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

Dear ladies and gentlemen, welcome to the Ferronordic Audio Call for Teleconference Q4 2021. Today, I am pleased to present CEO, Lars Corneliusson; and CFO, Erik Danemar. [Operator Instructions] Speakers, please begin.

Yes. Good morning, everybody. This is Lars Corneliusson speaking, and welcome to this presentation of the Q4 2021 report. And if we move into Slide #2, a summary slide, we start with where we saw strong growth in sales and profit during the quarter. And for the Group, we had a 43% revenue growth to roughly SEK 1.7 billion. We saw demand remaining very firm across the line. We have a balance sheet that remains strong and the working capital on low levels. And the Board proposes SEK 11.5 per share dividend. In Russia/CIS, we had 31% revenue growth with a greater share of aftermarket and contracting services sales. We saw 37% operating profit growth as the margin improved on product and revenue mix. In Germany, our truck sales in units actually increased by 70% in a market for the total Germany that declined by 4%. And we saw good revenue growth of 91% in Germany, which was also supported by used truck sales and a strong aftermarket performance. So 43% revenue growth, 71% operating profit growth with a 6.6% operating margin and a doubling of the earnings per share in the quarter. And if we move forward then to Slide #3. Some of the highlights for the full year of 2021, and it was our best year to date. We had revenue increase of 34% to SEK 6.2 billion with all business areas contributing to the growth in all countries we're operating in. And the operating margin increased to 7.8% and operating profit by 47% at SEK 483 million. We saw net profit grew by 53% to SEK 339 million. We also had strong cash flows from operations of SEK 457 million. And as I said, a robust balance sheet and dividend proposal of SEK 11.5 per share. We have started to promote e-mobility in both our segments. And despite supply and operational disruptions in Russia/CIS, we saw a record year. We further developed contracting services and also further engaged and expanded our operations in our machine and component rebuild center. During the year, we broadened our cooperation. We also added Sandvik mobile and stationary crushers to our product offering. We continued investments in network development and organization in Germany. We acquired and integrated 5 workshops in Germany. And we saw, as I said, growth in new and used equipment and in aftermarket sales. Some financial highlights for Q4 then, to repeat again, revenue up 43%, where Russia/CIS revenue was up 31% with equipment sales up 17%, aftermarket sales 43% and contracting services 82%. And Germany revenue was very -- had a good growth with 91% to SEK 445 million with truck sales doubling and aftermarket sales up 71% and other sales up 77%. So very good growth numbers there. And also, we have an operating profit that increased by 71% to SEK 112 million, where in Russia, our operating profit increased 37% to SEK 124 million. And in Germany, the operating loss decreased to SEK 12 million. And that gave us an operating margin of 6.6%, which is up from 5.5% last quarter 2020. We saw negative cash flow somewhat in the quarter due to working capital increase to 2% of revenue, and acquisition of businesses in Germany and also adding machines into contracting services in Russia and CIS. And that led us to a net debt at SEK 198 million or 0.3x EBITDA. We now move to Slide 5, and some operational highlights in Russia and CIS. And in Q4, the market continued to grow strongly, and the market was actually up 49% in units. And it's continued -- the market has continued to be supported by pent-up demand from previous years on non-investments into renewal of fleets. We have strong commodity prices, which, of course, supports the markets. And we saw continued spending on big infrastructure projects in -- within the national projects, as they are called, and major federal construction projects. So -- and obviously, you've heard about the potential increase in the so-called utilization fee, which causes -- which continues to cause uncertainty, but it has still not materialized. Our own construction equipment unit sales actually declined by 5% to 274 units where we saw a decrease in most product groups, mainly then due to supply problems. But we increased the sales of wheel loaders, backhoe loaders and bulldozers. What we have also done is we have -- the product mix has changed to bigger machine and the average sales price in Swedish kroner actually then increased by 20%, which is 11% in local currency. We had a very good development in the aftermarket, continuously improving and increasing, and it was an increase of 43% in Swedish kroner compared -- versus then 33% in rubles. In contracting services, we saw, during the quarter, very challenging weather and operating conditions which negatively affected production in Norilsk and in Northern Siberia with extreme weather really. These are not very pleasant places to be in the winter. But the iron ore site in Russian Karelia developed well, which is a project we started up recently. So the aftermarket share of revenue increased with 2 percentage points to 24%, and contracting services increased 5 percentage points to 18%. And if we move to Slide 6 and some operational highlights in Germany. Total market in Germany during the quarter declined 4% -- 4.5%. Rigids declined more, 10%, than tractors. We saw continued recovery in economic activity. We saw pent-up demand and need for fleet replacement, which is boosting demand. Demand is much higher than supply movements. But again, the total market growth was held back by supply constraints and they are basically at the same -- more or less at the similar level as in 2020. And in our area, the decrease in the quarter was even bigger by 15% in the total markets, and then represent 17% of the total German market. And in such conditions, we are, of course, very pleased to see our units increased by 70% to 275 units. And obviously, our market share for Volvo Trucks increased even further then in the quarter. Good growth in aftermarket sales as well, 71%, of which 13% was organic growth, and the rest then came from the acquisitions we had made during the year, which I will talk about a bit later. We also saw gross margin in Germany grew from 7.7% to 11.8%. In terms of business development, we see very good customer acceptance and demand on the rebuild components and rebuild machines from our center in Ekaterinburg and we have decided to make yet another expansion of that center to increase capacity. And we have seen very good cooperation and development with Sandvik mobile crushers and screens and also stationary, which we added later on in the year, and we're developing our service and sales organization and going out to customers. And obviously, this is a very good fit for us as there are tremendous synergies between the [ Volvo C ] offering and the Sandvik crusher offerings basically, the same customers that are using both equipment. So very good and positive start on the Sandvik cooperation. And we are moving into electromobility also in Russia. We have the first electric Volvo wheel loaders certified, and we are now preparing or actually have started the first field tests of electric machines in Russia, and we're very excited about this, of course. In Germany, we had -- the acquisition of Bergstrasse workshop was completed in October, and we completed a acquisition of Bingen in December. We are planning to further expand our network in Germany. The used business that we started late in 2020 had a very nice growth in the year. It's not easy to get hold of used trucks, as you can imagine, with the supply situation as it is. But I think we've done a great job there. And we have continued to restructure the organization and change processes in -- throughout the business in Germany, and we are -- I think we've come a long way and done a good job in changing the organization and the processes to more performance-oriented culture. And we announced in late December that we have made the first order for 32 electric -- battery electric medium-duty trucks from Volvo and Renault for sales, rental, test drives and demo to really start the journey of electrification in Germany. And if we go to Slide 8, you see the status of our network expansion in Germany and remind you that this is a core of our strategy to become profitable in Germany. We need to increase our aftermarket presence. We need to take a bigger share of the aftermarket in our region in order to become profitable. And we have, throughout the year, then made fiver acquisitions of workshops: Fulda, which was closed in January; Limburg, which was closed in April; Nordhausen, which was closed in June; we have started and are constructing our new sales and service hub in Hanover, we expect that to be completed in Q3 this year; and in the fourth quarter then we closed the transaction with Bergstrasse; and we made a closing of the transaction for the workshop in Bingen, as you can see on the map here. So all in all, at the moment, we have 15 outlets in Germany and we are continuing to expand our footprint in Germany. So that was what I had to say, and I hand over to Erik Danemar, who is our CFO, to talk a little about the economic development on Slide 10. Please, Erik.

Thank you very much, Lars. Yes, indeed, I'll start with the macroeconomic overview of our markets. So on Slide 10 then, looking at Russia, 4.6% growth in 2021. Forecast is difficult going forward, but 2.8% is where the consensus forecast lies for this year and 2.1% in 2023. Other indicators impacting us and business climate overall, inflation is picking up speed in Russia and in large parts of the world. So it reached 8.4% in December. Central Bank target is 4%, so significantly above. And that's why we have seen some decisive action on behalf of the Central Bank, 100 points in the quarter and another 100 points after on the 11th of February. So we're currently at 9.5% on key rate and most prime being somewhere 50 points, 70 points above that. The ruble in the quarter, we record on appreciated. And we see also a year-on-year effect for the balance sheet translation if we look again at the fourth quarter of last year to the fourth quarter of this year, even if the average rate in 2020 was stronger than it was in the average of 2021. But again, if we look on the quarter, we see appreciation, which impacts both income statement on translation and then again, balance sheet. In Kazakhstan, 4% GDP growth expected in 2021. That's preliminary, of course, but that's where they expected to land and approximately the same expected this year. If we look at Germany, 2.7% with a stronger growth expected as we enter this year. If we move on one slide to one that we keep coming back to, I'm on Slide 11 now, and we're looking at the Russian market versus our performance. And we can see that if we look at the last 12 months, which now makes up 2021, as it were, we're at 69% of the level that we had in 2011, which is when we really started and when we index this graph here, the lower black line being the market there. Our revenue, meanwhile, has doubled since then. So no market is 31% lower, our revenue has doubled since we started. And our operating profit is then 489% higher, so about 5x what it was when we started, which is very satisfactory. And again, we believe that the market is far from its peak potential at this level. Not only can it go up to where it was in '12 and '13, we also believe that it can indeed go higher, given the infrastructure need and the replenishment of fleet in Russia, the pent-up demand that is still there, we believe. Now if we go into a little bit more detail on the financials. I start on Slide 12 by wrapping up income statement for the full year. And so this is looking at the full year 2021, and we will then see a revenue at SEK 6.2 billion, that's about 1/3 higher than it was last year or in 2020, so 34% higher. The revenue mix between the segments, roughly the same. In 2020 was 79%, Russia, now it's 78%. If we look at the revenue mix, also relatively stable, 62% equipment and trucks sale and 23% aftermarket. Contracting Services is the one that has moved, that was 10% last year. So that moved higher as a result of the expansion that we had in contracting services in or through 2021. Small gross margin increase, when we look year-on-year, to 17.9%. G&A -- SG&A as a percent of revenue at 9.9%. It's -- we want to be below 10% and Russia at 8.2% helped us get to that. We want to get Germany, of course, lower there as well to get maximum operating efficiency in Germany as well. We had a lot of restructurings from our acquisitions in Germany, both the regional ones of the assets we acquired in 2020 but also with the 5 acquisitions that we completed in a relatively rapid pace in 2021. It's been a lot to take in. And I think we've done a very good job at integrating, but there have been cost related to those acquisitions and also priming the organization for the future. Looking at operating margin, higher also, if we look year-on-year, 7.8% above our financial target of being above 7% on the operating margin. And as a result of that, we saw good growth in operating profit at 47% and a net income increase to, as Lars mentioned, a record level, 53% growth to SEK 339 million. If we move to Slide #13 and wrap up the fourth quarter rather than the full year. So we look at the incremental, we see a revenue of about SEK 1.7 billion, plus 43%. And here, a bigger shift, Germany grew, as Lars mentioned, more strongly versus fourth quarter last year than Russia did. So here, a bigger shift. Russia was 74% of the revenue mix in 4Q. That was 80% in the fourth quarter last year. So that's a meaningful move. The revenue mix by activity more stable. Again, contracting services stands out 13% here, it was 11% in the last quarter of this year -- sorry, of last year, which is when we started some of these expansion projects that then delivered through 2021. Gross margin also, when we look year-on-year in the quarter, a bit stronger. SG&A on the quarter basis, above 10%. Again, we work to push that down, and Russia is again leaner if we look at SG&A cost as a percentage of revenue. Operating margin at 6.6%, stronger than last year. And then when it comes to these restructuring and acquisition costs, we took another SEK 3.5 million as we see it more one-off and should not be recurring in Germany in the fourth quarter. And that added up to still a strong operating profit growth of 71% and a doubling of net income to SEK 88 million versus where we were in the fourth quarter of 2020. If we move to the ladder graph that we usually include to illustrate the movement in operating profit, we see Russia's gross profit being the key driver, but also Germany, making a positive impact here, clearly. So a [ bigger ] contribution from Russia again, gross profit. It doesn't come free, it does come with costs, and we see an increase in SG&A. And then you see the German gross profit growth and cost increase there also, and then the nonrecurring, as we would look at it, in the fourth quarter, which brings us to the SEK 112 million that we report for fourth quarter of 2021. If we move to longer-term trends for an overview, I am now on Slide 15. What we see is, we are again in growth territory, both in Russia/CIS and in Germany and hence a red line on the top graph showing here on a last 12-month basis, which again coincides now with the full year '21 growth year-on-year and quarter-on-quarter. On the graph below, you see the margin trends. And here again, versus fourth quarter last year, we see positive dynamics, both in gross margin and in operating margin. If we look quarter-on-quarter, we have a decline. Again on a annual basis, we see a growth trend in the results. If we move one slide further, to OpEx or cost trends and also our important metric of return on capital, which we always monitor. Starting on the cost trends, you will see there also a declining long-term trend, which we hope to continue last few quarters here and this is, again, this slide is LTMs in the last 12 months, so not on the last quarter itself, and therefore, moving more slowly, so to say. Last 4 quarter, we see us hovering around the 10% mark. And again, we want to -- we have the ambition to be there or below. When it comes to return on capital employed, we were at 29% in Q4, which was an increase versus where we were last year and also in previous quarter, and that is mainly a result of the strong performance in Russia/CIS. Again, this is also drawing on last 12 months. So we stress that, whereas the capital employed is the average over the period measured. With that, I move to Slide #16 for few words on the cash flows. We did have, as Lars mentioned, negative cash flow in this quarter for the first time in some quarters. It was partly a result of an increase in working capital. We also had higher income tax and interest paid in the quarter. The main driver behind the working capital change was in Russia, where we had higher inventories and lower payables in the quarter from settling some of our outstanding payables there. And in Germany, cash flows were more a result of the negative operating results, whereas working capital was more stable. Investing activities also, you can see here for the Group, SEK 122 million, so a meaningful number, that being driven then by contracting services in Russia, which seems to replenish the quarter, and also the acquisitive activities in Germany, of course, contributing to that investment number as well. If we then move to the balance sheet, we can see that those investments, of course, contributed to a growth in the PPE. So again, the acquisitions in Germany, the machines, mainly in Russia, and to some extent, also the FX, of course, stronger if we look year-on-year, slightly even quarter-on-quarter, but a marginal difference there in the [indiscernible]. And year-on-year, there is such an effect also the stronger ruble converting back to more Swedish kroner on the balance sheet. Russia/CIS, again, was setting the tone in terms of the working capital. We were at that low minus-2%, then we moved to plus 1%, and that impacted the overall balance for the business or for the Group, Germany, again, being relatively stable, small increase there, but the Group then as a result, moving from 0% to 2%. That is still a low level we have said and comment on in the report as well that somewhere between 5% and 15% is probably where long term will be normal in this tight supply situation we're in still and strong demand environment. It's not obvious that we would see a normalization in this in the short term, but over the long term, it's probably where we would expect to be in more, again, normalized business environment. If we look at the last item on this slide is the net debt, which, of course, to some extent, reflects those cash flows. And we see that we land just below SEK 200 million or 0.3x EBITDA. And then I turn to Slide 18 on our financial objectives and dividend policy. And here, you will see that if we look on, again, last 12-months basis, so 2021, 1.3x versus the revenue. So we are making steps towards our goal or objective of doubling revenue by 2025. We are comfortably above our operating margin target at 7.8% and well below the net debt target that we see for the business. And Lars has commented on the Board's recommendation to the AGM of a dividend payment of SEK 11.5, which is in -- which is aligned with the dividend policy that we have stipulated. And with that, Lars, we turn to Slide 19, and I hand back to you.

Yes. Thank you. And if we then talk a little about how we see the markets going forward, we expect our markets to continue to grow in 2022. For Russia/CIS, we see high commodity prices. We see a continued pent-up demand in the market, and we see good, continued activity on the so-called national projects. The current very tense geopolitical situation has not yet affected our business, but of course, brings significant uncertainty and we closely monitor these developments. In Germany, we expect to continue European recovery to boost demand. Adding to uncertainty, of course, relates to cost pressures and continued supply chain constraints, which we expect to continue well into '22. In a longer perspective, we see very strong underlying fundamentals and business opportunities in our markets. So if we go and just a quick summary again on the market, we saw -- for the quarter, we saw 43% revenue growth, 71% operating growth with a 6.6% operating margin and the doubling of the earnings per share. And by that, I hand over for questions.

[Operator Instructions] The first question is from Victor Hansen, Nordea.

Lars and Erik, Victor here, I hope you can hear me. I'm wondering, first, if you could quantify the negative weather impact within contracting services. It seems to have been slightly negative for sales. But then I'm also wondering if you saw a larger effect on efficiency, meaning the margin.

Maybe I'll start here, Lars, you can nuance it. I think, Victor -- I mean, it's weather, so it's a statistic by itself and measuring the impact, I think, is difficult, and it makes it also very difficult to make any, I would say, projections about how it can impact our outcome activity. But if you would look at -- I would maybe put it like this, that if you look at the quarter-on-quarter rubles result in contracting services that we saw a decline of 10% in revenue. And the complications, the extreme weather that we saw, which caused more complicated operating conditions started somewhere in December. And I think it's fair to say that when we have a harder time operating the machine, then yes, it has an impact on the profitability as well, if we cannot keep the production levels as high, meaning delivering as much cubic meters then there is, again, an impact. But I wouldn't quantify that for you at this point. So that's what I would say.

Yes, that's helpful. And then in Russia/CIS, your used unit sales declined almost 20% year-on-year. And first, I'm wondering if this is all due to supply problems. And then also if you could perhaps expand on the supply issues you are facing more generally and how you're dealing with them.

Yes. Well, the answer is yes. The reason why we don't keep our pace with the market or supply constraints, but also the fact that we have deliberately chosen to change the product mix to bigger machine and creating a higher ticket sales -- average ticket sales to somewhat take effect away from units because, obviously, you see that we're increasing revenue, although we are losing market shares in units. So the supply constraints are there, and they will continue into -- well into 2022. Unfortunately, we don't see any positive development there yet. We can -- and as I said, how we can counteract that is obviously to make sure that we focus on bigger machines and the scarce resources for scarce supply that we have so that we get rubles out and also invest for the future in a bigger aftermarket for bigger machines. So that's what we can say. And I think we've done it in a good way by increasing revenue, although we haven't been able to keep up with the pace of the units in the market.

The next question is from Kenneth Toll, Carnegie.

Can you hear me?

Yes.

Okay. But I'm sorry, I have to ask these uncomfortable questions maybe around the political tensions. I'm thinking about if there are severe sanctions introduced on Russia by the EU and the U.S., how prepared are you to handle such a situation? It's a broad question, but let me narrow it down. How much of your sales goes to organizations that are owned or influenced by oligarch's which are likely to be very badly hit by sanctions? And the other thing, if Russian banks get a lot of sanctions, so it might be harder for them to transfer money and execute payments with banks abroad and so on. Could you still run your business or?

Yes, Kenneth, we don't want to speculate too much into what will happen, obviously. As we said, so far, we have not had any effects on our business. We have a very diversified customer portfolio, and we have no customers that stands for more than 4% of our sales. So we are working in many different sectors, as you know, and that is what I can say on that. When it comes to banks, we're also working with a number of financial institutions, both inside but also outside Russia, and that should help us to mitigate the risks. But clearly, there are uncertainties, and we are obviously working to -- we monitor the situation and we make, what we say, appropriate preparations to manage what possible eventualities can come.

Okay. That's as good an answer as one would expect. Then on Germany, you're right also that the road to profitability has been a little bit delayed. It takes some longer time. And I mean, there has been corona and now there are shortage of components hitting truck and spare parts sales, maybe and so on. But during the time now that you have owned the German operations and getting closer to the operations and you've done a couple of acquisitions and so on, is there anything that you have found out that sort of disturbs the longer-term picture that you should be able to do good margins in -- or decent margins at least in this business longer term?

No. No, Kenneth. I think, frankly speaking, the opposite. I think we have worked hard in these 2 years. And as you say, it's been tough because there has been corona restrictions. We haven't been -- or our teams, rather, haven't been able to travel to Germany and to work and there's been restriction inside Germany, et cetera. So of course, the restructuring and the reshaping process has taken a bit longer and has been more harder than we expected. But at the same time, there is nothing that we see that changes our mind that this -- we can make this sustainably profitable going forward. And we are on that path. I mean, the key to profitability in our region in Germany is to increase and expand the aftermarket sales in the region. And we have made these 5 acquisitions. And as you can see, they have added quite considerable amount to our aftermarket sales, and we will continue to do that. It's good also to see that now we're getting traction on the market share for trucks, which obviously is a basis -- fundamentals for being profitable in [ each of the population ] to service. So I don't -- we don't see any reason to question, so to speak, our ability to be sustainably profitable in Germany, really the opposite.

Okay. Great. Then there are some news out that the coronavirus is sort of increasing in the Russian part or the Eastern part of Europe and so on. Are you facing more disturbances in your operations now than previously?

In terms of -- in January, that was the peak of -- as everywhere, I think, in Russia with Omicron. And of course, a lot of people were on sick leave -- a lot of people were on sick leave. But I think we've been living through this now. We know how to handle it, and we don't see any big disturbances from COVID although a lot of people have been -- at least maybe not ill, but on sick leave for -- at the same time.

There are no further questions at this time. Speakers. Please go ahead.

Okay. So if there are no further questions, then I thank you all for listening in to this quarterly presentation and hope to talk to you again in the next quarter. Thank you very much.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.