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

Good morning, and welcome to the Ferronordic Q4 2022 Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Lars Corneliusson, CEO. Please go ahead, sir.

Thank you very much, and welcome everybody to this presentation of the fourth quarter in 2022. And if we move to Slide #2, we call the report moving forward. Obviously, we managed to restoration business in the third quarter. SEK 1.3 billion. Cash proceeds from a sale was SEK 1.1 billion, which then brought the group to a net cash position of SEK 957 million. And this also means that after a very time-consuming process, we can now focus our time and resources for developing in Germany and more but also looking for new changes. It also means that the numbers in the report that we published today are very different in comparison to what we published last Q4 and that the Russian numbers are, in most cases, not included. So this comparison basically between Germany and Kazakhstan. So Germany, it went well in the quarter. We increased our truck sales by 43%. It was more or less flat. We bring increased 58% and mainly due to the growth in truck sales and towards the end of the quarter, we used to break the increase for operating profits in Germany. So in CIS, then after the sale of the Russian business, the CapEx one is now the only current only unlevered in the CIS segment. Here, we have to be on increase in local currency rate increased by 112% and almost 200% in sales, -- and being less than 14% overall increase in revenue, 47% in operating profit, and we had a minus 1.9% operating profit margin and earnings per share of these went down, we come axles. Okay. If we turn to page to #3. Obviously, we completely Ukraine maybe or less possible for us to conduct business in Russia. It was not easy to manage to sell it. Again, it takes a lot of time to complicated processes, but we managed to do for price close to net asset value. And we're very happy about that actually more -- we think it was an achievement and the best going forward for us. So again, net cash receipts of almost SEK 1.1 billion and the cash position of SEK 957 million. And the part for us is to use the sales proceeds and strong management largest furthering in our operations in Germany and Kazakhstan and also in new opportunities. And we continue to develop our organization network in Germany. We work with our partners to accelerate bringing electric trucks and sustainable transport solutions to the markets. And we also develop our organization and our opportunities for contracting services in Kazakhstan. And as I said, we look after the one markets and opportunities. So the Board proposes a 7.5% share as dividends. We turn to Page 4, some repetition you made, but I think it's unfortunate that we talked a little about appoint the results, which are the different in comparison. So of the SEK 1.334 billion, I should say, was the price and the net asset value was SEK 1.92 billion. And all this SEK 237 million was used by terminal B to repay debt to sold until subsidiaries, meaning rent cash receipts of 1.097 billion and the cash was received in you in our accounting posture on the 23rd of December. And basically, with the sale of our Nordic has substantially divested all these assets and liabilities in Russia. Turning to Page #5, summary again, 48% group revenue increased to SEK 705 million. German revenue 616 million, equipment sales of 57%, aftermarket sales of 21% and other sales, which is a smaller part of business, it was down 45%, and the sales running 0.69%. The equipment sales tripled sales grew by 20%. So we went from minus SEK 25 million in group, operating for future minus SEK 13 million. We saw increase and general profitable in CIS in terms of store and we also saw good trends in the German authoritative profit from minus SEK 12 million to minus SEK 5 million, and that meant an adjusted operating margin increasing from minus 1.4% to 1.9% with 58% equity to total assets and which we have a seal net cash position at the one. So if you turn to page to Page 6. Again, ending operational highlights, market decline by 1% in Q4. ranges declined more by 5%. Tractors actually grew by 2%. There are, of course, growing concerns about the economy, what will happen but despite this market demand is firm. We see, however, rising inflation in energy prices, higher interest rates, and weak business indicators are main affection trucks negatively However, we also see a pent-up demand from -- in the fields coming all going out for almost 3 years from starting from calling times, which probably can make up for the indicators that are not very positive at the moment. So new trucks registered in our area represented increased by 3%, and it was an 18% of the total. And we had slight constrains in Q3 and following that, actually, we increased in sales by 43% in Q4 of '22. And in sales, that was actually 58%, and we also saw 21% increase in open market of which 4% was organic growth in the rest tenant acquisitions. And despite the increase in more increase in equipment sales, we actually grew the gross margin from 11.8% to 13.4%, obviously on improved price realization. And then moving on to CIS operational highlights on Page 7. It's now the owner market currently in our CIS segment. The market increased by 25% in '22. And the Kazakh market is supported by Kazakhstan's growing role as a regional hub, strong commodity prices and big infrastructure projects. So numbers are very small so far in Kazakhstan, but we increased the sales in the quarter to SEK 26 million, which was increased by 117% or in terms of money, that's 300% due to product mix and price. And aftermarket sales increased by 20%, 9% in currency, and we also saw an increase in the gross margin here gross profit then increased to SEK 15 million from SEK 4 million. Now if we go to Slide 8 and talk about business development. As we said, we are actually looking at new markets and business. In Germany, in Q4, we offered a workshop on a used truck center, a cost region part of our territory. We will open a workshop in Peine, which is the of handover in the end of February. And then we move into a newly built greenfield service and sales up in Hanover in the end of the quarter, which is just West of Hanover and we're working very intensively to continue to develop our rental for electric trucks to sell rental company. That we are the ranking electric trucks out in the markets. And as we became a dealer for Sandvik in Germany, we also sell parts warehouse and service organization for Sandvik mobile pressures and streets. And in Kazakhstan, in Q4, we opened a workshop in Astana with a special focus on the road construction segment. We are taking and further developing our digital sales programs and systems that we have successfully needless to Kazakhstan and further development to improve the service and sales performance and also customer satisfaction, of course. And we're moving to bank's organization to improve customer focus. And also here in Kazakhstan, we have been become a dealer for Sandvik mobile curses and screens and more than selling up the service and sales report for Sandvik in Kazakhstan. So next page, Page #9, we now see Ferronordic life in Germany. We are now change 21 outlets, as you might remember, which you go from 10 outlets in 2020 and then simultaneously we bought 2 outlets from a private dealer and since then, we have made a number of acquisitions and investments, and this is now how we like again to meet a sustainable profitability in our general business. We need to take a bigger part of the aftermarket that is out there, and these investments are intended to partly do that to have a bigger share of the aftermarket but obviously also to improve mention customer satisfaction and improve and grow the market share. So on Page 10, you can see our Kazakh net projects like and the outlet in Kazakhstan will continue to develop and expand there. I think the case business is going well, where we have many opportunities to show the growth in Kazakhstan, and we will do. So thank you. I now hand over to Erik for more on the economic developments.

Thank you very much, Lars. I'll continue on Slide 9, with a little bit of a macroeconomic context, as we usually provide, relying on external sources here. Germany, starting with what is now our biggest market and business. We saw 0.5% growth in GDP in Q4. Looking into 2023, for the environment, we'll be working in there. There is a lot of uncertainty among forecasters there. But ranging between minus 0.5% and plus 1%, somewhere there, have a reading here of 0.5% plus. And then looking at slightly better growth in '24, then at 1.4% inflation is high as we are aware, in many parts of the world. In Germany, it reached 8.7% in January. Energy prices also up significantly at 24%. And these are indicators that impact us and impact our customers, we do see some cost pressure but believe that we're managing those. Kazakhstan. Stronger growth in 2022, 3% and looking there at 4% in 2023 and about 4.5% in 2024. A resource-dependent economy still oil and gas make up some 1/3 of the GDP. So growth there obviously dependent on where commodity prices move. If we go into Slide 10 and rather look at the financial EBIT, starting with the income statement. As Lars mentioned, maybe start off with just saying that the sale of the Russian business it does change a lot of the financial statements. So looking at the income statement, worth pointing out that you see it here then without what we call the discontinued business. So only the continuing of Germany and CIS and CIS then being only Kazakhstan at the moment. Balance sheet on the 31st of December shows also the continuing business, whereas there, the comparables would include Russia. So if you look at Q3 or end of 2021. Cash flow statements. Again, continuing business excludes the Russian business, the discontinued business, but it's included in a separate line on each category of cash flows, so from operations and investments and financing. Now looking at the income statement then for Q4, we see a different picture. We have now CIS making up 30% Germany, 87% of revenue. The revenue split more similar to what we had before, 76% equipment and trucks, 21% aftermarket about 1/5 there and then 4% of other, mainly rental business there. Gross margin stood at 13.8%. That's up from last year, again, looking at the continuing business now that's a reflect of a different revenue mix but also strong price realization that we had in the fourth quarter. SG&A, if we look at a percentage of revenue that stood at 16.2% and 2% of which is group costs. That's down a bit from last year and Germany, there being lower than CIS in the last quarter. CIS did carry some extra cost of relocation of staff from our Russian office on that we'll be working on the CIS development in Kazakhstan for us. And yes, the operating margin improved year-on-year to negative SEK 1.9 million. Operating profit, plus 47% to minus SEK 13 million. Maybe worth pointing out here, again, looking at this income statement. Historically, we have allocated group costs, group overheads on a revenue, and gross profit basis. In this fourth quarter for consistency and to allow readers of their ports to compare with previous periods. We have continued to do so. So Germany got its share of the total that we have, including the discontinued business in the quarter and also for 2022. That is why you will see that the operating profit from the segments don't add up to the group in the group. We include the unallocated part of those group costs. Moving on to the full year. On Slide 13, and here, we see then the revenue split for the full year. Germany, making up 90% and CIS about 10%, a similar split on the equipment, about 2/3 of the equipment and trucks, 1/4 on aftermarket and 5% of other. Again, a gross margin that performed better year-on-year, revenue mix being the driver and also some improvements on the cost efficiency speaking of OpEx that is. And the operating margin also improving year-on-year and therefore, also the adjusted operating profit. Remind you also that when we speak of adjusted operating profit, this excludes the one-off compensation we had from DC in the third quarter of this year or of 2022. If we move to the next slide, 14, just to look at the trend of operating results and margin. We have shown a positive trend in Germany throughout the year and actually starting from fourth quarter of last year, which we, of course, will work very hard and expect to continue. We did hit a positive operating profit run rate towards the end of the year, and we do expect to have a positive EBIT in 2023 from Germany. If we move to Slide 15, next slide and look at the similar slide for Kazakhstan, we see a similar trend, but in positive territory except for Q4 of 2021. Moving higher, a small base, but moving in the right direction, and we do believe a lot in the potential of the Kazakh market. If we then move to Slide 16 and look at the balance sheet, this is again something that changed a lot as a result of the sale here. I again emphasize that the comparable period includes the discontinued business in Russia. So that's why quarter-on-quarter and year-on-year are very different. At the time of divesting the Russian business, the working capital there was about SEK 825 million. So that's left with the business. If we look at CIS, the net working capital decreased over the quarter from 4% to minus 3%, so actually negative working capital there as a result of payables growing faster than inventories and receivables. In Germany, we were at flat working capital, more or less, around 17%. We aim for that to come down. It is higher than it should be, so working towards higher efficiency on that metric in Germany. As a result, much of the sale of the Russian business, net debt turned into a net cash position of SEK 957 million, which put also net debt to EBITDA at about negative 30 as of the 31st of December and equity to assets, as Lars mentioned that 58%. So a very strong balance sheet indeed as we move into this year and to new opportunities for us as a business. Slide 17, we did present NAV slides previously in a different context, but we continue that here and show for the group overall, a very heavy point, which is a natural effect of the sale of course of the Russian business. We see cash and equivalence making up about SEK 1.7 billion there at the end of the year, and then we have trade and receivables and inventory and of course, fixed assets, a lot of which is in Germany in our workshops and the infrastructure that we have invested there and continue to invest in. And then we have, of course, on the liability side, our payables on the one hand and then the borrowings on the other landing on sat NAV of about 1.9%. And with that, I would hand the word over back to Lars.

Thank you. If you look a bit forward here. So obviously, following the sale of the Russian business, we look into the future in new opportunities. In Germany, we continue to see strong demand of trucks and service. This despite the concern now of economy supply constraints continue to limit the market growth. Our sales area, as you know, is at the heart of Europe transport business and it benefits from commercial activity across the industries. We see also growing interest in electric trucks and sustainable transit solutions. Our operations in Kazakhstan continued to develop and we also actively seek opportunities to grow our product and business portfolio. Demand for construction equipment in supported by Kazakhstan's growing role as a regional hub big infrastructure projects and strong price. Along this perspective, we believe that the underlying conditions and business opportunities in the German and Kazakh markets are strong. And we obviously also continue to look for new growth opportunities in our parts outside our current areas of responsibilities. So that's the outlook. And now I think I'll turn it over for question-and-answer session.

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

Yes. First question here. I'm wondering how you managed to take so much market share in Germany within new trucks.

I think it's been that work has been going on for a long time. We see a good trend in increasing market share. It's one of our objectives. Obviously, we want to take more market share in order to have a stronger aftermarket business. So basically, already from the beginning, it was clear that one of our past costs to improve the market share. As it is currently, market share are important to a certain extent, dependent on the supply and how that looks like. So as we said in Q3, we have constraints whereas in Q4, we increased sales in units of 43%. But of course, overall, we are taking market shares in the and we see a good trend and that absolutely necessary for us to have a sustainable profitability in Germany.

Okay. Great. And then on Kazakhstan. So earnings in Kazakhstan were much stronger year-on-year, but the margin was slightly lower sequentially. Is there anything positively impacting this in Q4? Or was the business as usual in the quarter here?

I would say, well, business is as usual. I mean it really is a lot and to the revenue mix. I mean we had a very strong -- if you look compared to previous periods sale of new equipment. So as mentioned, plus 300%, whereas the aftermarket was more moving as usual, and that's not an unusual picture. The deliveries or sales of machines can vary significantly over the quarters, whereas the aftermarket serving the population is more stable. So that would affect the gross margin by a lot with the -- as you know, margin in the aftermarket being bigger and then the margin in the new sales, equipment sales being lower. So that yes, shifts the margin when it grows and contracts.

Okay. And finally, here, I'm wondering if you could tell us anything more about the new growth opportunities that you mentioned in the report. And I'm wondering here, could it be a similar transformation as we saw with the acquisition of Germany a few years back? And also, are you searching outside of Europe.

Yes. What we can say is that we are looking for new opportunities. We don't limit ourselves in terms of geography. We're looking for opportunities that fit our specs and that's probably what I can say. We will see during the year or what will happen and what will come out of this. But clearly, as we say, I mean the sale of the Russian business have taken a lot of time, efforts, and hard work and now with a focus going forward, it's like we have put the destiny in our own hands now and the we can move forward. So we'll come back to what happens in our expansion plans.

The next question is from Adrian Gilani from ABG.

It's Adrian here at ABG. Just first of all, a quick follow-up question on the new sort of opportunities going forward. Is it fair to say that you're primarily looking for partnerships with logos and new geographies? Or are you looking for other opportunities as well?

Primarily, we are working with opportunities with our current partners... Yes. That's correct.

Okay. And then looking at Germany in the quarter here, can you just help us understand the mix effects a bit because on one hand, you significantly increased your equipment sales share, but the gross margin also increased quite a bit year-on-year. So that seems to be working sort of the wrong way around. Can you just explain how -- what drove the gross margin increase?

Yes. I think we had in Q4 quite strong price realization, as I said, on the equipment sales or truck sales. So that's a contributing factor. We also had good margins in the aftermarket. So I would say that those are the most significant factors in the quarter driving it. Yes, I think that there are always some smaller one-offs as well. But I think the biggest factor is the stronger price realization on the equipment.

Okay. So just to understand that better, were the prices then raised during Q4, so we should then expect a higher pricing component in growth for the next 3 quarters as well?

Well, I think it's hard for you to model it that way. It depends on the input prices we had and the pricing we had against our customers. So I wouldn't necessarily and model it that way. It can swing between the quarters.

Okay. Also, you mentioned in the report that you've set up your parts warehouse and service organization with Sandvik in Germany. Can you just sort of once again remind us how we should think about the revenue ramp-up in Germany from the Sandvik deal specifically?

Well, what we've said communicated, Adrian, is that we think that Sandvik could make up 15% of revenue in Germany. Remind you that in Germany, Sandvik we have for effectively all of Germany, there is one area around Bissendorf, which we don't cover. This will take time. No question about that. We are investing in the infrastructure. We are investing in organization, so management, leadership, service support. And as we stated explicitly here also taking in the part stock to be sure that we can provide parts availability and very high uptime for our customers. But it will take time, Adrian. We don't give a precise timeline. But yes, we think, over time, even considering other growth in Germany that it can reach such numbers in Germany.

Okay. And then looking at Kazakhstan, you talked a lot about you believing in the market and expanding contracting services specifically. But is it also that you want to expand sort of the base workshop network at the moment, I believe you had 7 workshops, how might that coverage look a few years from now?

Clearly, we will grow our network going forward with the sales of I think from a strategic tone are more covering the main areas now. But as we have done before, we will go with our customers. And there is no reason to do that will happen in Kazakhstan also. So yes, they're not ready, but we have a good base now in Kazakhstan, a good platform to move from and continue we have been with Kazakhstan for a long time and we can we have a good footprint, a good platform, and now we also have as a said, we have deployed people. And usually, we're working in -- the previous year, we're working in Russia and moving to our CIS segment and making now in Kazakhstan, we look pretty positively low.

Okay. And just a final question from my end. Regarding the sort of dropping margins in Kazakhstan, how should we think of this in a more long-term context? Is there any structural reasons why margins in Kazakhstan should be below what they were in Russia? Or is it a similar margin picture over time?

I think over time, it should be a similar margin picture. I think for some period, we will carry bigger overheads, of course. I mean, it was economies of scale working very well for us in Russia. So that we weigh for some time until we ramp up the cells there really. And then if you look at the gross margin, of course, it will depend on that revenue mix ultimately. It will depend on when and to watch a scale we can start with contracting services, which carries a very different gross profit contribution. So that's how I would think about it.

This concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Corneliusson for any closing remarks.

Okay. Thank you very much. Thank you for this meeting and I close this presentation over Q4 2022, and we look forward to present Q1 in the new year 2023. Thank you. Goodbye.

Thank you for attending today's presentation. You may now disconnect.