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

Good morning, and welcome to engcon's Q3 report presentation. My name is Stig Engström, CEO and with me today, I have our CFO, Marcus Asplund. Let's start our report presentation for the third quarter. In some ways, the third quarter was another lost quarter. Still a war in Europe and the conflict in the Strait of Hormuz seems to be far from resolved. Besides these military conflicts, we also struggle with trade wars. Of course, the conflict hits the economy, affecting interest rates and increased fuel prices. Altogether, it has a negative impact on our end customers will for new investments. Older excavator fleet gives more spare parts and service need. That's good business for engcon, but now we want to increase our new product sales. This shows in our numbers. Demand is weaker and order intake fell 10%. But we cannot blame everything on the world around us. I'm not satisfied with what engcon has achieved either before I took over or since. Sweden, our main market, stands out as the strongest. Sales have recovered to historical high levels. Economic uncertainty is holding back demand across the board. But France, an important market for us, has been a clear disappointment in 2026. Here, we need to look ourselves in the mirror and question our priorities. One positive thing is that we finally have an agreement with OilQuick and Zero Degree. We have put in writing a partnership that has worked well for a long time. Now we can look ahead and take it further. More on that later. Profit improved in the quarter. The operating margin happened to reach 20%, our financial target. Tighter cost control helped, but let's be clear, currency saved the margin. Gross margin remains a challenge. We cannot control an uncertain world. Things do not always go our way, but our direction stays the same and the work towards our financial targets continues. Let's take a look at the numbers. After a good start, the first half year, it's come down again and the sales came out weaker than we had hoped. Uncertainty in diesel price and interest rates lay like a heavy wet blanket over the investment mood. We just managed to increase net sales, thanks to the Nordics. Order intake from especially parts of Europe lower than expected. The gross margin is mainly affected by low production level and our decision to invest in personnel and production process instead of cutting costs. As mentioned, currency saved our EBIT margin. Order intake fell with 10%, which is unusual for us. Europe, that should be our growth engine was weaker this quarter. Gross margin was 40%. The new price and product packaging connecting to the Series 1, 2 and 3 is helping. We also have more production capacity than we need in Stromsund and Poland. This puts pressure on our margin, too. This is a deliberate choice to have capacity and competence ready the day the market recovers. The EBIT margin was 20%. Currency movements were the main reason. We have introduced tight cost control mainly in administration. We saw some results in this quarter, but more will come. Return on capital employed was 41%. We need to reduce our stock levels. We will see full effect yet. They are too high, especially in markets far away. Marcus will talk more about the financial numbers later. The picture puts the sales in perspective. Order intake was lower than expected after the summer holidays. And as I just said, there are several factors behind this. We may also have received more orders in the spring before the price change in conjunction with the Series 1, 2, 3 launch. A tiltrotator pays for itself quickly, even, or especially in difficult times. Jobs will be done more efficient, gives more work and reduce fuel costs. The tiltrotator system is here to stay over good or bad times. Let's take a closer look at different regions. Most of our growth this quarter comes from the Nordics, but the performance varies across the region. Sweden continued to recover. Excavator sales have picked up in all shapes and sizes. Engcon has a strong market share, and we're growing along with it. Large investments in roads infrastructure are driving demand. Many customers have delayed buying new machines for some time, but they have now reached a point where they need to replace them. You can see that in our spare part figures. Another positive is the launch of our Series 3 product. Customers have responded well in our largest segment, machines of around 19 tonnes. Our unique product help us avoid competition. Norway has now passed the bottom. Machine sales have increased after a really bad period. We have taken market share and built our own local team, which is appreciated by dealers and customers. Normally, Norway is a little bit behind Sweden in the business cycle, and hopefully, their increase will come 2027. Finland has been slow for a long time and has the weakest economy in the Nordics. We are gradually hearing more positive views from the dealers and customers, but we can't see that in our figures yet. Denmark is closer to the Central Europe and seems to have felt the same weakness this quarter. Business did not really pick up after the summer. The region has performed well during the year, but we want more. Europe should be our main source of growth, but we are not seeing that happen in Q3. The Netherlands is driving growth in the region. We are well placed with a strong local team and the tiltrotator use is growing. Still a lot here to do, but they are best-in-class. France is the biggest disappointment. The economy is weak with growing budget deficit. The political situation, as we can see in all news make the future hard to plan. All this is bad news for our business. But we also have ourselves to blame, focus on wrong priorities for a long time. A long reorganization has also kept us away from the right things. In that region, we had no large orders this quarter comparing with previous years, but we now have the right conditions in place with a new collaboration agreement, and I will come back to that shortly. Americas. Performance was weak in this quarter than was expected. We are following our plan, though it reduces our focus and cost. We have a new country manager in place with mission to build a solid organization. We have also taken stronger steps to reduce stock levels and administration costs. The market is good in general despite all the things going on there. There is plenty of work, and we remain positive about the region in the long term. Asia, Oceania, we are seeing changes from a low starting point. We have also taken stronger steps to reduce stock levels, especially Australia. We have signed a collaboration agreement with OilQuick and Zero Degree. The Schauer family has done an impressive job over many years developing the German market for our joint tiltrotator offering. The agreement does not fundamentally change how we work, but just have it in writing. With the agreement in place, we can take our collaboration to the next level and start to reduce our own cost. The agreement mainly say that we are appointing OilQuick and Zero Degree as the exclusive distributor of our joint tiltrotator offering. In turn, engcon will become the exclusive supplier of the tilting and rotating part, so-called "yellow heart." Together, we have now laid the groundwork to increase market penetration in Europe's largest excavator market, and I'm convinced that this collaboration will continue success for many years to come. In September, we made our first trade show together, GaLaBau. The Schauer family has made substantial investment in new facilities for assembling an impressive demo area, including showrooms. They will have the possibility to take customers from the whole region to their premises for demo, testing and education. With this partnership in place, we are convinced that we have done the best we can in the DACH region, and now we can focus our own resources in other regions. And with that, thanks from me for now, and over to Marcus.

Thank you, Stig. Let's take a look on how the quarter came through in the P&L. Net sales came in at SEK 435 million, a modest 4% organic increase. The Nordics, in particular, Sweden are driving sales at the moment. For the first time in a while, currency actually worked in our favor. Norwegian Krone strengthened, which helped just as our sales in Norway were growing. Gross margin at 40%. That's down on last year, but an improvement from Q2. A few things here worth highlighting. First, market mix worked against us. Most of the growth came from Nordic markets, which leaves a footprint on the margin as pricing is more competitive. At the same time, volume reduced on high-margin markets in Europe and overseas. We also had lower fixed cost absorption in production. As Stig mentioned, we have spare capacity in both Stromsund and Poland. So lower sales leaves us with less volumes to spread those costs over. On top of that, we have depreciation related to the Series 3. On a positive note, the pricing review tied to the Series 1, 2, 3 launch began yielding results in the second half of the year. While most of the benefits were realized in Q3, additional gains are expected moving forward. Selling expenses improved slightly, primarily driven by the timing of trade fairs events and reduced sponsorship costs. Administrative expenses were flat versus last year. Lower ERP costs were offset by other initiatives, mainly development of our new e-commerce platform. We have now rolled it out in all of our markets, and we see it as an important step to enhance future growth and revenue streams. We also had a sizable currency gain in other operating income. This mainly relates to receivables in foreign currencies. In 2025, this worked against us. We're now seeing some of that come back. EBIT came in at SEK 86 million with a margin of 19.9%, just below our financial target. The weaker sales is clearly showing, particularly as a smaller share of sales came from higher-margin markets outside the Nordics. At the same time, we should be clear that favorable currency movements provided a substantial boost to this quarter's result. Putting EBIT into perspective, a 19.9% EBIT was a strong result, although we naturally have preferred a different mix of drivers behind it. When sales outside the Nordics pick up again, we expect that to help margins, combined with continued cost discipline that should give us a solid foundation for profitability growth over time. Cash flow from operating activities improved, driven primarily by higher operating profits and positive changes in net working capital, namely accounts receivables and inventory. We are continuing to see smaller positive effect of improving net working capital management in the quarter. But as Stig mentioned earlier, there is more to do here. Higher investment activities are attributed to the estate in Poland as well as improvements in Stromsund. Loans taken out now in October with SEK 27 million for the Poland facility and SEK 10 million for the Stromsund extension. Return on capital employed remained above our long-term sustainable target coming in at 41.2% and 42.7% adjusted. And on that positive note, I'll pass it back to you, Stig, to summarize and give us an outlook.

Thank you, Marcus. Many challenges remain in the global economy, and it's difficult to say when the market will turn. I'm not satisfied with our performance in the quarter and how we have acted. However, this does not change my strategy. We will continue to dig where we stand and then focus on what we can influence, continue to develop our successful collaboration with OilQuick, Zero Degree for the biggest excavator market in Europe, being our customers' first choice by offering the right product to the right market at the right price; strengthen the organization to increase our focus on end customers while rolling out an e-commerce platform; continue to work to create the right conditions for profitable growth with cost focus and firm action to reduce stock. On sustainability, we follow international regulation initiatives, but we are also taking local action to reduce our use of fossil fuels. Heating our facilities should, as far as possible, be fossil-free. Global travel should be kept to minimum and shorter journey should be made by train. Our own vehicles should run by electricity or HVO, and our ambition is to make it easier for all our employees to choose renewable fuels. We are not doing this to improve the bottom line. It's our contribution to the survival of the planet. Right now, we have excess capacity in our facilities. This is a choice we made. It's hard to tell when the market is back, but I'm hopeful for the coming digging season in the Nordics. Nevertheless, we will be ready with capacity and skills to change the world of digging. Okay. That's everything we have for today's presentation. And now we're happy to open for your questions. Please feel free...

[Operator Instructions] The next question comes from Zino Engdalen Ricciuti from Handelsbanken.

Starting off, you, of course, talked on the demand side about the macro factors that have impacted. But earlier in the year, you've also done some reorganization measures. How would you say that those have been affected the group in this quarter?

Yes, maybe I can -- it was a little bit hard to hear, but I think I got it. The reorganization, yes, that coincided, for one market is French market where we also had that, but that wasn't really in that reorganization that we did on the biggest thing. But it kind of coincided with that, and it has taken a longer time on that. So that was particularly then for the French market, I would say.

Understood. And given how much the Americas is down on a similar topic, how much of that has changed, as you said, your regional priorities? And what should we think ahead?

I think it's -- all of the big decrease is, of course, because we have taken away stock. We have taken away personnel. And of course, even though we may still have the personnel we need, but of course, it made some worries in the organization and so on. So we need to start all over. And I'm quite sure of engcon's decision to slow down. The U.S. market also affected on the numbers. We were ready for that. But in the total revenue of engcon, it is quite a small numbers.

Okay. And last question for me. Of course, if we go back to the previous quarter, you sounded optimistic to reach your margin target at the end of the year. Of course, the outlook sounds a bit worse now, but what are your expectations on when to reach the margin target?

Hopefully -- of course, now we have the currency with us, but hopefully, we will see bigger impact from our own things we have done so far. Of course, we have just worked with it now more 3 or 4 months. But hopefully, for 3 months more, we can see more from the inside. And, we may probably need some help from outside as well, but I'm quite positive that we can see positive things happening 3 months from now. If we're talking about the next -- the market will come back, so normally, when we're now talking about coming back into the Nordics markets mainly, of course, then we have to wait for the springtime normally, if we're talking about March, April before we can see a big impact. Hopefully, we'll have something in December coming in, but normally, we have to wait for the digging season to come.

The next question comes from Agnieszka Vilela from Nordea.

I have a few questions. Maybe coming back to the order trend in Europe. Can you tell us is this 20% down organically on orders in Europe? Is it because of the overall market slowing down? Or is it more -- or due to what you, Stig, mentioned like a kind of blip in your own performance given the changes in your leadership team and restructuring that you have been doing in these markets?

I think that the most of them come from ourselves, that's for sure. But of course, we have bigger customers here earlier and of course, they were more sensitive for global change. And if we have worked the way we should work from end customers' perspective, it shouldn't be a problem. We know that France has something like 70,000 excavators working every day. They are selling something like 20,000 machines every year. It shouldn't be a problem for us to sell 1,000 tiltrotators if we've done it the right way. So I think it's -- unfortunately, it has most to do with ourselves.

Understood. And maybe on that topic, like do you see more stability in your own organization in Q4? And also what impact would you expect from this kind of a bit tightened with OilQuick and Zero Degree?

We have done a lot internally for our organization. I'm satisfied with our -- even though I'd say I'm not satisfied with the quarter, but we have done a lot of good things internally. And then we can see results of that coming up next quarter, that's for sure. We're talking about Germany, I think they have done great investments down there themselves, and of course, it takes a lot of focus from them as well. So I think they also have taken a step back from the marketing for the moment just to build up the internal capacity, but they will come back, and then even stronger than before.

Perfect. And then maybe a question to Marcus or to Stig. I mean Q4 usually is stronger than Q3 in terms of orders. Do you expect a similar development this year and maybe in relation also to your pricing strategy? And what have you seen so far in October when it comes to orders development?