Troax Group AB (publ) (TROAX) Earnings Call Transcript & Summary

Hi, everyone, and welcome to the second quarter interim report for the Troax Group. My name is Martin Nystrom, and I'm President and CEO of the group. And together with me, I'll have Anders Eklof. And together, we will present the second quarter results. And after the presentation, we will open up for a Q&A. So without further ado, let's dive into some news and of course, the quarter. So the second quarter was pretty -- offered a very interesting macro environment and in total we reported a minus 6% order intake growth. Europe continued pretty slowly as well as Americas, while APAC was more stable in the first quarter. If we look to North Europe, we continue to develop weakly, driven by the automotive as well as the warehousing segments. Southern Europe grew in the quarter, and we saw this being driven by general industry as well as the process segment. We had a good run in Americas in the first quarter, but we saw from the beginning of April that our customers have become a bit more hesitant during the quarter when figuring out and analyzing what the potential tariffs and so forth would mean, and I'll come back to this in the next slide. APAC had a very strong quarter in the first quarter, as you know, so a very strong start of the year. In the second quarter, we were more flattish when we report in euros. If we look into local currencies, we also have a small single-digit growth also in the APAC region. Moving over to the profitability. We came in at 14.4% EBITA margin in the quarter, mainly driven by lower volumes in Europe, but also due to FX effects. We had a solid gross margin in line with our informal target of around 40%. We initiated a cost reduction program to get to a sustainably better place. And I'll have a slide, in a few slides from here we are going into what that entails. And last but not least, we also had FX headwind and FX losses, which impacted the result by roughly 70 bps. Our working capital continued to be -- we continue to work disciplinedly with this, and we kept, I think, our cash flow on a reasonable level as well as then with a stable net debt. And I do think that discipline on inventory management in terms of accounts receivable as well as accounts payable were all in good shape in the quarter and continue to be so, which means that our balance sheet with a net debt to EBITDA of 1.1 means that we have room for further both acquisitions as well as organic investments where we think that's appropriate. During the quarter, we've also made progress on some of our strategic priorities, and I have decided to highlight what we have now decided to do in Europe, and that comes very much back to simplifying our supply chain as well as simplifying our racking portfolio. If I then move over to, I think, the big news in the quarter. Towards the end of June, we released that we are taking action on our cost side and optimizing our organization a bit. And this pretty much entails 3 things or contains 3 things. During the second quarter, we have had to say goodbye to roughly 100 employees. And this is a -- you could say, an adjustment based on the fact that we have lower volumes, mainly in Europe as well as in the U.S. We have areas where we've seen SG&A efficiency potential. And of course, we've also taken our strategic priorities into account. So -- based on the first part of this cost reduction program, we will see a run rate saving of roughly EUR 5 million a year, which will then come into effect in the third quarter of this year. The second part of the program is to streamline the manufacturing footprint in Europe. And here, we think that and see that we will have plenty of benefits by moving the warehousing products and the racking products. So we will move those from Poland and move those to existing facilities in Sweden. This also means that we can manage the racking portfolio, so shelves, dividers, anti-collapse systems in a better and more effective way. This also means that our factory in Poland will be closed. And as an impact of this, we will have additional 125 employees being affected in Poland. This will also mean that we will have a few new recruitments in Sweden. The run rate savings from the second stream of this is roughly EUR 5 million a year, and we will -- we aim to be have our Polish facility closed and have the move done by the end of this year, which means that the run rate savings will come into effect in the first quarter of 2026. So in total, we have EUR 10 million a year of full run rate savings coming from these 2. And in the second quarter, we have then booked and as reported as one-offs in the second quarter, we have restructuring costs, including severance pay, but also moving costs and some asset write-downs, which amount to EUR 6 million. The third part of optimizing our supply chain comes back to what we disclosed a few quarters back, which is our investment into the North American manufacturing. And we have decided to build a new factory in Tennessee, and this will do both because we need higher capacity due to the growth we have had and will have, but also we see that there is a gap in efficiency where our American operations are not as effective and as efficient as we are -- as we're running in Europe, which means that we have both the ability to produce more, but also at a higher efficiency. And I think we're doing really good progress here according to the plan, and we will ramp up during the beginning and mid of 2026. This will also add additional savings on top of the first and the second stream of this program. But we're not yet in a position where we want or could quantify what that means in terms of money. I would also like to welcome you to our, in fact, first Capital Markets Day. So this is more of a heads up or an early welcoming. So on the 5th of November, we will have a Capital Markets Day in Hillerstorp, where we will talk about our future vision, our business and future ambitions. You'll get the chance to hear presentations, meet a few of the group management members. We will walk you through our factory. And of course, we'll hopefully have a lot of good discussion and dialogue throughout the day. So there will be more information and invitations coming out after the summer period during Q3. And there will, of course, as always, be more information available at our homepage. So that let's dive a little bit more into the market and what we are seeing. And I'd say, if we start with how we -- the lens through how we view the world, we are looking at this through the lens of geography as well as end market segments. So if we start with Northern Europe, we were down in total by 13% order intake change year-on-year. This decline is driven by automotive, but mainly from warehousing. I'd say this, though, that we have had a general demand in Northern Europe that has been somewhat muted. And I would say, and we could already in Q2 see that there is some more light at the end of the tunnel. And I'd say that goes for general industry, where we've seen growth in the quarter as well as in Process. And from process, I'm very happy to see that we have a green arrow because it's also one of our strategic growth priorities where we can regain share also in this very tough market. Moving over to Southern Europe, which was down -- or which was up 5%. Also here, automotive declined a bit as well as warehousing. But also here, we saw good growth coming from the process as well as the other segments. So all in all, we are, in fact, up a bit more than 5%. So from that point of view, I'm pretty pleased with the development in the quarter. Then moving over to Americas, where we were down 14%. And here, we clearly see a shift in how the market and the market temperature has changed between quarter 1 and quarter 2. Quarter 1, we were a bit more positive. Now I think in U.S., we see that customers are, generally speaking, a little bit more hesitant. A lot of our products come together with investments and those investments of machinery equipment, robots, et cetera, are usually manufactured outside of the U.S., which means that they are also then very much impacted by whatever the tariff policy will be. So I think from that point of view, it's probably not super strange. We saw automotive continuing roughly on the same level, warehousing on its way down, where process and others were down and flat, respectively, but down all in all in Americas. In APAC, we reported flat when reporting in euros. If we continue or if we look at local currencies, we were up roughly 7%, 8% in local currency. So there is underlying growth in APAC, but due to currency, we're reporting flattish. Now that being said, I do think that APAC, if we consider the full first half of the year is up 40% year-on-year. So I still think that we have a good growth momentum in the APAC region. If we then look at this more from a product point of view, I think we have a stable, slightly growing machine guarding business in the quarter. So a lot of this drop really comes from the racking products and the storage products, which might be good to know. And all in all, we then reported a minus 6%, including currency for the quarter. So I'd say there are some lights at the end of the tunnel when it comes to general industry. And I'd also say that we now start to see more activity in the presales on the warehousing side. So this is a segment which has been very, very slow and continued to be slow in Q2, but we do think that there is more activity, which then bodes well for the development towards the end of the year as well as going into 2026. And with that, I'll hand over to Anders to run us through some numbers. So please, Anders, go ahead.

Thank you very much, Martin. I will go through this pretty quickly as usual. I will start with the order development. In the second quarter of this year, we reached EUR 65.3 million in orders compared to EUR 69.6 million in Q2 of last year. That is minus 6% decline, and that goes both organically as well as in total, meaning including structure and FX. When it comes to sales, we reached EUR 68.7 million in sales compared to EUR 71.9 million in Q2 of last year. That is a 4% decline, both organically as well as in total. On the EBITA side, we reached EUR 9.9 million, which is 14.4% EBITA margin to be compared with EUR 12.1 million or 16.8% EBITA margin in Q2 of last year. The decline mainly comes from the drop in volumes, whereas Martin said before, we kept the gross margin on a stable level. We also had some headwind on the FX loss side in this quarter coming from the revaluation of receivables and payables mainly in the balance sheets. So excluding this FX loss impact, we reached 15.1% in Q2 of this year compared to 16.5% in Q2 of last year. When it comes to working capital, it's stable, I would say, in terms of days. We see a decline in absolute numbers, mainly related to the decline in sales volume. But overall, a very stable, I would say, working capital level. Cash generation, we had a free operating cash flow of EUR 8.9 million in the quarter, and that is a 90% cash conversion in relation to EBITDA, which we believe is a pretty good level. So we're pretty happy about that one. And also on the net debt side, we are at 1.1x net debt in relation to EBITDA, the 12-month rolling EBITDA which is also a good and low level, we believe, which gives us an opportunity for further acquisitions looking into the future. And the next one, here we have the summary basically of what I mentioned in the previous slides. The only thing to be added there perhaps is the EPS where we hit EUR 0.11 for the quarter compared to EUR 0.14 in Q2 of last year. And with that I hand over again to you, Martin.

Thank you, Anders. So in summary, we had a pretty eventful second quarter. We saw Europe continuing slow. We saw Southern Europe growing while we saw North Europe continuing to decline. We had some more hesitation in the U.S., and we continue to be flattish or slightly positive in local currencies in APAC. The margin was 14.4%, driven by the production volumes as well as the FX effects and we continue to be disciplined when it comes to our capital management side, and we continue to generate a reasonable and good cash flow in the quarter. So with that, I'd say that we prepare to open up for Q&A.

[Operator Instructions]. I think we will do ladies first with Anna Lindholm-Widstrom.

So my first one is if you can give us some details on momentum in ordering in the different regions during the quarter. So to say, if the year-over-year change in the beginning of the quarter was a bit different in comparison to the end of the quarter?

Yes. I'd say this Anna that I think it varied a little bit between the regions. So I think Europe was pretty much kind of the same through the quarter. Nothing material changed. I think in the U.S. We probably had some hesitation in April than May probably below point and then June, probably some kind of acceptance. And if I'm being half -- the glass is half full person, probably June was a little bit on the better side sequentially. But overall, we're quite a bit down in the U.S., as I said. Asia, I think, is still pretty small and pretty lumpy. So I wouldn't say anything around really about the market dynamics or I wouldn't draw any specific conclusions on that. I think it's more, in fact, more customer-driven and customer specific on that side than some general market development.

Okay. Great. So basically, the order intake is sort of reflecting the current business momentum, so we should sort of assume a normal seasonal pattern in conversion rates between orders in Q2, in terms of sales in Q3? Okay?

Right.

And then a question on the progress on the cost savings. Should you expect the full pace already in Q3? Or could there be slightly more in Q4 in comparison to Q3 of the EUR 5 million there?

Yes. I'd say when it comes to if we focus on the two first elements, so when it comes to head count reductions, so the first part of the program, that has been fully executed during Q2. So it means that, that portion and that run rate should be expected to full extent already in Q3. When it comes to the factory movement and factory move from Poland to Sweden, obviously, this is a gradual process where we need to move equipment and lines and so forth step by step. So it means that we probably will see some of this impact in Q3 and certainly some in Q4 but we've been probably a bit conservative here and said, well, assuming we'll close Poland down in Q4 will have the full run rate effect from that initiative starting from Q1. But it's a gradual process where we move pretty much line by line and machine by machine. And with that, we people will also leave our Polish facility. So it will be a gradual process, but we'll -- we think of it as a 100% impact starting from Q1.

Okay. Great. And then talking about Northern Europe, it seems you said that the warehousing segment is the one that stands out basically on the big side. Do you think there's any impact from the whole sort of [ restructuring ] initiative? Or is this fully market related?

No, I'd say if we look at what we see during the quarter, I don't think it's -- I think it's more of a market-driven thing than a home-cooked thing, if I may use that word. So I think it's definitely more market related than something that is company specific. At the same time, though, now Q2 was, I would say, very weak from our standpoint. At the same time, I do think we see some of the larger customers in this space, announcing activities and starting projects in our presales phase. So from that point of view, I'm somewhat positive that we'll see the light at the end of the tunnel and whether we'd be fully bottomed out now in Q2 or whether that will go continue into Q3? I'm not sure, but I certainly know there is some light at the end of the tunnel in this segment.

Okay. Great. And then just a final one from my side before I get back in line. The sort of hesitation that's been an effect from, like, the tariff turmoils and such. Does that have any greater impact in your sense in any of the different end markets, such as automotive or warehousing? Or?

I think it's a little bit across the board, frankly I think we -- I think when it comes to what we call [ order store ] or you can say it's a proxy for general industry. I think it's probably I'd say it's more general hesitation when it comes to warehousing, I think we'd see both customers powering through with their initiatives and continuing. And I think we see some customers hesitating. On the automotive side, I'd say all the big 4, if we take the American manufacturers are still -- are a bit more hesitant as to what should be done and by when and so forth. So I'd say that's also probably a bit more of a general nature to that. But warehousing is more mixed where you would have -- where we have customers pushing forward and customers being a bit more on the hesitant side? Thank you, Anna. Then next see if I can allow Jonny Jin.

Just have a couple of questions from my side as well. I think I will start with a follow-up question on Anna's question there. And I want to understand the order trend in Americas a little bit better. So I mean, looking at book-to-bill, it looks to be quite a lot below 1 here at 0.75 here in the quarter. And looking at your arrows, they also look to be clearly negative sequentially here on the market development. And I understand it very uncertain on the market here after Liberation Day, et cetera. But could you maybe elaborate what you're seeing here and what you have for your dialogue with the customers, the prebuying activity, et cetera, in Americas? And also given the funnel or pipeline you have right now, what is your best guess for outlook here for second half of the year? I mean, could we expect a rather flattish sequential order development from here? Or has the momentum stabilized or worse than further here going into Q3?

Yes. I'm not -- if we start with the first one, Jonny, I think I think the discussions are a little bit different in the different end segments. I do think that if we look to automotive, first of all, I do think it's pretty much the same type of discussion and the same type of hesitation that they've had to remake some of their plans. And in this, there is, I think, now more preference for hybrid and combustion over EV. At the same time, there is also this where should things be produced? Is this still Mexico? Or is this U.S. or what parts of Canada will we utilize. So in a sense, there are 2 uncertainties at the same time. So I do think the big carmakers would think slightly the same if we talk about the American makers. When we look at foreign makers, I'd probably say they are pushing a little bit more for investments in the U.S. I think we see that from parts of the European ones, and we definitely also see that from parts of the Asian ones, the Korean and Japanese ones. So that's one, you could say, one cluster of discussions. Then when it comes to warehousing, I'd say this is very split. So we have few customers who have plants who have put already the foot on the gas pedal and they are continuing. There are also projects which are a bit more have gone into this hesitation phase as well. So a pretty mixed picture on the large projects. On the smaller, what we used to call bread and butter business, and I think that kind of gives the temperature a little bit. I think to begin with in April, there was a bit of, okay, what's happening now, but people keep going for some time, then May was probably the bottom or the trough when it came to, okay, let's do nothing. And then I do think in June, we saw a little bit of more decisiveness in that sense. So a bit of a dip on that. When it comes to I'm not sure if your second and third there, Jonny, were -- if they were meant for U.S. or if they were meant for kind of general there?

I think if we start with the U.S., but you can also talk broadly, it was also very interesting.

Yes. No, I think in the U.S., depending a little bit on the Big Beautiful Bill and other things. I do think that if one believes that consumption is going to -- if there is growth in the U.S. and if that needs to be handled -- that needs to come from consumption. So if the main scenario is more consumption, that means that there needs to be more warehousing definitely. And there is also a bit better supply/demand balance in the U.S. when it comes to warehousing. So from that point of view, I'm a bit more optimistic that people will start to make decisions again when it's been slow in the second quarter. I think the car industry will take a little bit longer because their platforms and other things that usually takes a little bit more time before it can turn into decisions. Generally, I -- and then if I move over to Europe, I do think that general industry is -- and the overall temperature and I hear some of that from my colleagues as well. I do think there are some good signs that we're getting to a place in the next or next quarters, which is a little bit more positive than what we're -- where we're currently at.

Yes. I understand that. It's a lot of moving parts here. I mean, with the Liberation Day and tariffs, et cetera. So but looking at in America for a while here, it looks like the momentum slowed down quite a lot here if you compare Q2 to Q1. And I also don't just trying to understand how much was due to the Liberation Day? And also like given how your late cyclical nature of your business should we interpret that as a lot of started project already is now closed and that you're now more dependent on newer projects coming along? Or is this that type of department?

I think the pipeline in the U.S. is pretty all right when it comes to projects and whether it has been quoted and what is being discussed. I think it's -- so I don't think the underlying activity and initiatives, I don't think that's, that's weak. I think it's more moving from, you could say, idea to ink on the paper and get going in many cases. I'd rather read that into the situation more than anything else. So I think in terms of activities and in terms of what's needed, I do think that looks on paper pretty healthy in the U.S. And perhaps to that, if I may add, Jonny, I think we also have a bit of this comparable is also related to FX in the quarter which impacts the compare a bit.

Yes, yes. I understand that. We'll see. But then I also want to follow up a little bit on your statement that you mentioned somewhat higher presale activity here, which I think you said in the report, bodes well for 2026 and onwards. I was wondering, could you maybe elaborate also a little bit more here, how we should think about the timing there? I mean, given what you see now, can we expect to see to interpret that the bulk of that, those orders should convert into sales second half of '26. Is that the most likely base case? Or how should we think about the timing there?

I think it's -- again, timing in big project seems to be very hard to predict. I do think -- and I think it's worth noticing that if you look at the big players in the warehousing and intralogistics space, some of them have announced pretty big investment programs in different parts of the world. So it could be Europe, could be Middle East, India, could be also for that matter in the U.S. So I do think that there is a bit more commitment and a bit more drive from that end, which is now being then worked on and eventually, we'll see some. We think, good orders coming through, whether that's going to be Q1, Q2 or Q3, Q4, I think I'm not in a position to judge exactly which quarter it will be. But I do think that clearly '26 looks overall definitely more positive than '25 has turned out to be.

Okay. Yes. That's fair. But I mean the best guess then, I mean, given that it's prebuying activity now, then maybe they are converted into orders, let's say, I mean, during the first half of next year, then I suppose they are delivered during the second half of '26? Is that a fair assumption?

Yes. No, that's probably a fair assumption. I think we have presales processes, which are 2 weeks, and we have presales processes that are 1.5 years, and everything in between. So -- it depends a little bit which customers here decides to go forward with what. So it could be fairly quick, but I'd say probably would have more going into mid-second half of next year? I think that's fair assumption, Jonny?

Yes, yes, I understand. I understand. That's clear. And then just one final one from my side. I mean demand in Europe is a bit mixed, as you mentioned here, but I noticed that you see somewhat higher orders in EMEA South region, which I think is quite interesting here in the quarter. So -- maybe I missed it here, but what is driving that? Were there anything particular in Q2 here? Or was it anything or is it more broadly driven? And has that momentum continued here in Q3, would you say?

I think it's we're -- it's pretty early in Q3. I think the historic Q3 has been good, also in Southern Europe. Now I think when it comes to Southern Europe, I think the main geographies, so Italy, France as well as Spain. I think they're performing well, and I also think that there are plenty of projects, especially general industry, I think there are also investments going into process, especially retail, food, pharma, et cetera. And I think we're chasing our fair share of that growth. And in the second quarter, I consider that to be go -- it went well from that point of view. I think it's more broad-based than anything particular that stands out. And we have Daniel Lindkvist.

Perfect. Thank you, Martin. So just 2 quick ones from my side. Given it's been a bit messy here lately. So just it would be interesting to hear your base business with the machine guarding, how is that faring? How much volumes has been lost and what's the margin profile for that part? Or the delta is that basically from warehousing and property protection that hits profitability?

Yes. No, our machine guarding business is doing, in fact, very well. We see -- we think we have grown that business flattish to slight growth and the margin profile of machine guarding is in relative terms, more profitable than storage and warehousing. So pretty much, pretty much all of the drop is explained by warehousing and storage.

Okay. So down the line business is really healthy. And then would that mean that you've taken market shares that is measurable as well?

I wouldn't conclude that on Q2 because I don't have access to all the competitors' numbers. But I do think it's fair to conclude that we during 2024 took some market share in the core segments.

Okay. Perfect. And then just on M&A, you have a sentence on it in the report. With the internal measures taken now there's nothing stopping you from making an acquisition, if that would turn up? Or is it too soon at this point? Or maybe...

I would say that on the contrary, I think we're by -- by taking these measures, I think we make room for other growth initiatives and investments portfolio-wise, I don't think there is any contradiction at all whatsoever in this. I think what's standing in between us and acquisitive growth here would be it needs both parties to say, yes, and agreed to a valuation, which with more uncertainty around this might be a little bit more difficult to agree on what is the value and unfortunately, we weren't able to close any acquisitions during the second quarter. But be rest assured that we're pushing and pushing hard for that during the second half of the year.

Okay. Perfect. Great. Thanks, Martin. That was all from my side, Martin. Have a really nice summer now.

Thank you, Daniel, and likewise. Okay. Let's see. Are there any more questions? In fact, I don't see any more hands in the air, which means that we will conclude the second quarter interim report for Troax Group. And thanks a lot for calling in and asking questions. And if not before, I'll see you in a quarter's time. Enjoy your summers. Bye-bye.