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

Thank you, and very welcome to this presentation of the year-end report. This is Lars Corneliusson speaking. If we start with Slide #2 and summarize the Q4, we saw strong equipment sales and strong cash flow. We had Russia/CIS unit sales up 17% in a market that started to recover. We had strong organic revenue growth, which was then offset by a weaker ruble. We had operating margin lower on revenue mix and ramp-up costs in contracting services. Germany was affected by COVID restrictions and restructuring costs, and our strong cash flow led us to a net cash position by the end of the year for the group. And the Board updated the financial objectives and proposes a SEK 7.5 per share dividend. If we then move over to Slide #3 and talk a little bit about the full year 2020, when we believe that we had a very strong performance in very challenging conditions. Russia/CIS actually delivered its best results ever and cash flow. We saw our unit sales up 15% in Russia/CIS whereas the market for our main products declined 4% and obviously then [ took quite ] some market shares. We have the operating profit in Russia sales increasing 10% to SEK 394 million with an operating margin of 10.8%. We continued our development of contracting services. We initiate a component and machine rebuild center in Ekaterinburg, which we then later actually expanded by the end of the year due to demand. We increased our used business healthy, and we continued our expansion in Kazakhstan. Also during the year, we started up our operations in Germany in January. And obviously we made investments into network development, into organization, into implementing new processes in both the aftermarket and sales. However, Germany was indeed affected by COVID restrictions, and we also took restructuring costs to make sure that we, going forward, can reach our target of turning the operations profitable by the end of this year. We had -- due to the costs in Germany, our operating profit decreased 8% to SEK 328 million and the margin declined from 9.5% to 7.1%, still within our financial objectives. Working capital as a percent of revenue actually declined from 20% in the beginning of the year to 5%. And we had then a very strong cash flow from operations of almost SEK 700 million. And thereby, the net debt of SEK 593 million, we turned into a net cash position of SEK 20 million by the end of the year. And as I mentioned, the Board has then updated financial targets, we will come back to that later in this presentation, and proposes a SEK 7.5 dividend per share. If we then look at the Q4 group financial highlights, the revenue was up 23% to almost SEK 1.2 billion. And in Russia/CIS, our revenue was up 34% year-on-year in rubles, but that actually resulted in a 0% growth in Swedish krona due to the sharp decline in the ruble, which then on year-on-year on the quarter -- year-on-year was actually a 34% decline in the Russian ruble. Equipment and contracting services revenue increased 5% in SEK, 40% in rubles; and 15% in SEK, which was then 54% in rubles, respectively, while aftermarket sales declined 16% in Swedish krona, but was up 12% in Russian rubles. German revenue was at SEK 233 million, which is then slightly up quarter-on-quarter with 62% coming from truck sales, 27% from aftermarket and 11% other. In the quarter, we saw truck sales increasing 8%, but aftermarket sales declined 11%. And this then led to a group operating profit of SEK 65 million, which is a decrease of 31%. In Russia/CIS, we invested for our future, and the decline was 5% in the operating profit year-on-year, partly as a lower share of aftermarket sales and the revenue mix, but also on lower margin contracting services, mainly driven then by the ramp-up costs and use of subcontractors in our new big project that we started up in the quarter in Norilsk in far north of Russia. And as we mentioned, Germany, partly affected by COVID restrictions, new COVID restrictions and restructuring costs. And then we had an operating margin in the quarter of 5.5% and then mainly due to the negative contribution from Germany. But again, lower working capital and strong cash flows and a net cash position. If we look a bit more on the market for Russia, we saw a recovery in the market for our main product groups. If we measure it in units, by 6% in the quarter. We saw uncertainty easing. We saw commodity pricing -- prices coming up, and we saw investment programs restarted or actually, in certain cases, accelerated. Our new equipment sales we grew 70% to 89%, obviously gaining market shares. And we saw customers continue to demonstrate resilience in their operations, and they maintained investment programs. And we saw increase in articulated hauler sales, but also smaller excavators and wheel loaders. So then we get an average ticket which was 5% lower in SEK but still 27% higher in Russian rubles. Aftermarket revenue share declined by 5 percentage points to 22% whereas our contracting services business increased to 13% of our revenue in North Russia/CIS. In Germany, we also saw a recovery in the market in Q4, up 4% year-on-year and 17% quarter-on-quarter. And it was mainly driven by the tractor segment. Our sales area in Germany is approximately 19% over the total market. And it grew 6% year-on-year and 13%, so broadly on quarter-on-quarter. So that's broadly in line with the overall German market. We sold 162 new units, which was then 7% higher than in the previous quarter. Mainly due to renewed lockdown restrictions, we saw a decline in the aftermarket sales by 11%. Gross margin 7.7%, down from 9.8%, mainly as a -- it's a revenue mix effect mainly on that. And obviously, we remain alert to the risks of the epidemic. We keep focusing on customer and employee health and safety, while aiming to continue to deliver great and uninterrupted customer service that we have managed to do throughout the year of 2020, and I think we should be proud of what we have delivered. We have tried to make sure that we don't leave customers alone out there despite restrictions, or severe restrictions in some cases that we have seen. A little on business development. In Germany, we are continuing our sales organization and process restructuring. We're picking up good speed there. We have expanded the network, and we are continuing to improve our network. We have announced 2 acquisitions to extend the network. And our intention is to, as we said previously, we want to extend, we want to improve, and we want to take a bigger part of the aftermarket business in our territory, which is one of the ways to reach a good, sustainable profitability in our business in Germany. If we move to Russia/CIS, we saw in contracting services, robust performance, very challenging conditions. Many hinders on the way when our operators are moving back and forth to the sites with quarantines, with lockdowns. It's been very difficult really for contracting services, but they performed extremely well under these conditions. And in Q4, as I mentioned, we launched the new project for a palladium mine site in Norilsk, which is far north in the Krasnoyarsk region of Russia, where we're taking on a general contract role, which includes road construction, drilling and blasting, overburden removal and site preparation for a site, a process plant for palladium. Part of the project is subcontracted, and we started up in Q4. We will see more revenue and benefits coming from that project going forward in 2021. Also, very -- we're happy that our machine and component rebuild center in Ekaterinburg that we initiated really in the early 2020, we already expand capacity, and that was completed in Q4 2020, where we actually recycle components and rebuild machines and giving them new life and using sources -- resources to extend the life of both components and machines. And that is also -- we sourced the machines and components, both, of course, from our contracting services business, but obviously also from external sourcing from our customers out in the market. So by that, I hand over to Erik Danemar.

Thank you very much, Lars. We'll move on to the next slide then and start off a bit on the macro side, what we see in our markets. In general, as you would expect, we have seen a slowdown in the economies where we operate due to the effects of COVID-19 in general and more specifically on the Russia, Kazakhstan side, also due to the oil price decline. But the general consensus seems to be to expect a recovery in 2021, of course, depending on how the pandemic develops going onwards with mutations and other corollaries of this pandemic. If we look at the market separately, Russia minus 3.1% in 2020. That was less than what was anticipated in terms of decline. So a smaller decline. And we expect then for 2021 more or less an equal size increase, albeit from a slightly lower base. And when it comes to inflation, we have seen an uptick lately. The Central Bank did take down rates fairly aggressively. And then, of course, in the last year, also, the weakness in the oil price had the implications on the ruble, which would see some imported inflation into Russia. As mentioned already and an important factor for us in our operating environment, looking year-on-year from the end of '19 to the end of '20, we had a 36% depreciation of the Russian ruble against our reporting currency in the Swedish krona. Kazakhstan, slightly more shallow decline and also a more shallow increase or recovery expected next year. Germany, a steeper decline and slightly bigger increase than we expect to see in Russia and Kazakhstan. If we move to next slide, #9, and look at our markets. Lars has already mentioned the development we saw. So we did see a decline in our market or in our main product groups in 2020, which puts us in a lower position versus where we have been in Russia. So what we see now is a market that is only 52% of the level that the market was in 2011, and even lower if you compare to the base of 2012. And this is something that we come back to because we don't see '11 or '12 as necessarily a cap of the potential of the Russian market. So we are still quite optimistic on the long-term potential of the Russian market, even without national projects. But as we've noted in our report, we do also see increased activity on these national projects, and that's also encouraging. Even though we are still 52% only of what the market once was, our revenue is up 51%, and our operating profit, even more so at 320% higher. So again, we see -- we continue to be quite optimistic and see great potential in this market. If we move on to look at actually the income statement, Lars started by giving the headlines and speaking to the business development we did in 2020. It was also a year of protecting ourselves in the situation of the pandemic but also seizing the opportunities that we could and building for the future, and that's something that we think that we've done quite successfully. If we look again in financial terms on the year in P&L, then we can see that we ended up with a revenue of SEK 4.6 billion. And to get a sense of the distribution, we're then 79%, so about 4/5 in Russia/CIS and 1/5 in Germany. And if we look at the split across the revenue mix, then you see 63% being the equipment and truck sales. And then about 1/4 being the aftermarket and 1/10 of the total being our contracting services activity. On your far left of the graph or of the table, you will see Russia/CIS in '19. There is a small consolidation of Germany at the very end, but that's more or less Russia as it were. And to your right, you can see Russia stand-alone and then Germany stand-alone and then you have the group together. So comparing the leftmost 2 columns, you will see that we ended up with a slightly, when it comes to Russia/CIS, smaller revenue. Again, significantly driven by the weaker ruble, that decline. But also a slightly lower gross margin. And even so, given the cost controls we put in place, partly driven to brace ourselves for the potential implications of the pandemic, we did keep costs in check, and that's one of the reasons, in addition to actually the very strong sales results we had in this year that we're very proud of, that allowed us to produce a higher operating profit in Russia/CIS and a stronger margin as well. Group, if we look on a group level at G&A expenses as a share of revenue, we're still down in 2020 versus '19 and that's even though we then take on a bit higher percent of revenue from Germany. A decline in the operating margin, and that's driven by the negative impact from Germany in 2020. The Russian stand-alone operating margin was higher than it was in the previous year. Operating profit then on a consolidated basis, they increased 8% to SEK 328 million. We also did, as mentioned, not only in terms of translation, but also had some direct FX losses resulting from the weakening of the ruble that impacted the net income in 2020. Moving on to Q4 on Slide 11. And here, again, we can see similar relationship in terms of split between Russia/CIS and Germany, our 2 segments. Worth noting that we have a lower share of the aftermarket, and that's something that Lars has pointed to and he discussed the operating results in Russia, aftermarket did not grow in pace with contracting services. And the equipment sales, so making up a smaller share of revenue and similar in Germany as it were. So 23% aftermarket in Q4, that compares to 26% in Q3. So that's a decline. And that's one of the factors that impacts the gross margin in the income statement. SG&A in Russia, again, holding firm on the costs and then seeing the, so to say, upside of the weaker ruble, so a decline of 23% there, although we had a slight increase quarter-on-quarter. And as a share of revenue, again, we are lower year-on-year still in Russia. But when we put Russia and Germany together, again, given the operating losses we had in Germany, we end up with an operating margin at 5.5%. That's a consolidation of the 9.5% we had in Russia and the negative contribution from Germany. That puts us at an overall operating profit which is down 31% to SEK 65 million. And if we move to the next slide to get, I think, a sense of the key drivers of that result, operating result, then what this ladder shows is basically we're looking in Swedish krona. So we, in the fourth quarter, see stable revenue but a lower gross profit, as mentioned, driven much by revenue mix; to some extent also the start-up costs that we had in contracting services as we increased and launched a new project there. So a lower gross profit coming through from the revenue. And then we have the cost savings that we have pushed through in this year, which raises our EBIT. And then we had a negative contribution from Germany in the business itself. Again, there is also there a factor of lower aftermarket. And in addition to that, we have restructuring costs in Germany and items that we would classify as one-off and not recurring to the business. Briefly, we usually give an overview of the long-term trends, revenue and margin development on Slide 13. And we can see that Russia last 12 months revenue, that's what we're looking here, has been relatively stable. That is in Swedish krona. Had we looked in rubles, it would be a different picture, of course. And the red line then capturing the nonorganic, so to say, increase that we get from the German assets, SEK 233 million in Q4 and just below SEK 1 billion in 12 months. Margins have come down in this quarter, as discussed. Goes for gross margin for the reasons that we have touched on and also on operating margin when we consolidate the negative operating margin that we took in from the German operations as we work to restructure that and get our network in shape there. If we move to Slide 14, we will see the cost development and the return on capital employed. And to your left there you have the cost and, as touched on, we have had strong cost control in Russia. There is, again, the help from the ruble there as well. But we did put programs in place to brace ourselves for this year and have found efficiencies there that we believe we can also keep going forward. So even though we bring on a high level of SG&A to revenue from Germany, we're still lower as a group because of the savings and efficiencies that we've created in Russia/CIS. To the right, the return on capital employed. Here, of course, again, the contribution from Germany, which drives down the operating profit, but also the assets that we have added to our balance sheet, especially in Germany. If we look incrementally, that has the negative effect on the return on capital employed, which then came out at 20% in Q4. Quickly on cash flows, which was one of the strong themes of 2020 overall, but also in Q4 2020. You will see in the columns there that Russia/CIS, again, generated quite healthy SEK 206 million, whereas Germany was at negative SEK 27 million. And it is a tail of opposite directions there, a declining working capital in Russia/CIS. Also lower interest and income tax paid in Russia. Interest coming, of course, from not having the debt that we had last year. In Germany, the other way around, we actually increased our working capital, and that's what drove the cash flow there. We did hold back on CapEx. I draw your attention to, as we disclosed in the footnote here, that there are investments going into contracting services, but when they come out of what is initially taken on that inventory, it goes through movements in working capital. But you see there in Q4, we had SEK 29 million as such going through the cash flow statement. Looking at the balance sheet, we can see some of the reasons for, again, the cash flows, but starting just on PPE (sic) [ PP&E ]. Of course, worth bearing in mind there that on the Russia/CIS side, the ruble has a significant impact there. It is a ruble-functional currency balance sheet that we work with in Russia. So of course, when we have this 36% depreciation, it does impact the assets that we have on the balance sheet. I mentioned the strong cash flows in Russia. So working capital actually coming down to 3%. This is low. And again, an important driver of the cash flows that we've seen. We started the year at 19% -- or rather, ended last year at 19%. And again, slightly different direction in Germany with marginally higher working capital from 7% to 9%. These cash flows produced the change from a net debt position. We were at SEK 83 million at the end of Q3. We were at SEK 593 million at the end of last year and found ourselves with a net cash position of SEK 20 million at the end of 2020. And with that, we move to the next slide and look at what is our current or past, maybe, the financial targets, where we stand on that. And when we closed Q4 and look at where we stand, then we see that we are 2.2x the 2016 revenue. Our target there was set to triple our Russia/CIS revenue by 2021. If we look at operating margin, after going into Germany -- before Germany, we had a range or an objective of a 7% to 9%. Going into Germany, and saying that we expect Germany to be around 30% of the total revenue, we lowered by 1 percentage point to 6% to 8%, and we found ourselves at the end of the year in the middle or slightly above the middle of that range. And then again, with regards to debt, we set ourselves to be, as an objective, between 0 and 2x. And again, now find ourselves slightly negative net debt. And with that, I'd like to hand back the word to Lars. We have revised our financial objectives, and we think it's essential that the financial objectives support and reflect the strategic objectives of the business. And that's the place we should start.

Yes. Thank you, Erik. And if we look at our strategic objectives that we have actually had for many years now, we have -- one of them is leadership within markets for construction equipment and trucks. We have expansion into related business areas. We have aftermarket absorption rate of at least 1x or 100%. We have geographic expansion. And we have further development of contracting services. And obviously for those of you who have followed us during the years, we have maybe not illustrated the industry-leading digital service and sales platforms, but that has been at the core of our development for the last 5, 6 years. So if we look a little upon how have we delivered on those strategic objectives as of today, I think we have delivered well. We were founded in 2010. And as a result of executing on these strategic objectives, we are now a more mature and diversified business. We today operate across 3 markets. And we represent several leading brands, next to Volvo. We have also developed vertically by investing in a component and machine rebuild center. We have grown our rental business and used business. And we have, as you know, significantly expanded our contracting services business. And we are continuing to deliver on these objectives. We have developed a digital sales platform that supports our service organization and our customers. And that has been a significant driver of our development in the aftermarket, mainly. We have potential to continue to grow with significant contributions from contracting services and Germany. And as contracting services and rental operations, they tie up more capital in machinery and network infrastructure in Germany, it's either owned or leased for long periods, our business model becomes more asset and capital-intensive than before. So in line with continuing to pursue our strategic objectives, we have then updated the financial objectives to reflect the current position and strategic direction in 2020 to 2025. I hand over to Erik to say what the new objectives are.

Thank you, Lars. Then we move to Slide 19 of the deck. And there you can see our new financial objectives. As Lars mentioned, we have grown horizontally and vertically, and we have developed different business areas, many of which where we see further growth potential. We have looked on this call and previously at the market opportunities that we have, both in Russia/CIS but also in Germany, where we see upside from the equipment business. But we are quite excited about the opportunities in contracting services as well and the strategic direction of that kind of value that we can deliver to our customers. And also the potential, of course, of our franchise in Germany. So we do see opportunities to grow, and that's what we try to capture in this ambitious growth target that we set ourselves from 2020 to 2025 to double our revenue in our current markets. To define what that means, it is then the market where we're currently operating: Germany and Russia/CIS. CIS, though, including the -- all of the CIS markets and the potential there. Looking at operating margin, we have since 2017 performed at above 7%. And we have indeed been above our 7% to 9% given target. We believe that this is a good measure for us for where we should, as a group, stay over. And we don't want to limit the upside there, but we believe that this is a good target for us to stay above. When it comes to net debt to EBITDA, Lars mentioned that some of these growth areas and potential that we see does change our balance sheet to some extent. Contracting services ties up fixed assets that we carry on our balance sheet through machines. In Germany, whether we acquire or lease assets with IFRS 16, they come on to our balance sheet. So more infrastructure-intense and capital-intense business. And with that comes a different balance sheet that we should be able to use as we support the growth of these very interesting areas going forward. It also gives us more flexibility to act on opportunities that we see. So that's on these targets that we present to you today. We have also revised our dividend policy. So it used to be that the ambition was to pay at least 25%. We now want to be a bit more transparent with our investors, with the market and say that the ambition is to pay at least 50% if net debt-to-EBITDA is less than 1x, and at least 25% if net debt-to-EBITDA is more than 1x. And these are at least so that it doesn't per se mean that there is a limit to this, but these are the targets that we set and the policy that we've put. As before, the Board will, of course, take into consideration several factors when they look at what dividend to consider and to recommend. With that, we can turn to the next slide, which really just summarizes and visualizes where we have been and where these targets put us. So what you can see on your top left there is the growth trajectory that we've had up to 2020 and the potential that we see going forward and what we're aiming for. You can see to your lower left, the operating margin performance that we've had all the way back from 2013. And indeed, as I mentioned, since '17, we have been above the floor that we now set ourselves to be above going forward. And when it comes to net debt to EBITDA, you can see that we have been lower than within as our business to some extent with the opportunities we see changes the nature of our balance sheet, we want to give ourselves more room there and more flexibility. And the lower right graph there illustrates this point that on our path when we have taken on more assets in contracting services. And of course, if you look 2019 on the lower right graph, it also captures assets that we acquired in Germany. So that reflects part of the reason that we have for setting the objectives that we've presented to you here today. So with that, I will give back the word to Lars to wrap.

Yes. I mean the Slide 21 is a repeat of the first slide. And I think in the interest of time, we move over to the outlook, which is clearly uncertain still. There is uncertainty, both on the supply side, as you might know. Obviously, there might be uncertainty on the demand side as well. However, we currently expect the markets in Russia/CIS and in Germany to recover in 2021. In Russia/CIS, obviously, our optimism is supported by the stronger commodity prices and increased activity on the so-called national projects; however, checked by certain risk or potential changes in taxation. In a longer perspective, we believe that the underlying fundamentals and business opportunities in our markets are strong. So fairly cautiously optimistic about our markets in 2021. Thank you. And I think we can hand over to questions.

[Operator Instructions] We have a question from Vic Hansen from Nordea.

Victor from Nordea here. So according to AEB, the scrappage fees are up 2 to 4x due to government interventions, and you also touched upon this in the report. How do you expect the increased sales in Russia to impact your new unit and aftermarket sales in 2021? And have you seen this lead to an increase in your price per unit?

Yes. Victor, there is indeed a proposal for an increase of the so-called utilization fee or the scrapping fee, which is called for certain of the models, not all. And it is not yet decided. The levels are not yet known. It is under heavy discussion, I can tell you. And the timing for this is not known. So that's part of the uncertainty overall. But you're right, for certain models, we're talking about an increase -- a manifold increase in this fee or tax, which would mean that we would need to push that out to the end customers and, eventually, back to the government, who is paying for it all, but that's in parenthesis, with quite some percentages. And if that happens -- there is one thing, however, we need to mention here, and that is that it's a flat fee. So it is a different fee for each product's model, and it's a flat fee. So if we take something positive out of it from our side, it's that it relatively affects us the least since we are price leaders in the market. But it's -- if it's being implemented, it will have an impact on -- a negative impact, obviously, on the market. But at this stage, I think it's too early to say whether the positive impacts that we see from increased activity in the economy in general, pent-up demand and the national products -- projects, sorry, how that will play out. So we still believe in an increase, as we say, in the total market. That increase would have been bigger if this would not be in place, which we still don't know if it will come in place. So it's an uncertainty that we live with, which is not unusual, but that's the way things are.

Okay. That's interesting. And on contracting services, to what extent are you currently using subsuppliers to carry out work in the -- specifically in the CMC mine in Norilsk that you mentioned? And how should we expect this mix to change as operations there mature? And could you please quantify how the ramp-up costs that you mentioned has affected your results?

I don't think we can quantify that, Victor. But at the moment and during Q4, we have had a high degree of subcontractors in Norilsk project. That level will go down over time. So we will have more own machines there going forward than we had in Q4.

Okay. And a follow-up on that. Could you provide some guidance to the targeted level of subsupplier mix in general for your contracting services going forward?

No, we don't give that number really, Victor.

I would add to that, Victor, it's not only about not giving guidance, but it depends also on the opportunities that come up, for which projects our competencies would be better served by doing ourselves and where we could benefit from taking in external partners as well. So it depends a bit also on the opportunities that come up, Victor.

Okay. And are there any sales in Russia from projects related to national projects in the Q4 numbers? Or it's still -- or is this opportunity still completely untapped?

I would say that very limited sales in Q4...

Okay. So it has started?

It has started on a small scale.

Wonderful. And how much of your cost savings in Russia/CIS would you say are temporary?

I wouldn't give you a percentage, Victor. But as we mentioned before, I think there are, I would say, structural changes that we've done to our organization, and I mean if you would look at our cost structure then, people is a big part of the G&A, of course. And there, there are some of the savings that will last from the level that we see at the moment now. But then there are temporary ones that -- I mean, for example, traveling and marketing, where we have to put the brake completely. And still, if you look at Q4, we're very low on those posts. And that's not sustainable over time. We need to go out and travel. And when I say stable, again, one needs to think also in terms of percent of revenue. Of course, when we grow our projects in contracting services, when we grow our market presence, it comes with some cost as well. But when we grow, we do expect to see scale economies. So I do think that we can hold on to, again, efficiencies that we have found this year.

Okay. And a final question for me. On your new revenue growth target, is this including acquisitions in the parts of Germany where you are currently present?

Yes. It does. So it's, how do we say, nonorganic in the sense that it does not include new markets if we would go into new markets. But in terms of the current business area, and again we say that CIS is a business area, that's included in this revenue target.

Okay. So if you would expand to a larger part of Germany, is that included also in this revenue target? Or is that additional?