Ferronordic AB (publ) (FNM.ST) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for your interest in Ferronordic, and welcome to our Presentation on the Results of the Second Quarter 2025. Looking at some highlights for the group during the quarter, we had stable sales and stable cash flows, revenue amounting to SEK 1.088 billion, slightly lower than last year. Cash flows from operating activities amounted to SEK 262 million compared to SEK 270 million last year. Gross profit declined by 4% to SEK 177 million compared to SEK 185 million last year. Gross margin was largely unchanged at 16.3% with higher gross margin in Germany and lower gross margin in the U.S. SG&A across the group decreased by 6%. All in all, we had an operating profit of minus SEK 5 million compared to minus SEK 4 million last year. Net finance costs decreased by 26% during the quarter to SEK 29 million, and net debt increased to SEK 1.679 billion. During the quarter, we took further steps toward profitability. I started as new CEO in mid-May. And during these months, I have traveled extensively throughout the organization to meet colleagues, partners and customers in my new role. It's been very exciting. Revenue was stable despite continued uncertainty in the U.S. and persistent stagnation in Germany. Operating profit was negative at SEK 5 million due to lower contribution from the U.S. segment. This, however, was not primarily because of softening market, but mainly due to our own measures to improve and grow the business going forward. In the U.S., demand was holding up, and the market in our U.S. territory was up 10%. In Germany, the operating result improved year-on-year, but remained negative. Here, the main priority remains to continue increasing the number of technicians to fully meet the demand from our customers. During the quarter, we continued to optimize inventories, and they are now generally in balance, and we continue to reduce our debt. This led to lower financing costs, which positively impacted the net result. Looking at the group financials in summary. Revenue, as I said before, amounted to SEK 1.088 billion, down 2%. Revenue in the U.S. was down 4% in Swedish krona at SEK 695 million, but was up 4% in U.S. dollars. Germany revenue increased by 10% to SEK 366 million, and that was 12% up in euros. In Kazakhstan, revenue declined by 54% to SEK 26 million and was down 45% in local currency. Operating profit at minus SEK 5 million, mainly because of lower contribution from the U.S. segment, where the operating profit decreased from SEK 51 million to SEK 26 million. In Germany, operating profit increased from minus SEK 27 million to minus SEK 13 million. Kazakhstan operating profit was largely unchanged at minus SEK 1 million. Unallocated group costs decreased from SEK 27 million to SEK 17 million. Net income increased to minus SEK 51 million compared to minus SEK 81 million in the second quarter of last year, primarily on lower finance costs and continued -- despite continued foreign exchange losses. Net debt decreased to SEK 1.679 billion, mainly on loan repayments and currency effect. Equity at the end of the quarter was equal to 31% of total assets, and the book equity was SEK 1.302 billion at the end of the quarter. Looking at the operations in the U.S., we see consistent demand despite uncertainty, primarily regarding trade policy and tax. Activity remains high, predominantly in the infrastructure segment. Customers are optimistic and they have strong backlogs for the future. The market in our U.S. territory then increased by 10% during the quarter. One uncertainty has been related to the continuation of tax incentives for investments. The passing of the so-called Big Beautiful Bill in July should remove those uncertainties, which should support demand going forward. We currently do not foresee that tariffs will affect our operations in the U.S. worse than anybody else in the market. Our market share during the quarter, however, decreased somewhat as we added fewer new machines to the rental fleet. One positive thing we have seen during the quarter is that rental revenue increased consistently during the quarter as rental utilization improved. Service and parts sales were stable. During the quarter, we took actions to optimize our rental fleet and to increase our rental utilization by selling certain low utilization machines at loss. This added SEK 19 million to revenue, but reduced gross profit by SEK 2 million. We also made an impairment of certain parts and components amounting to SEK 5 million, affecting the gross profit with the same amount. Without these effects, gross margin was largely in line with the previous year. I would also add that we had some costs that were somewhat high during the quarter relating to maintenance of rental equipment and service vehicles, and we're taking actions to address this. And as a result, operating profit in the U.S. was down significantly compared to last year in this quarter. And naturally, this is not a result that we are happy about. But the good news is that we see we are now in a good position going forward. Looking at Germany, demand for new and used trucks remain soft. Many customers continue to delay new investments. Truck registrations in Germany as a whole decreased by 27%. And in our Germany territory, truck registrations decreased by 38%. Our territory represented about 18% of the total German market. Our sales of new trucks, however, increased by 53% in units to 155 and by 32% to SEK 180 million in revenue. The good news is that customers continue to actively utilize their fleets. So even if they postpone purchases of new trucks, they use their old ones, and this results in continued demand for service and parts. Service and parts sales increased by 6% to SEK 152 million, which is positive, but it's not enough. We have increased capacity in our workshops, but we will continue to increase the number of technicians to -- going forward to fully meet the demand that exists from our customers. Gross margin improved and gross profit increased by 33%. And despite this, our expenses declined. Inventory was 53% lower than last year at SEK 218 million compared to SEK 461 million at the end of the second quarter 2024. This also resulted in lower debt in Germany and lower financing costs. Looking at Kazakhstan, the economy continued to grow. However, the activity in the mining sector, which is important to us because many of our larger customers are active there, remained low. The market for larger machines, thus declined by 27% year-on-year. Our equipment sales were down 79%, as we sold less new and used machines. However, service and parts sales increased significantly by 65% year-on-year. The gross margin improved despite making an impairment of spare parts of SEK 1 million. We also had lower expenses during the quarter despite SEK 1 million of restructuring costs. Inventory reduced to SEK 68 million at the end of Q2 compared to SEK 209 million at the end of Q2 last year. I hand over to you, Erik.

Thank you very much, Henrik. As per usual, I start with a bit of an economic backdrop. The macroeconomic context we worked in, starting with our biggest market in the United States, GDP growth 2% in the quarter, but 3% quarter-on-quarter. So positive development there, between 1.3% and 1.5% expected for the year as a whole. Looking at inflation, 2.8% seem to be signs of some room for the Fed to potentially lower rates, which would be positive. At the moment, the Fed funds rate effective is unchanged at 4.33%. Germany, up 0.4% year-on-year, but slightly lower quarter-on-quarter. The economy remains sluggish -- and that is, to some extent, as Henrik said, reflected in the market, 0% expected for the year and an inflation rate at 2%, just below where the ECB has its rate at the moment. Kazakhstan, strong growth at 5%. That's year-to-date, so 6 months actually. But mining sector being quite slow for more structural reasons there, and that affects the demand of -- for Ferronordic and our biggest customers, who are active in that segment of the economy. Inflation rate, 11.8% and the Central Bank rate of 16.5%. Financing and access to liquidity is a limiting factor in Kazakhstan, so positive when monetary conditions can ease up a bit in that market. Moving over to our income statement and performance. Looking at some of the details, Henrik covered the big picture there. We saw, again, total revenue down to about SEK 1.1 billion. That's 2% negative. But that's with the USD that on an average basis versus last year, lost 9% versus the Swedish krona and the euro about 2%. So adjusted for that, we would have a positive development on revenue year-on-year. Looking at the distribution of our business, almost 2/3, 64% in the United States, almost 1/3 just above at 34% is Germany and Kazakhstan making up only 2.4% in this quarter. In terms of revenue mix, which is a factor also on gross margin, as we know, with different margin pictures in the different revenue streams, 49% to about half coming from equipment and trucks in the quarter, 41% aftermarket and 9% other, and that other is mainly mind you rental. So again, positive to see that grow in the U.S. and also positive to see strong aftermarkets in both our big markets, the U.S. being stable and growth in Germany. Looking at gross profit, a slight decline there, 4%, again, partly currency driven. If we look on a margin basis, we're more or less flat year-on-year, down slightly, and that's a lower margin in the U.S. compensated by a higher margin in Germany. Our overheads or SG&A, selling and general and administrative costs down 6% year-on-year. That's about SEK 12 million in the single quarter. That, in turn, reflects lower costs in Germany. partly driven by our cost reduction program there, lower costs in Kazakhstan and lower group costs, whereas we did have higher administrative cost in the U.S. and selling costs, but that's again something we're looking at to address going forward. As a percent of revenue, SG&A declined in the quarter versus where we were last year. Operating margin more or less flat year-on-year. And we have operating profit slightly down to negative 5% versus negative 5% last year, and that's mainly on a lower contribution from the U.S. Looking below the operating profit, we had a net income negative SEK 51 million, which was up versus last year. Lower financing costs. We have brought down debt and net financing costs were down 26%, but we did experience negative currency differences in this quarter as well as last year, minus SEK 15 million versus minus SEK 35 million last year. Turning to the balance sheet. We had a slight increase in PPE, so our property, plant and equipment, and that's despite a weaker foreign exchange situation in the sense that Swedish strengthened about 13% against the dollar and 3% against the euro if we compare year-on-year. Growth in property, plant and equipment, driven mainly by addition of rental fleet in the United States and electric rental fleet in Germany, not conventional that is slightly down year-on-year rather in Germany. In the U.S., looking specifically, net working capital decreased somewhat from 17% to 14% of last 12 months revenue as a result of inventory and receivables decreasing more than payables. In Germany, net working capital also decreased meaningfully as a percent of last 12 months revenue from 16% to 11%, mainly there a result of lower receivables. Receivables were down SEK 85 million quarter-on-quarter. That, in turn, was much driven by receipt of subsidies from the state on our electric trucks rental fleet. In Kazakhstan, net working capital was down in currency in SEK, but higher -- slightly higher as a percentage of revenue due to lower revenue rather than higher working capital. So overall, I think we brought down working capital, as you can see in the table to your left there, quite significantly year-on-year, but also about SEK 200 million movement quarter-on-quarter. Reducing debt, while growing sales is in line with our effort to increase capital turnover and also raise our return on capital. So happy to see that come through, and it is also reflected in lower debt and financing costs, as we have pointed out. Net debt indeed being down SEK 146 million quarter-on-quarter to SEK 1,679 there -- million. And then equity to assets slightly higher by 1% at 31%. With that, I turn to the next slide, slightly technical, just to remind those of you that follow our business and of course, those of you are new to our business as well that we have, as of the start of this year, made a change in the presentation of the income statement of our U.S. segment. we present in the report and here to your left, what the U.S. segment looked like in Q2 when released last year and what it looks like now following these changes in presentations and in the pink colored column here, the difference between the 2, so you can follow that. And you will see that we have brought some costs from SG&A up to cost of goods sold and also made an adjustment of some other income rather being classified as revenue. The net of this is a reduction in the gross profit and therefore, the margin, but it has no impact on the operating profit or below. So it is a difference in presentation. Moving to the big dynamics in terms of operating profit year-on-year, just to summarize really a decline in the U.S. if we look year-on-year, which we talked about, an improvement in Germany, which lifts the group's results, but we're not in Germany, where we want to be. We're still negative. We are making progress, and we're confident that we'll get there. Kazakhstan being largely flat year-on-year. And then, again, efforts to rein in on group costs, also a reduction on the group level there. And that brings us to more or less stable year-on-year, down by SEK 1 million. And then I summarize for us our balance sheet. Looking at the asset side first. On this slide, you will see that the biggest part of our assets are in our rental fleets, red being the United States and gray here on this slide being Germany. Inventories further to the right on this latter graph being another big piece or the next biggest piece on the asset side of the balance sheet, a smaller blue line there also for the inventory in Kazakhstan. And to the right of inventories, you will see trade and receivables also being a meaningful part. And then to your far left, worth noting also the real estate that we have in the United States and in Germany. In Kazakhstan, we only have short-term leases really. Liability side to bring the balance sheet together to our far left, you'll see our trade and other payables, interest-free and then moving right, our bank loans and then our floor plan directly linked to inventory and rental fleet there, bringing us to the book equity position of SEK 1.3 billion. With that, I am sort of -- I reached our financial objectives. So last 12 months in Q2, we're at [ 1.02 ], the revenue we started from. So still a long way to go. But we want to make sure that we are efficient in growing in terms of our capital structure and again, making sure that we increase capital turnover when we grow. So we improve return on capital also as we expand our revenue. And in terms of operating margin working there as well. We want to, again, expand aftermarket and the business in Germany. In Germany, an important component of that is getting these service technicians up and running, qualified and trained, and that's something we're working hard on. And then, of course, in the U.S. to keep those margins and continue to grow the business. It is encouraging to see really that our customers are in good spirit and there is good backlogs in their order books and strong demand in the market. Our net debt to EBITDA is lower, and we will continue to watch that KPI also to get to our target levels. And with that, Henrik, I hand back to you for an outlook before we pass over to Q&A.

Thank you, Erik. Recapping the outlook statement from the report. We remain optimistic about the operations in the U.S. and the long-term opportunities there. We expect activity in the infrastructure sector to remain good as the need to maintain American roads and other infrastructure is significant. We see clear opportunities to further develop and expand the U.S. operations going forward. In Germany, truck demand remains low, but demand for service and parts is holding up relatively well. And when the economy eventually starts to recover, demand for both new trucks and service and parts should increase as well. And we must then ensure that we have enough capacity in our workshops to fully meet the demand. Meanwhile, we have reduced our cost base in Germany. We have reduced our inventory levels, and we have reduced our financing costs. And overall, we are optimistic about the operations in Germany, too. Kazakhstan is currently a small part of the group's business, but we see promising opportunities in that market as well over the longer term. That concludes our presentation, and we are now open for questions.

[Operator Instructions] The next question comes from Adrian Gilani from ABG Sundal Collier.

A couple of questions from my end. Starting off in the U.S. and trying to understand the different components in the gross margin. You mentioned you're selling some machines from the rental fleet at a loss to replace them with better ones. Is that sort of a onetime thing in this quarter? Or is this something we should expect will continue going forward?

I would say that we have plenty of opportunities to grow in the U.S. and to gain market share, particularly in big metropolitan areas. We have invested in the rental fleet to approach some newer customer segments for us. That has taken a little bit more time when it comes to certain machine models. And for that reason, we decided to rip the Band-Aid and sell off some machines that we had low utilization on. Overall, the rental fleet is balanced, both when it comes to size and composition. And as we've seen during the quarter, our rental utilization has improved and rental revenue has followed consistently throughout the quarter.

And maybe to add to that, Adrian, we also, as you saw, took impairment on some of the spare parts and that, I mean, we would classify as a single event. We obviously constantly review our inventory, but that was something that we made a decision on in this quarter specifically.

Okay. That was going to be my next question. But it sounds like -- so you're confident that there's not any more inventory that might not be sellable at book value?

No. In general, we find the rental fleet in balance.

Okay. Understood. And then I remember last quarter, you talked about the gross margin being pressured by price pressure on certain -- certain machines. I mean that might be the thing you mentioned before and selling at lower -- selling certain machines at a loss. But in general, the pricing situation, has it gotten better or worse? Or is it the same as in Q1?

I would say that -- I mean, the market remains strong, but it's also a competitive market, and we are fighting on every deal. And in general, I think we are protecting our margin pretty well. And if you take away the special events that happened during the quarter, our underlying margin is more or less the same as last year.

And then a final one on the cash flow. Since you sort of switched to booking the U.S. rental business under working capital instead of capital employed, we've seen some big sort of swings in the working capital levels. Can you give us some indication of with this new -- or with this change in accounting, what's the sort of normal working capital level that we should expect in, I guess, medium-term sense?

Adrian, if I understand your question correctly, I mean, the working capital itself, I mean, that's built up from the balance sheet, right? So that's not going to -- we've always kept the U.S. rental fleet and the German rental fleet in PPE and then inventory for direct sales in inventory clearly and receivables and then deducted the payables we have. So that, I don't think is going to change. And if you're rather looking at the cash flow statement, then I think you can use -- I mean, we have this way of presenting this year. So I think you can use -- and obviously, we corrected at the previous years as well to be in line. So I think you can use the current quarter and the previous quarter. I mean, we were stable also as you'll see year-on-year. If we're looking at operating cash flow at SEK 262 million, I think it was versus SEK 270 million. So that's probably something you should be looking out for going forward.

Okay. But to sort of maintain that SEK 200 million level, you will need to release further working capital as well because that's been boosted quite a bit by working capital releases. So you're expecting that part to continue.

Well, Adrian, so we're clear on that. I mean the operating cash flow is -- you'll see in the financing adjustments, there you have floor plan coming down as a result of the release of capital -- working capital. So you see the operating cash flow coming out. But then, again, in the financing, you see repayment of that to floor plan providers. In addition to which you have, of course, usual redemption of bank debt that we do. So you need to match those together.

The next question comes from Anders Akerblom from Nordea.

So just 2 quick ones from my end. On the first, it would be interesting to hear you again just elaborate a bit on your view that you do not expect to be more adversely affected by the current tariff scheme in the U.S. relative to competitors. That's my first question.