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

Welcome to the Ferronordic Q4 Presentation for 2023. [Operator Instructions] Now I will hand the conference over to the CEO, Lars Corneliusson; and CFO, Erik Danemar. Please begin your meeting.

Welcome to the presentation of our fourth quarter '23 results for Ferronordic. And if we start with a summary of the quarter, we call it a restart. And we feel definitely that it is after a challenging and a transformative 2023 where we went from having our biggest business in the eastern part of the world to having the biggest business in the western part of the world in less than a year. And we did a successful completion of Rudd acquisition then in the U.S. in Q4 in 2023. And Rudd result is consolidated for December and balance sheet on 31st of December, '23. And Group revenue increased then by 30% to SEK 915 million, mainly driven then by the addition of the United States for 1 month, we should say. However, the operating result declined to minus SEK 62 million. If we exclude one-off costs, it was minus SEK 15 million, we'll come back to that. And working capital, we're working hard to take that down and we expect that to decline in the first half of 2024. We have a restructuring efficiency program launched in Germany. And the proposal is to pay no dividend in 2024. So if we then turn to the next slide, basically again, then 30th of November, we acquired Rudd Equipment Company. It's one of the biggest dealers of Volvo CE and other brands in the U.S. December was strong for Rudd. Revenue of SEK 308 million with an operating profit of SEK 25 million, that's an operating margin of 8% and that was actually including then the SEK 11 million of transaction costs. And we see big potential to build further on an already good business in the U.S. that we have acquired. However, in current markets, the fourth quarter was challenging. Germany order intake and truck deliveries decreased. The aftermarket grew, but not enough to cover our costs. We have launched efficiency program in Germany to reduce administrative costs and to create a leaner organizational structure, and this is now under a new leadership in general. In Kazakhstan, the market for construction equipment decreased despite a growing actual economy. Our sales and machines also decreased in units, I should say, by 35%. As mentioned, we have stock levels that are too high currently, both in Germany and Kazakhstan. And we have a lot of initiatives to bring this inventory down, which should normalize during first half 2024. And obviously, as we see market contracting in Germany, we're taking down our used stock and rental fleet to strengthen the business and free-up further capital. Good to see that the market and the interest in electric trucks is still strong and growing. And we are definitely ready for a restart after a challenging fourth quarter and looking forward really to 2024 after this transformational full year of 2023. So by that, I'll hand over to Erik for some more details on our Rudd acquisition.

Thank you, Lars. Yes, a few points on the closure of the Rudd acquisition. We announced the deal on the 13th of November, 2023 and the deal was completed on the 30th of November. So as Lars mentioned, we consolidated the result in December and balance sheet in full on the 31st of December. We paid USD 10 million for 2 properties, workshops and another USD 95 million for the shares, the equity 100% in Rudd. During this full year of 2023, Rudd had revenue of SEK 258 million with an operating profit at SEK 21 million and earnings before tax at SEK 18.9 million. This is based still on unaudited IFRS numbers converted from still unaudited used GAAP numbers, I should stress, but these are the numbers that we have at this time. At the time of the acquisition, Rudd had slightly more than SEK 50 million, SEK 54.7 million of net debt. So that would imply an enterprise value of just below SEK 150 million. So based on our purchase price of SEK 95 million for 100% of the equity and these preliminary 2023 [Technical Difficulty] the price corresponds to 5x Rudd's 2023 earnings before tax or an enterprise value of 7.3x Rudd's 2023 operating profit on the basis, as I described above. The purchase price will be subject to a true-up of the balance sheet. That is currently pending. We have made a reserve in our accounts for USD 1.3 million or SEK 40 million for such a contingent consideration to be paid following the initial results from that true-up. Following the acquisition, Rudd's balance sheet as of the 30th of November, i.e., the date of acquisition, was subject to a fair value assessment, i.e., a fair valuation on both all the assets and liabilities. That is for the purpose of a purchase price allocation. And based on this so-called PPA, purchase price allocation and fair value exercise, which remains preliminary at this point and including also the contingent consideration that I mentioned, the USD 1.3 million, we paid -- Ferronordic paid a goodwill of USD 14.5 million in the transaction. That corresponds to SEK 150 million for goodwill. If we move to the next slide, a short summary of Group financials before Lars take you through some of the operational highlights. So Group revenue increased 30% to SEK 915 million. German revenue was down 10% to SEK 555 million, minus 14% in euros. Central Asia, which at this point is Kazakhstan, was down 41% to SEK 52 million. And then you have the U.S. revenue contribution of SEK 308 million. The Group operating results stood at SEK 62 million negative SEK 62 million. The German operating profit decreased to SEK 2 million itself. That was partly driven by one-off restructuring costs, which we will get back to, and they are related to the efficiency program that we started in end of Q3 and through Q4 and also impairments. So restructuring cost of SEK 23 million and impairments of SEK 11 million are included there. So excluding those, Germany standalone was minus SEK 28 million. In Kazakhstan, the operating results also decreased from [indiscernible] to minus SEK 6 million. In that result, there is also SEK 2 million of impairments of the stock, mostly slow-moving parts. In the U.S., the profit contribution was SEK 25 million positive. And as Lars mentioned, that includes the acquisition costs, which stood at SEK 11 million. So if we look at the Group overall and we exclude the restructuring cost at SEK 23 million, the impairments at total of SEK 13 million, SEK 11 million in Germany and SEK 2 million in Kazakhstan and the acquisition costs, the adjusted Group operating profit would be then minus SEK 15 million. Net income decreased to SEK 89 million. Net income is now exposed to currency. We report in Swedish krona, had almost all the assets of the business in euros and U.S. dollars. So FX is likely to be a item in our Group income statement. Net debt stood at SEK 1.3 billion. The change in net cash position of course mainly a result of the acquisition of the American operations, to some extent to also increase in working capital. 34% equity to total assets and a book equity of SEK 1.6 billion at the 31st of December, 2023. And with that, I hand back to Lars again for some operational highlights.

Okay. So basically, the German market is -- for trucks is on its way down for sure. However, in Q4, the registrations actually increased by 5%, it's really supply that is catching up with pent-up demand. However, going forward, we expect that to drop. As we saw ourselves already in Q4, new trucks in [indiscernible] is in line with the market, 18% of the total. Our own sales in units decreased by 58%. We should mention that we had a very strong Q4 in '22 in terms of deliveries of trucks. Used vehicle sales grew 176% in units to 116. Here, you can see we are actively selling out our used vehicle inventory. We're working hard in keeping a good balance there. Obviously, greater supply of course on the market, which is putting pressures on margins. We also see that demand for rental. Diesel rental, we should say, has declined, as I mentioned, as the supply of new trucks has normalized. So we see a kind of normalization of a market, which for 3 years have been not normal, I would say. It's been restricted by supply constraints and demand has not been able to be satisfied by that restricted supply. It's now has caught up clearly and is on its way down for kind of a normalization and probably a bit more than that. So obviously, as I said, we are reducing both our used stock and rental fleet. What's good to see and it's clearly quite common in this type of market environment that service and parts sales continues to deliver in situations like this and we actually increased 20%. It was a combination of organic growth and acquisitions. And obviously, this is extremely important for us that we can continue to grow our aftermarket sales to keep a profitable business moving into our [indiscernible]. We had SEK 11 million impairment of Sandvik's stock. We've had machines in inventory that are difficult to sell in the German market. And we took an impairment on those and then SEK 23 million, as Erik mentioned, on one-off restructuring costs. I will talk a little more about that on the next slide. Given that, the gross margin was decreased to 8.4% from 13.4%, which was then obviously impacted by the impairment of Sandvik machines. So if we talk about the efficiency program, obviously, we have had and have too much cost for the business at hand in Germany. We see a setting in the market. One of our key objectives have always been to have a high absorption level and absorption level means that how much our fixed costs are covered by the gross profit from the aftermarket. And usually, what happens in a declining market for trucks or machines is that the aftermarket actually continues to tick on and be healthy and can actually grow. And we want to increase that absorption level that is the main objective of this efficiency program to move non-production productive costs into productive costs and also to cut down on non-productive costs. And also to make our organization leaner, more efficient and also more resilient for the future by reducing both horizontal and vertical administrative units. So we have, for instance, then reduced the number of regions in our sales area from 4 to 2 and we have removed a number of middle management roles. We have a new management team and that then also includes Group executives with operational roles, including our Group Commercial Director, our Group HR Director; and myself. We have also analyzed our cost structure across all functional areas to identify opportunities to reduce costs. However, it's important to note that we keep investing in our aftermarket structure because we should capture the growth opportunities at the same time as we increase efficiency and productivity in our aftermarket organization in general. So that's the target of this. What we expect from this program is that we expect to save annually SEK 60 million starting from Q2 2023. This does not come free of charge. So we recognized one-off restructuring costs then in Q4 of SEK 23 million. So this is what we're doing to create more efficient and more resilient business for this year, but also for the future. We need to become more productive and more efficient. So if we move to Kazakhstan, our -- obviously, the market is supported by the growing role of Kazakhstan as a regional hub. There's still strong commodity prices and big infrastructure projects going on. However, despite the economy growing and government investing in the market for construction equipment actually declined by 20% in Q4. Our own sales of new machines in units decreased by 35%, whereas used equipment grew by 100%. You can see that the numbers are not that high. Stock levels, again in Germany are high, working hard to normalize that in first half of '24. Also impairments of slow-moving stock of SEK 2 million, gross margin decreased to 8.9% and gross profit to SEK 5 million. Our contracting services team continued to explore potential work in Kazakhstan, and that's very, very important for us. We want to introduce the concept of articulated orders, not only for ourselves in our own contracting services program, but also to the market. We were successful in that in another big market. We haven't really come there yet in Kazakhstan to get traction on the articulated hauler market, which is of course, a sweet spot for Volvo units. Okay. Next slide. So U.S. network, as you can see, this is a map of our footprint in the U.S. now, starting from November 30 last year. As we said, Rudd is one of the largest distributors of Volvo CE as well as other brands and strong brands, Hitachi, Sandvik and Link-Belt cranes. We have a sales area of all or parts of 9 states in the Midwest, actually, Kentucky, West Virginia, Ohio, Indiana, Western Pennsylvania, Eastern Missouri, Southern Illinois and then several counties in Tennessee and Maryland. And obviously, the United States is the world's second largest market for construction equipment with substantive infrastructure investment programs, as we know. In 2022, the market for Volvo construction equipment products for GPE, which is general purpose equipment, which are the bigger machines, not everything that Volvo produces. But in this area, it was around 4,000 machines was higher in 2023. And in general, we see this -- we have had a good start. We have a good feeling for the company, for the organization. The matched cultures and the match we want to achieve is very, very positive. And we have a vision that we share. And we're very much looking forward to developing this together with the team in the United States. Rudd has a long, long history and solid customer base and very, very strong brand name and good customer relations. And we can build together a stronger and bigger company in the area. So we're ready for a restart on operation in the U.S. For Germany, the network look like this. We have now 22 outlets in Germany. We have invested a lot. We have built a network that we feel is adequate for our purposes. And we need to increase market shares. We can sell more in the aftermarket in this network. We can and we will become profitable. We will become more efficient. And now it's time to optimize, become more efficient and productive in this network that we have built. And that is the main task, and obviously, the target with the program we've put in place, but not only that, but in general. So we have now a well-structured network that fills its purpose and a good base in Germany. Kazakhstan, this is the network that we have. And Kazakhstan is a potential, obviously, a market that is -- has a lot of potential to grow where our premium segment is a smaller part of the segment. We need to be able to convince customers to buy premium, to take a longer look at their investment horizons when making investments into their equipment fleet. And we are starting to get traction and we feel that we're on the right track in Kazakhstan. So we're also looking forward in Kazakhstan. So by that, I'm handing over again to Erik for economic development and some more numbers.

Thanks, Lars. Starting as we usually do a bit of a macroeconomic overview, adding the United States to this chart, 2.5% GDP growth in 2023, expected to slow down a bit by the IMF in 2024, also coming down 1.1 percentage point to 1.4% in growth. PCE inflation is coming down, but as you may have seen on the last release, not as quickly as many market participants expected. So fund rates remained high. And I think the consensus is moving to rate cuts coming now after May some time. In Germany, a weaker economy. Clearly, negative territory in Q4, minus 0.4%. And for the -- as a whole, also negative 0.3%. Some improvement expected in 2024, goes against some of the indicators that we're seeing at this point, but maybe the rate comes down it will give some further fuel to the economy. Inflation rate was high through 2023, has come down in the beginning of this year. But again, they're a bit more resilient maybe than was initially anticipated. In Kazakhstan, strong economic growth. It is driven partly by its role as a hub in the region. Commodity prices also important drivers. Slightly lower, but still strong growth, 4.2% expected in 2024. Inflation rates high, but expected to slowly drop. And then also to see rates come lower over time. With that, we move to the next slide and look at the income statement overview. So revenue up 30%, again, including Rudd. And of that revenue, 61% was Germany, 34% U.S. and 6% Kazakhstan. Of course, that was 1 month of U.S. So if one would take that as we indicated for 3 months, then the U.S. contribution would rather be 60%. The revenue mix is more or less what we typically see, 70% equipment, 27% aftermarket. That's the part that we want to see grow, of course. And then 4% other, most of which is revenue business. Gross profit up along with gross margin, much driven by again the contribution of 1 month of Rudd in the U.S. If we look at Kazakhstan and Germany, we see lower gross margins. And that is again partly driven by the provisions or impairments that we did in those markets, again, SEK 11 million in Germany in the quarter and SEK 2 million in Kazakhstan. SG&A up significantly, 73%, but that is again driven by the inclusion of the U.S. business. And of course, the restructuring costs that Lars mentioned that we take as an investment really in the efficiency enhancement that we are planning and implementing in Germany to improve its resilience and economic performance going forward. As a percent of revenue, SG&A stood at 21.5%. So also there higher for of course the same reasons as mentioned above. And operating margin decreased the operating profit at minus SEK 62 million or adjusted them to SEK 15 million if we exclude the one-off costs related to restructuring and impairments and acquisitions in the quarter. Next slide, really just an overview. It comes from the [indiscernible] report. So you can see there the contribution from the U.S. versus the negative results in Germany in the quarter and then the Group costs. So as in this slide, Rudd covers the Group well and also part of the negative results. But of course, in the future, we look forward to see these other segments contributing to the bottom line for the Group. I move onwards to the balance sheet, a meaningful increase, of course, if we're looking quarter-on-quarter and year as well. Last year, we just -- as you may recall, sold the Russian business on the 23rd of December, so just before the new year and 31st of December balance sheet. And this year, we add Rudd a little bit less than a year later than that on the 30th of November. So that sort of is consolidated on the balance sheet that is the 31st of December of 2023. So that explains of course a lot of the differences quarter-on-quarter and compared to year-end. PP&E includes a meaningful rental fleet in the U.S., so that would explain part of the increase there. If we look at the segments in terms of working capital, in Kazakhstan, we see a small increase in percentage terms. It is actually a small decrease in actual monetary terms, but we had lower revenue in the quarter. So when we look on a percentage of revenue basis, it is a small increase. In Germany, we had an increase from 22% to 26%. As Lars mentioned, there is a revenue there as well, but also a result of long lead times, supply constraints after the pandemic and trucks coming in while the market turned lower. In the U.S., net working capital stayed at 17% of revenue. Net debt stood at SEK 1.3 billion, mainly driven by the acquisition in the U.S. And if we look at other balance sheet metrics, equity to assets decreased from 62% to 34% quarter-on-quarter. And I mentioned the net asset value or equity of SEK 1.6 billion for the Group. With that, I move on to the next slide to show the change in the net debt. So you can see here that it's much driven by the acquisitions. There is also a factor of the net debt that we acquire in the transaction. So that Rudd carried at the time it became Ferronordic U.S. And then a contribution also from net working capital, and that's mainly being Germany in this quarter. If we look at the NAV of the Group, so the total equity, we can see that, that has come down slightly as a result of the losses that we had in the quarter and the FX effects. And looking at the balance sheet, you will see that the bulk of the asset sits in inventory and in PPE, property, plant and equipment. And again, mind you, that includes rental fleet, but of course, also property as workshops, the network that we've built, and then to some extent, receivables and cash and equivalents versus the liabilities that we carry. And with that, I want to hand back to Lars again for a round-up and the outlook.

Yes. Thank you. And so after a challenging and transformative 2023, we look forward with confidence to restart in 2024. We are very optimistic about our expansion in the U.S. and the opportunities there. U.S. is the world's second largest market for construction equipment. And we see that demand is supported by very dynamic economy and extensive support programs for infrastructure investment. The German economy looks weak and the truck market is expected to decrease in 2024. We have taken steps, as we talked about, to adapt our organization and cost structure to a weaker market. We believe in continued strong demand in the aftermarket business. And we're confident that we will emerge stronger from current challenges and we remain optimistic about the long-term potential in Germany. Also, our operations in Kazakhstan continue to develop even if they will be an even smaller part of the Group's total operations in the future. So by that, I hand over for questions and answers, please.

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

A few questions here from my end. I want to start off on Rudd. It's the first time we see a gross profit figure for Rudd. And granted it's only for 1 month, but it's -- it's only for 1 month, but 27%, that's a lot higher than your other segments. Can you just tell us if there's anything exceptional in the product mix or anything else that has boosted this figure or is this a normal figure for Rudd?

I think, Adrian, what we can say there, I mean, they had a very strong December. That's visible I think if you look at the annual numbers that we showed. So that is would probably be fair to say that it was product realization and product mix that contributed again to December being strong. And if maybe you want to make sort of forecast, you should look probably more at a longer period, so take the year into effect and also maybe use those indications that we provided in the press release.

Okay. So is it fair to say that the difference between the December EBIT margin and the full year EBIT margin is almost entirely that a very strong December. It's driven by the gross profit, so to say?

I would say, yes. I mean, the full year is probably more indicative of normal business, so to say.

Okay, perfect. And then also you mentioned the main increase in unit sales in the U.S. came from articulated haulers and crawler excavators. So it seems more sort of mining tilted, not so much mentioned about the big infrastructure programs in the U.S. Can you give some sort of a timeline when the money from those federal infrastructure programs is actually expected to reach the market and drive demand concretely?

To be honest, the articulated haulers and wheel orders are needed to build roads and infrastructure as well.

Okay, that's fair. In that case, is it more...

Regardless of those infrastructure programs, it's not, how do we say, discrete big programs. There is a lot of support programs that subsidizes. And yes, I mean, supports basically infrastructure projects. So not easily to point to the incremental when things will, so to say, hit the market. That will be a process in the upcoming years.

Okay. I understand. And then a broader question on Rudd, just to understand the whole rental conversion model a bit better. Is there some sort of rule of thumb you can give us for how long customers typically rent the machine before buying it out? And do they almost always end up buying it or will one machine typically be rented out to several customers before someone eventually buys it?

It's a mix, Adrian. I mean, machine can be rented for a couple of months, it can be rented for a longer period of time. But usually, it would be between -- I mean, this is very, very average a year, maybe year and a half. Not always this is bought out from the same customers. It can also be taken back and sold to another customer, it can be taken back and put into rental for another customer. So it's -- but it's very clean, I should say, way of going to market, but that's how it works. When we call rental conversion, it means that the customer who actually rented the machine in the first place, he bought it. Otherwise, it would go back to rent in this case and be sold as a used machine.

And then on Germany regarding the cost saving program. Will you go from essentially 0 to SEK 60 million run rate between Q1 and Q2 or are we going to see some partial savings in Q1 as well? And if so, can you quantify those roughly?

Adrian, I think we implement these programs. There are a number of initiatives, there are changes to our organization. It doesn't happen overnight at one point. So we say that from second quarter, so some point towards -- I think the end of the second quarter this would be fully implemented. But if anything, thinking as an analyst, I will probably take a straight line from 0 to SEK 60 million over that period. Does that makes sense? I mean, that's the best estimate I think you can use. It will be a gradual process over this period.

Yes, that's very clear. And then a final one from my end. Before you've talked about there perhaps being more workshop additions and building out the network in Germany, but now focus seems to be more on cost control. So presumably, this means that we won't be seeing any new workshops pop-up in Germany for a while. Is that fair?

Okay. Again, Adrian, I mean, currently, we need to optimize what we have and make sure that we make money in the network that we do have. But I don't exclude changes within the network, I don't exclude additions coming forward. But right now, we are making efficiency programs with what we do have in all respects. So yes, that's our main, main target is to we need to turn journey around quickly, and that's what we're focusing on.

The next question comes from Anders Ekblom from Nordea.

It's Anders here from Nordea. It's nice to see such a solid performance in the U.S. here. So I was wondering, firstly, if you could just holistically talk a bit about what you're seeing so far in the year here in the U.S. It will be interesting to get some flavor on how the market is trending currently and what you've seen so far?

Well, I think we're typically cautious on giving guidance. We will provide that outlook statement for you. I think what we can say in general is pointing towards what we expect in the U.S. economy. It is typically a good indicator of the market activity. And we say that there is expected to be a slowdown in the market to some extent. But on the other hand, there is a balancing factor, I think that the market has been somewhat supply constraint. And that is sort of rectifying. So I think that's the balance of those 2 effects that we're looking at when we look into 2024.

Sounds fair. But in terms of like the mix here -- and I understand that we shouldn't extrapolate Q4. But I mean, could you give us a bit of a direction in terms of the aftermarket here, both in the U.S. and maybe also Germany? And what do you expect for 2024?

No, I don't think we can, I mean, give estimates for aftermarket. I think -- I mean, looking at the [Technical Difficulty] that we had in last quarter, what we typically say is the aftermarket is more stable. We're looking to grow the aftermarket in all our markets, that's good. The equipment sales part of the business is more exposed to external conditions. The growth of the economy, commodity prices to some extent, infrastructure projects that were mentioned [Technical Difficulty] to customers, how do choose. And that will make the aftermarket, which again is more stable and hopefully as well as strategically growing, that's more stable. But the percentage, the mix of aftermarket will vary as the equipment sales part of the revenue stream is a bit more variable and [indiscernible] economy.

Yes. What we can add there, Anders, clearly is that what we see in Germany, considering that we do expect the truck sales to -- truck market to go down. And we hope that we will see our aftermarkets continuing to develop the share of the aftermarket and our total revenue will hopefully go up. That is what's happening in a declining market and that is a healthy mix of revenues obviously from a gross margin point of view. So that's why we are so focused on the aftermarket, we've always been. We should also say that in the U.S. the penetration in the aftermarket that has historically been -- has been good. Customers are being taken care about and are loyal in the aftermarket, and that's a very, very good base to standalone for the future. And obviously, we see opportunities to take market shares in the U.S. further on machines. And when you have a strong base in the service footprint, so to speak, that is a good base for growing both top, but also bottom line.

I just have like a final question on working capital here. You mentioned that you see improving working capital now in H1. I mean, do you expect this mainly from phasing out the inventory? And I mean, I understand that you can't give an exact number in any sense, but like in terms of pricing, what do you kind of see here trying to phase out this inventory? Is it difficult to kind of maintain your historic pricing level or...

Well, clearly, in a declining market, pricing becomes an issue clearly. We should, however, remember that margins in the market, in tough markets are quite thin to start with. So it's not too much fact, we believe in the total. Again, the more important thing for our profitability, how we can handle the growth and efficiency and productivity in the aftermarket. And that's the key really to the bottom line. So we want to release capital and we want those trucks that are now in inventory to get out in the market and go into our workshops. So it's a mixed bag really, but that's what we're trying to achieve.

Yes. And maybe just to add to that also, I mean, we mentioned that we've had these supply effects long lead terms. So this, Anders, is also a bit of balancing just -- we've had strong supplies coming in to us and to the market that has been fading somewhat on the sell-side. And that now has rebalanced in the first half when we will put more of that inventory that we have out in the market than we have supplies incoming.

There are no more telephone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

Thank you very much. We had one question on email coming in with regards to net debt in the U.S. and how that changes over time. And I guess, what I can say there is that it's largely driven by working capital, of course. And there is a certain time when inventory is on supplier, payables for us, receivables for them. And then after that, it typically goes over to either BFS or other financial institutions and then becomes debt. And the time when it sort of moves from one to the other, it impacts the net debt situation. So that's just explaining the mechanics of that.

All right. So if no further questions, thank you for calling into this presentation for Q4 2023. Again, we look forward to 2024 with confidence and looking forward to speaking to you again in the quarter. Thank you very much everybody, and bye, bye.