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

Yes. Good morning, everybody. This is Lars Corneliusson here, and welcome to this presentation for Ferronordic's First Quarter of 2023. And if we go to Slide #2, we believe that we have reached a milestone in Germany with posting a positive operating result in the quarter for the first time since we started operations in 2020. Overall Group, we had a 39% revenue growth and strong performance in both CIS and in Germany. We had an improvement in the operating result to minus SEK 14 million and operating margins minus 2.2%. And we continue to explore, obviously, new growth opportunities for us. In Germany, revenue increased 30% to SEK 548 million, and we had strong growth in aftermarket sales. We have good growth in truck sales as well. But it's very pleasant to see that our aftermarket sales is growing very nicely. And again, we had an operating result of SEK 5 million with a margin of 0.8%. In CIS, the revenue actually more than doubled to 138%, also mainly driven by new and used equipment sales. And we had an operating profit of SEK 7 million and an operating margin of 8.7%. So overall 39% revenue growth, 42% operating profit growth, minus 2.2% operating profit and an EPS increase of 122%. So if we then move to Slide #3. Again, we -- as you might remember, after a long time consuming and burdensome process, we sold our operations in Russia in the end of Q4, 2022, and that meant that we, during the quarter, actually could focus on Germany and Kazakhstan fully and obviously, on our next growth opportunities that we foresee. We want to use most of the money we receive for selling Russia to expand into new markets. Again, we had a positive operating profit in Germany, and we see that as a result of our strategy to grow our network. When we took over in January 2020, and we took over 9 workshops from Volvo then loss-making workshops, we have increased that. We have invested and expanded our networks. So now we have 21 workshops in our territory. We have invested a lot in the organization in creating better processes and most of all creating a performance culture within the company. And obviously, this has also then led to an increase in our market share for new truck sales and aftermarket business in our sales area. We -- in February, we started operations in the new workshop in Peine. And we see now that we're starting to see the results of the investments and the changes we've made. And obviously, this is the first step and we are being positive, but it's been a very important step for us. And of course, we want to continue to move these numbers up, and we see the potential for doing so. We continue to work with our partners and customers to promote electric trucks and offer sustainable transport solutions. And as I said, in Kazakhstan, we have new and used machine sales, which doubled compared to the same period last year, and we continue to work on reorganize our network in Kazakhstan to further increase customer focus. And we're also exploring the potential for contracting services projects in Kazakhstan. Quickly on the numbers, again, Group revenue up 39% to SEK 631 million and operating profit from minus SEK 25 million to minus SEK 14 million. And we have a strong balance sheet. We have 59% equity to total assets. And we have a net cash position of SEK 680 million -- SEK 681 million, sorry, or over 2x EBITDA. And obviously, we feel that we have opportunities to grow and expand to other territories, and we're actively looking for opportunities to do so. A bit more on the Germany highlights on Slide #5. The German market actually increased by 19%, and supply improved slightly, and that led to an increase. Rigids declined by 11%, while tractors grew by 24%. To be honest, I think Rigids also increased. It should probably be increased there by 11%, sorry about that. And clearly, there are concerns about the economy, how it's going to look like moving forward. But despite this, the market remains firm. And the IFO Business Climate Index continued higher in the quarter. In our area, the increase was less, it was 10%, and the area then represented 17% of the total market. Our new truck sales increased by 8% to 244 units. So in percentage of sales, equipment sales increased by 31% and aftermarket sales increased by 33%, combination of organic growth of 16% and acquisitions of 17%. So again, the investments and the work we're doing to improve our processes and customer focus in -- through our network is continuing to give good results in terms of growth, and that then led to a gross margin, which increased to 12.3%. In -- on Slide 6, we talk a little about the CIS operational highlights, where we see that the Kazakh market is supported by Kazakhstan's growing role as a regional hub. Strong commodity prices and big infrastructure projects that are being implemented or being planned to be implemented and strengthening of -- in Q1, with the market actually declined by 35%, which, however, was mainly driven by wheel loaders, smaller wheel loaders, where -- which is a segment, where Chinese are dominating. And in the market for heavy equipment that we are mainly involved like excavators, for instance, that market increased and we actually increased our sales by 92% to 23 units. We're still talking very small numbers here, but in percentage, it was almost doubling, and our used construction equipment sales grew by 140% in units. So overall, equipment sales increased by 173% and aftermarket sales increased by 51%. So we also see good growth in the aftermarket, which is was very good to see. And gross margin then increased to 20.4% from 18.6%. So good growth numbers in Kazakhstan as well. A bit on the business development. As we said, we launched operations in our new workshop in Peine. We have a very nice opening ceremony with partners and customers at our newly built greenfield service and sales hub in Hannover. And obviously, we continue to work to promote electric trucks and develop sustainable transport solutions, and we set up parts warehouse and service organization for Sandvik. And in Kazakhstan, we reorganized our workshops into 3 regions with clear customer responsibility and clear result responsibility. And also here, we are starting up and working hard to get the Sandvik business growing. We have a workshop in Astana now with focus on road construction. And as I said, we're exploring contracting services opportunities in Kazakhstan. And for the Group, as we have mentioned now many times, we have a strong balance sheet. We feel that we can actively look for new markets and business opportunities, and we are doing so. On Slide 8, we have map of the German network expansion. As I said, we started by taking over 9 workshops from Volvo and now there are 21 throughout our network, with the latest addition in Peine, which opened in February 23. And on Slide 9, we can see a map of Kazakhstan network, where we now have 7 outlets covering the country. And I think so far, this is strategically important outlets. And I think for the time being, this looks good. We are looking at growing obviously, but mainly growing then where our customers are on site and on in mines, for instance, and so on and so forth. So by that, I hand over to Erik for Slide #10.

Thank you, Lars. I as usual, start with a bit of macroeconomic overview, the economic context we operated in the quarter, starting with our biggest market now Germany. So after a 1.8% GDP growth in the previous year in 2022, we had a more modest growth in the first quarter, almost flat 0.20% growth. Obviously, an important indicator of the transport industry and the area, where we operate. Looking for, again, modest growth through this year, 0.1% and stronger growth again in '24. Inflation rate remains high in Germany. We had 7.9% in '22, and we saw 7.2% still in April. High energy prices metrics in January were up almost a quarter, 24.4%. And as you're all aware, ECB has responded accordingly raised rates. That does affect economic conditions in our industry, as well, of course, cost of capital and funding has gone up. If we look at Kazakhstan, stronger growth at 3.3% in the previous year. And looking at this year, consensus forecasts are around 4.3% and even closer to 5% in 2025. A resource economy to a large extent, so exposed to fluctuations in commodity prices, but that's where -- what's expected. Also strong infrastructure investments in Kazakhstan and Kazakhstan taking on some roles of becoming a regional hub supporting the overall growth there. Inflation rate high 20%, 17% in April and the Central Bank rate at just below 17%, 16.75% there. So high levels of local funding interest rates in Kazakhstan [indiscernible]. If we go forward one slide and look at our income statement on Slide 11. You will hopefully recognize this slide, what we show here, your first 3 columns from the left has the comparative period Q1 '22, and then the next 3 columns show this period that we're reporting for now Q1 '23. And encouraging, I would say that we can see, I think, improvement on every metric here. So Lars mentioned that the market and the growth in units that we have, low base in Kazakhstan, but growing very quickly, doubling growth in Germany. We had, as you may recall, very strong growth in fourth quarter, still up here, 8% versus the same period last year, but not at the same pace. It is still a movement that is partly supply driven. We've had supply constraints through the 2 previous years. We see some relief to those constraints, and that drives the overall market versus our growth to some extent there. Revenue up strongly in both markets, almost 40% overall. Gross profit also higher. We had a higher share of aftermarket given that we've had healthy growth in both our segments, and that's a big factor to driving the higher gross profit margin, as you can see, for the Group in Q1, '23, 13.4% versus 11.7% last year and also in the respective segments, higher [indiscernible] margins there. And operating profit up in both markets, and again, very satisfying to see that we are now in positive territory in Germany. And as we mentioned in our report, there are macroeconomic uncertainties, but we do expected to hold on to this and post a positive operating result in 2023, as a whole. Looking to some of the bullets on the right, Germany is now 87% of revenue. The revenue mix similar to what we had posted before. 70% equipment and trucks, about 1/4 of aftermarket and then 4% other, in that other mind you, mostly rental in Germany. That aftermarket number is higher than it was in the same period last year, driven by growth in both operating segments, and that again has an impact on the gross margin given that margins in aftermarket are higher, and you can see that again up. Looking at SG&A as a percent of revenue, 15.7%, 4.1% of that is Group costs. And Germany were at 11.8% and CIS at 9.9%. We want to be below 10%. We have been, obviously, with the changes in Group structure we've gone above. But again, long term, we want to make sure that we keep that cost profile below 10% on SG&A. Operating margin increased, so minus SEK 2.2 million and yes, minus SEK 14 million operating profit for the Group as a whole. And worth noting looking at the net income, which was positive that there is a big FX gain effect there, and that is driven by the euro assets we have and mainly now the cash position, which we keep mainly in euros, to some extent in U.S. dollars and a smaller share in Swedish krona. So that had a positive currency effect in the quarter. If we move one slide forward, to #11. It is a slide that we've included from our quarterly report and the point of including that here is just to show how we show our operating performance in our respective reporting segment. So you will see here for Q1 '23 and the comparative period for each segment and also for the unallocated Group costs, as we call them, and that's why we include this slide here, important to show. Notably, for Germany, if you would look at our Q1 report last year, you would see minus SEK 10 million. In this year, you will see there's minus SEK 3 million, and that's because we don't allocate the Group costs now. We put them separately, so it's clear what is for the benefit of the Group as a whole. And so that you compare like-for-like also the SEK 5 million positive that we had this year against the -- than SEK 7 million negative that we had last year. Group costs are what is weighing on the overall results. We did disclose them also in Q4. There are resources that we have reorganized in the Group to keep our capacity for the Group as a whole and our potential to manage new markets and new products to some extent. As we've stated explicitly that is one of our strategic objectives with the proceeds that we got from our sales -- from our sale of the Russian business to invest that in new market opportunities. And for that, we will need the organizational resources that we built up when we were a larger Group. There were some transitional costs in Q1 as well, but we haven't separated them because, again, we do have higher costs. Most of these are labor. There are some IT systems as well. And again, this is to support a bigger geographical fit and also resources for product expansion, Lars mentioned, we are looking at contracting services opportunities and we are investing in the future in terms of electric and sustainable transport as well. If we move on further to Slide #13, what we can see here is just showing the trend of performance in Germany. So since Q2 last year, we had a positive trend. Again, we will see what the overall economy does in Germany, but we are optimistic on having found and captured a bigger share of the aftermarket and also of new truck sales, as we endeavored when we went into Germany, so happy about the results we're achieving and that we're having a better balance in our earnings and income statement there. If we look at the similar slide, the next one, please, for Kazakhstan. Next slide, please. You will see a similar trend, but from a positive level with also a higher and more healthy margin level there in Kazakhstan. Again, a low base, but we see good potential for Kazakhstan to grow even further. If we move on to the next slide, please, looking briefly at the balance sheet. What you will see here if we start on PPE level, remind listeners or viewers here that on the balance sheet, we have the Russian assets when you look at the comparative period for last year. So that's obviously the big explanatory factor in terms of PPE decline versus Q1 '22. If we look more recent developments versus Q4, we do have growth in net working capital in both our operating segments in Kazakhstan from minus 3% to 17%, building up some of the inventories that we think we need for the opportunities that we believe we can capture in Kazakhstan. And similarly, in Germany also higher working capital there, partly driven by the extra work that is done on trucks in terms of super structures. And that affects the net debt or rather net cash position that we have as a Group, again, as Lars mentioned SEK 681 million, still a very strong balance sheet. And partly due to the translation effects on the balance sheet, a stronger actually equity to assets ratio than we had at the end of the year at 59%. And with that, I believe I pass the word back to Lars or actually -- sorry, one more slide on me. One more slide, please see if we move forward. We kept this NAV slide, again, to show that we have a lower net cash position, but much of that has gone into inventory and partly PPE, as well, lesser extent, trade and receivables. So assets that we believe we will monetize in the future, of course, and that is to capitalize on future opportunities and that our NAV indeed, is actually stronger. And with that, I pass over to Lars. Thank you.

Thank you. So we are now on Slide 16 and a bit on the outlook. And we -- in Germany, we continued to see strong demand for both service and trucks despite the concerns that are out there about the weaker economy. Oversupply has slightly improved. It continues to limit market growth. Obviously, our sales area is in the absolute heart of Europe's transport business and benefits from commercial activity across the industries. And we also see a growing interest in electric trucks, and we're investing into that, and because -- to develop this market is clearly a strategic priority for us. And our operations in Kazakhstan, they continue to develop, and we actively seek opportunities there to grow our product and business portfolio. And as I said, as Kazakhstan is growing its role as a regional hub, it contributes to the demand for construction equipment and so does infrastructure products -- projects and clearly strong commodity prices, obviously. And in a longer perspective, we believe that the underlying conditions and business opportunities both in the German and Kazakh markets are strong. And meanwhile, we are also continuing to analyze new opportunities outside our current markets. So by that, I will hand over for questions-and-answers, please.

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

Thank you, operator, and Hi, Lars and Erik. A couple of questions from my side. First one here. So you had a large working capital build up in the quarter, it's now at 23% of sales. And do you expect to release some of this working capital in the short term? Or is it more likely that this ratio declines over time by you growing your sales?

Maybe I'll start there, at least. I think -- I mean, some of it is part of growth that we're seeing. We were growing strongly in both our markets, and that leads to us tying up more working capital, both on the receivables side from the sales that we've done, but also in terms of inventory to capture future opportunities. I think there are some transitory effects, hard to read how transitory they are. Some of them are related, again in Germany, if we over a certain period, have more additional work on the trucks that we sell in terms, for example, of superstructures, then that would typically also lead to higher working capital. And that's not a bad thing for us, that comes with some additional margins. And so a good thing, but it costs us in terms of funding costs, of course, especially in the higher interest environment, but that's something that we, of course, factor in. And again, Victor seeing that from quarter-to-quarter can be hard, I think, in terms of visibility and nothing that we offer guidance on. I think the work that we're doing on electric, the subsidy process is very important. As we've said before, there is a lot of potential in that with the German government cover some 80% of the difference in pricing between conventional diesel and electric. But it's not fully transparent or well oiled, so it takes some time to process this. And this also leads to some holding of inventory longer than we might have chosen optimally, and that is probably an effect that would work through time, Victor. So I wouldn't expect that to maybe disappear quarter-on-quarter. But over time, that mechanism should kick in and work more efficiently, I would assume.

Yes. That's great. Good answer. Next question. So Erik, you mentioned that you wanted an SG&A below 10% of sales in the long term. So I'm wondering here, are you working to reduce perhaps mainly admin costs in the business areas or -- and at the Group level? Or will you remain focused bit to grow into current cost level, so to say?

Thank you, Victor. Important question. I think, I mean, on the one hand, as a rule, we always work to optimize costs to make sure that every cost has a return on it that it's optimized. But I think it's fair to say also that, again, the way we state our strategy of wanting to use the resources again or the proceeds we got from the sale of Russia to open up new markets that the main aim and the reason why we have these overheads now, which are, quite frankly, big for the current operations we have is that we want to take on new markets and products to some extent. So we have ambitions to expand geographically. That will demand an organization more similar to what we had when we had Russia as well, even if the size is not the size of Russia necessarily, but we will see what opportunities come up. In addition to that, CS, contracting services, we see potential, mainly in Kazakhstan at the moment. And again, I mentioned electric, that's also an area that we see so to say, a separate potential for expanding that as a business area. So a long answer to your question, but the answer is that we probably see significantly more reason to expand revenue and that way, bring down the percentage then to optimize costs, given the ambitions of growth that we have.

Understood. Finally, here, you touched upon it also and you wrote in the report that you are exploring contracting services in Kazakhstan, and I was hoping that you could share any more details here, perhaps would you say that you're close to getting a deal, maybe already this year [indiscernible] you say anything?

Victor, I don't think we can give any details on that. We're working on it. As you know, from our previous experience in Russia, it takes -- it's not a quick fix. It takes time and efforts to make these projects happening. But we are working with the resources, part of the resources that Erik was talking about to make that happen. But that's probably what we can say.