engcon operates as a group. As part of our long-term strategy, all engcon companies are now working within one common ERP system. And bringing an entire organization onto a single platform is not just a technical change. It is a transformation. During the implementation phase, this has naturally meant higher costs. We have invested money and time in systems integration, harmonizing processes, training our people and adapting the organization. These efforts have increased our costs, but they are laying a stronger foundation for the future. We can now have a focus on our core business and improve even more from there. If taking a look on the numbers then. Net sales, we ended the year really strong with a 34% organic net sales increase, SEK 498 million is a high level for fourth quarter, and we need to go back to 2022 to see a higher level. Order intake, we have a 12% organic increase in order intake compared to the previous year, and I will come back to talk more about that when we're also going through the regions then. The gross margin amounts to 40% and is squeezed from several directions. For example, net sales are impacted mainly by the strong Swedish krona and at the same time, a negative market mix as growth is occurring in markets with lower margins like Sweden. The EBIT margin amounts to 15%, which is low provided the strong revenue. The margin is affected by a negative cocktail with the main ingredients that are the weaker gross profit, revaluations of balance sheet items linked to a stronger Swedish krona and higher costs related to IT and legal services. As I mentioned earlier, the cost of getting all companies to the same ERP system is the biggest part of those costs. At the same time, we have also faced extraordinary costs outside our day-to-day operations. Rototilt have sued us again for the same patent as mentioned earlier. These costs have, therefore, also contributed to higher expenses for the group. When we look at these 2 topics together, they explain a lot why costs have been elevated during the period. But now when we have the largest part of the ERP behind us and profitability is currently below our target levels, we are, therefore, looking to implement targeted measures to ensure continued profitability growth with a strong focus on strategic priorities, pricing and product packaging and an increased cost discipline. And our ROCE amounts to 36%. That's also below our target of 40% and is affected by the lower profitability level and higher inventory levels we have seen during the year. And Marcus will talk more about these financial developments a little bit later on in the presentation. If we go into the order intake and net sales then and took a look at the fourth quarter as a whole, both net sales and order intake are at high levels. Order intake increased by 12% organically. Net sales increased by 34% organically. This is a strong performance, driven primarily by solid demand in Europe and the Nordics, even though the conditions have been more challenging in the America and Asia-Oceania regions. As we expected, order intake in Q4 was supported by preordering effects like last year, mainly from the Nordic region, but also Europe. These signals higher excavator sales and growing optimism among customers and dealers, an outlook that is also supported by reports from the construction equipment market. Overall, this gives us a positive picture. It shows that Europe and the Nordic continue to perform well and are the key contributors to our growth and results. Now I will go over to each region to describe that a little bit more, and we start with the Nordics. The Nordic region ended 2025 with a continued robust recovery. Order intake increased by 35% and net sales grew by 37% during the quarter. We're seeing clear signs of improving end market demand. Recent reports from Volvo CE indicate higher excavator sales, supporting our view that activity levels are gradually normalizing. Residential construction is recovering from historically low levels, while overall sentiment is increasingly supported by infrastructure-driven investments. Together, these factors are contributing to a more constructive demand and environment across our core markets. If you're looking ahead, we expect this gradual recovery to continue, supported by infrastructure pipelines, improving financing conditions and stabilizing dealer inventories. While short-term volatility may persist, the underlying demand drivers in our key regions remain intact. In the fourth quarter, the Nordic region narrowly surpassed Europe to become our largest region once again. We're going over to Europe. Europe showed a strong recovery during the fourth quarter with organic net sales growth of 39%, an increase in order intake of 9%. In France, our collaboration with Beauloc marks an important strategic milestone. France is a key market for us and gaining traction within the rental segment, traditionally more conservative in adopting new technologies, is a strong validation of both our product offering and long-term market potential. Increased penetration in rental increased the visibility, accelerates fleet exposure and supports structural adoption over time. In Netherlands, we are seeing encouraging momentum with customers placing preorders in a way that increasingly resembles to the Nordic markets. This signals growing confidence in the tiltrotators as a standard solution rather than an optional add-on. Customers are planning ahead and committing earlier, which indicates maturing demand and improving predictability. The fourth quarter reached a record high level for a fourth quarter in Europe. Importantly, this performance helps mitigate traditional seasonality effects related to the excavation cycle. It demonstrates greater stability in our revenue base and a broader market acceptance of our solution. Order intake in Europe is also stronger than it may initially appear. Our German partners would typically place larger less frequent orders did not place an order this quarter due to timing as they prepare to move into a new facility expected to be completed in the beginning of March. So we view this as a temporary effect rather than a change in underlying demand in Germany. Looking ahead here in Europe, we see continued growth potential in Europe, driven by increasing penetration, stronger OEM collaboration and expanding rental exposure. While quarterly order patterns may fluctuate, the structural adoption trend remains intact, and we expect Europe to continue playing a central role in our long-term growth strategy. Moving over to Americas. In the Americas, the performance during the year was weaker than expected, primarily due to the tariffs introduced in April. Increased uncertainty has dampened the investment appetite in the industry as a clear long-term conditions are still lacking. Despite this, net sales increased organically by 7%, mainly as a result of price adjustments. Order intake, however, declined by 13%, clearly reflecting the cautious market environment. We remain confident in the long-term potential of the U.S. tiltrotator market. The structural opportunity is significant, supported by the productivity gains and efficiency improvements that are increasingly relevant to contractors facing labor constraints and higher operating costs. That said, the introduction of the tariffs has added uncertainty and may delay the pace of market adoption in the near term. We expect the development in the U.S. to take time, particularly as customers navigate pricing dynamics and investment decisions in the current environment. However, we see this as a timing factor rather than a structural limitation. The underlying value proposition of tiltrotators remains strong in the long term in U.S. We also have CONEXPO in Las Vegas that will be an important exhibition for us. It will provide a valuable opportunity to assess how far the market has progressed in terms of our awareness and understanding of tiltrotator solutions. We see not only as a commercial platform, but also a strategic checkpoint for measuring adoption readiness in the U.S. market. Over time, we believe the U.S. represents one of our most significant growth opportunities even if the ramp-up will be gradual. In Asia-Oceania, we expect Japan to remain the primary growth engine within the region. The market fundamentals are supportive, particularly given ongoing government initiatives, including the programs led by MLIT and SME-related incentives that are aimed to encouraging investments in increased efficiency technologies. These incentive structures align well with our value proposition as tiltrotators directly contribute to productivity gains and improved capital efficiency. As we previously communicated, the region is characterized by significant quarter-to-quarter volatility. In the fourth quarter, net sales increased organically by 33%, while order intake declined by 32%, clearly illustrating the timing effects that can occur in this market. A good example of this is the Kobelco order received in the third quarter and invoiced in the fourth quarter. This type of timing difference contributes to quarterly fluctuations rather than reflecting any structural change in underlying demand. Kobelco, our earlier partner there, has also taken proactive steps to support adoption by developing a dedicated catalog aligned with SME subsidies program. This catalog then simplifies the process for end customer and increases confidence that incentives will be secured, lowering the barriers to investment and supporting a more predictable uptake over time. In Asia-Oceania region, the development remains gradual, but strategically important. Awareness is increasing, although the penetration remains at an early stage. We continue to focus on the education and dealer partnerships and building references cases to strengthen long-term demand. If we're looking ahead here, the 2032 Olympic games in Brisbane are expected to act as a meaningful infrastructure catalyst. Large-scale infrastructure and construction projects linked to the games are likely to support equipment demand and create a favorable environment for productivity increasing solutions. Overall, we expect Japan to drive near-term growth in the region, while the rest of the region represents a long-term opportunity, supported by infrastructure investment and increasing adoption. Although we will continue to see quarterly volatility in the region, the structural drivers across Asia-Oceania are intact and supported of sustained expansion over time. With that, I will hand it over to Marcus that will guide you through the financial developments.

Thank you, Krister. Good morning. EBIT landed on SEK 72 million for the quarter, an increase of around 15%. Our operating margin stands at 14.5%, which is below expectations. Although Q4 is typically a weaker quarter, our strong net sales are translating into bottom line growth. We are seeing margin compression at both the gross and operating levels due to several negative factors that are preventing us from achieving leverage in this quarter. Now let's go through the P&L in more detail. Revenues came in strong this quarter at SEK 498 million, representing a solid 34% organic increase year-on-year. The momentum is driven primarily by the Nordics with our home market, Sweden, leading the way, and we've also been able to release the European backlog that held down revenues last quarter. Overall, we are pleased with this level. At 40.2%, gross margin finishes below last year's level. This contraction is the result of a couple of headwinds converging simultaneously, which have collectively diluted our profitability this quarter. We're seeing a less favorable market mix as the Swedish home market has rebounded more strongly than expected. This is one of our most mature markets, which naturally comes with higher competitive pressure. In addition, the margin is being weighed down by a few deals with rental companies and bigger dealers and continued currency headwinds persist. When we get to the OpEx, we can see that we are benefiting from operating leverage as a result of the higher revenues. However, administrative expenses are somewhat burdened this quarter by IT and consultancy-related costs, which is a natural consequence of the intensive work required to bring all our companies into one ERP system. On top of this, the ongoing lawsuit with Rototilt is also adding costs related to legal advisory. Looking at other operating income and expenses, we can also see the impact of the Swedish krona here, a hit of roughly SEK 6 million related to the revaluation of balance sheet items. When everything lands on the bottom line, EBIT comes in at SEK 72 million, corresponding to a margin just above 14.5%. We can conclude that we are benefiting somewhat from a stronger revenue level, although the stronger Swedish krona and higher costs offsets part of that effect. All in all, EBIT is partly affected by external factors and could have been stronger, but it's a reality we must navigate. We are fully committed to active margin improvement and value-driven initiatives, such as a review of our pricing and product packaging as well as our strategic priorities, as Krister mentioned. Looking at the cash flow from operating activities before changes in working capital, it actually improved full year-on-year, mainly due to higher operating profit. This is, however, offset by increase in working capital, mainly inventory. Inventories have been increased to shorten lead times during the [indiscernible] Nordics and Europe. Hence, inventories are expected to decrease during the first half of this year. [indiscernible] return on capital employed. Not enough leverage on currency headwinds and increase in net working capital pulls below where we sustainably should be. To summarize, looking at our financials, while the organic net sales growth is strong, the EBIT level is not where we want it to be. And as was mentioned [indiscernible] with extra costs connected to one-offs pulls us down. As both I and Krister has been into, we are addressing these challenges. These challenges, together with higher inventory, also weighs on the capital efficiency. Capital structure, however, continues to be at a satisfactory level. The Board of Directors proposes a dividend of SEK 1 per share to be paid in 2 equal installments. And with that, I hand it over back to Krister to summarize it all.

Thank you, Marcus. I will try to summarize the presentation then. And we have a great quarter if we look at the net sales and order intake, and it's our key regions, Nordic and Europe, that delivers. Europe's order intake is better than what it looks, as I mentioned earlier, since our partners in Germany didn't place any bigger order this quarter since the extension will not be ready until the beginning of March. We see and hear positive signs about that excavator sales is picking up in whole Europe, including the Nordics. And this pickup is from low levels, so it's a lot of growth left. Our profitability remains below target, and we are not pleased with that, and we need to plan for actions like reviewing pricing, the product packaging, strategic priorities for improved profitability and reinforced cost discipline. After a major transformation like the ERP implementation, it's easy for a higher cost base to become the new normal. As we move forward, we are sharpening our cost discipline and reinforcing the entrepreneurial mindset that continues to define our culture. This means maintaining tight control over expenses while ensuring we remain adaptive and focus on long-term value creation. So we also have the second largest exhibition in our industry in Las Vegas in the beginning of March, CONEXPO. And it will be interesting to see, as I mentioned earlier, to see the knowledge level where it is right now then in the Americas. I would also like to extend my sincere thanks to our employees and partners around the world. Your commitment and dedication are the foundation of our success with the year marked by strong growth and increased market presence and a deepened partnership. We continue to strengthen our position as a global market leader now with a market share of 49%. Despite an uncertain external environment, we have established a stable and sustainable foundation for continued profitability growth. Together, we will continue to change the world of digging and create value for our customers, partners and shareholders. That was everything we had for today's presentation. And now we're happy to open up for your questions. So feel free to jump in through the telephone conference. So operator, whenever you are ready, please bring in the first question.

The next question comes from Zino Engdalen Ricciuti from Handelsbanken.

Starting off on the order intake side in Europe, you mentioned now that you didn't get this order from one of your partners. Could you elaborate a bit on the consequence or the scale of it?

I mean Germany is one of our biggest market in total then. So absolutely -- that is important for us. And I don't know if we communicate exactly how much they normally place or anything like that, but they place fewer orders and pretty large orders in that way, but it didn't come because they are building a new assembly factory for tiltrotators and that was not ready yet, and they were now using other places for keeping the stock and so on. So they wanted to wait to place it later when they knew that the new facility would be ready. So they're keeping pretty large stocks, of course, also normally, but now they try to slim it down a little bit. They are in an important market. So it would have been an important add-on for us on the order intake in Europe.

And if it's possible to say, is it to -- for your partner, are they increasing capacity with the new factory or anything like that?

Yes. There is a new factory that they are -- earlier, they've been having the assembling part of the tiltrotators in their old factory. Now they're building a totally new factory and demo area for a total of EUR 25 million. So there are -- I don't remember exactly the size of it, but it's more than double up what they're having in capacity in that way. So it's a big investment they're doing and they're doing because they believe in the tiltrotators in the DACH region.

Very, very interesting. I'm also wondering a bit on the gross margin. You mentioned that Sweden had negative pressure, but there are -- I guess then that since Germany maybe didn't get [indiscernible]. No, that was on order front. What I'm wondering is, did the higher deliveries to Europe because they were a bit lower last quarter, did that have a negative effect on the gross margin in this quarter?

No. Europe is normally a good gross margin country for us. Of course, it's been a little bit lower with the currency effects and so on. But as Marcus there and I also mentioned, the rental fleet there with Beauloc, it's always a little bit squeezed orders that you're getting like that and so on. But otherwise, they are normally good getting orders to the European market. It might be depending, of course, a little bit like we're also having in Netherlands, we're having the local coupler there where you're getting a little bit less margin thatn normally. But I would say, Europe is good for us to get orders to.

And I'll also ask on the IT costs, what we should expect ahead? How much of it has been taken? And maybe also elaborate a bit on the positive effects you expect to see from this implementation.

We expect, I would say, Marcus, that we will still have cost during Q1 because it's been like Hypercare and so on during the Q1. And then from Q2, we would see that our cost for the ERP system would go down in a bigger way than compared to. Q1 will still be higher and Q2 was supposed to be much lower than coming on that.

Yes. I mean, the project phase of it all ending, of course, that will take down some of the extra consultancy costs that we had connected to this, of course. And then some of the other legacy systems with licenses and so forth will come down as well. But we will see this trend more clearly in the Q2 for the IT, I would say. And then continue to come down after that with improvements that we make in the new whole setup as well.

And then that will also hopefully then -- for safety reasons, we've also been having higher stock for not running into problems or anything like with that. So -- but that will also work with that.

The next question comes from Agnieszka Vilela from Nordea.

I have a few questions. Maybe starting with order intake in Q4 and also your expectations for Q1. I can see that in the past 2 years, usually, the Q1 orders in absolute terms were flat compared to Q4. Now we had this dynamic in Q4 that you had some preordering, but also lower orders from Germany. So putting it all together, what do you think will happen in Q1 for you in terms of orders? Do you see a risk for any setback? Or do you think that you can kind of carry this solid momentum into Q1?

The feeling we're having as a current presentation is that we are optimistic about the outlook for our key markets, Europe and the Nordics, where we see positive trends, and we expect Q1 to be good in order intake for both Europe and the Nordics. Americas, it's hard to tell. It's depending a little bit what happens with the CONEXPO and stuff like that, if we can expect anything particular from there. Asia-Oceania is a little bit fluctuation all the time regarding what happens and so on. But I would say our expectations is to be keeping the momentum and being better each quarter than what it was last year.

Perfect. And maybe a question to Marcus really. Looking at 2026, what tailwinds and what headwinds do you see for your profitability? And maybe also if you could quantify the IT costs that you had in total for 2025.

Quantifying the IT, I'm not prepared to say any specific figures there. But talking about, I mean, a tailwind there, it will be a tailwind on the IT side, as we said, but starting to show in Q2, mainly before that, I think we still have to -- we have a higher level than we should have on a normal operational level. Tailwind from currency, I'm not expecting. But then, of course, we will look at, as Krister and I was into regarding the pricing and packaging, product packaging part. I think that will bring us back to a better position, especially coming into the second half of the year. So yes, as I said, there are some challenges, and we really need to address them, and we are, I believe. So this is my expectations at least.

But we also think we can get some tailwind from the volume, like we expect to keep growing and that will, of course, help us on the profitability level, the more volume we get.

Yes. Definitely, definitely.

Yes. So just maybe to end my questions here, you ended 2025 with 17% EBIT margin. So what measures really can you, as a company yourself, take now to push the margins towards 20% target? And do you think that it could be feasible to reaching that already in '26?

We're at least aiming at that. We believe that with the packaging and then the price adapting to the package and so on, we believe we can get the margins up and also the volume. And also then as we talked about that we not will have the cost for the ERP system change then at least after Q2 -- or sorry, after Q1, I think we will work our margin up. If we manage to reach 20% or more, that will be, of course, a challenge depending on now the Swedish krona has been kept on strengthening itself. But if we don't count on any help from that part, of course, we will have a challenge to reach it, but we still think it's possible to do it. We are not saying that we will not reach it, but we need to make some actions as we have mentioned during this call that we will launch pretty soon than what we need to do.

The next question comes from Anna Widstrom from DNB Carnegie.

So my first one is on how we should think about the preordering in the Nordics and Netherlands. Is there a substantial part of the ordering that we should rather expect to be delivered in Q2 than Q1?

Yes. It's like last year, it's probably spread out in that way, both Q1 and Q2. We had a pretty good preordering effect last year, not from Europe, but then from the Nordics. So I would consider it to be similar to that, like last year. It's spread out both Q1 and Q2.

Perfect. And then on the demand situation in the other Nordic countries, how is it in comparison to Sweden? And is Sweden expected to be sort of the main driver for the upcoming year in the Nordics?

Sweden is the country where we have seen the upturn or coming back the longest, I would say, at least. But we see also positive signs in the other -- maybe not Finland, Finland's economy is not that strong, but Finland normally delivers pretty good anyway then, but we will see there. But we believe that the rest of the Nordic countries will come back also this year. So we expect a pretty good growth in the Nordics together with Europe then. Also, if you're looking on the excavator sales there on Volvo CE reports, even if you don't see the Nordics separate, but you see that there a big increase of excavator sales in Europe then.

Great. And do you have any plans on increasing capacity in production and sales in any of the regions from today's level during the upcoming year?

Yes, we are working with changing a little bit where we are improving our possibilities of producing more in the same facilities like that. So there are no really big changes that we see right now than at least not in Stromsund. In Poland, we're talking about extension and so on, finding more space there because we will need that, especially since Europe is going good, and we're also selling more and more tools and so on there.

And could you give us some idea of how the EBIT margin would look if we were to exclude the Americas?

Excuse me, exclude what?

Americas.

No, we don't have a profit and loss on regions, then we would report each region in that way also.

Okay. But we could sort of assume that the cost levels should remain steady or maybe even increase from current levels given that we still have the positive view of the long-term possibilities in the region, even as it's quite uncertain in the near term?

I wouldn't say the cost level to increase since -- as we said, long term, we believe in it. But short term, it's more of a wait-and-see game and presence. So I would not -- shouldn't expect any increase in the cost base in the Americas.

No, I mean that's part of the strategic priorities that we need to look at where we believe we can get the most bang for the buck. That's part of the -- what we need to look into, and that's where we should invest more money in that case.

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

Thank you again for tuning in today, and we really look forward to seeing you all again soon. Take care, and have a good day. Thank you.

Thank you.