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

Hi, everyone, and welcome to the third quarter interim report for Troax Group. My name is Martin Nystrom, and together with Anders Eklof, our CFO, we will present the numbers and key events for the third quarter. After the presentation, we will open up for a Q&A session, which I will lead. So let's dive into the quarterly numbers. If I start with the third quarter, I'd say that we were offered a mixed market development, and we had some mixed outcomes. In total, we reported a minus 7% order intake growth and -- but this is distributed very differently. So if we start with the big exclamation point, APAC continued very strongly in the quarter. I think it was also very good to see a broad-based and significant growth in all the countries. So I think this is a good sign and also a good sign of the value proposition that we have also in the Asian markets. If I look at Europe, we continued largely as we did in the second quarter. Overall, I consider this to be relatively slow and also the long expected recovery is we're still waiting for that to see a broad-based recovery. However, I'd say there are some positive signs during the quarter in Europe. We did see a gradual comeback or recovery for the warehousing segment, and this segment has been fairly or very slow for quite some time. So I do think there are some positive good signs in this segment. This is also our largest segment and exposure in Europe. The counter side of this is that we also -- we have seen the demand in the automotive side decline a bit. And here, I'd also like to note that we're making very strong comparables from last year, but we do see the automotive sector being somewhat slower in the third quarter in Europe. We continue to experience a slow market in the construction -- in the Nordic construction environment. So all in all, it means that we had a declining order intake in Europe. On this, I would also like to point out that in the numbers for the third quarter, we also have a negative one-off effect due to the cutoff effects that we get when we now start to transfer the Polish factory and close that down, and we're moving that to Sweden. So there is an impact on the order intake side from this. Last but -- and also not least, in Americas, we continue to see a decline. And I think here, we do see pretty high activity. The quoting activity is very high, but the customers still hesitate to make decisions. And this is then driving the decline in the order intake in the quarter. If I move over to profitability, we have -- in the quarter, we have low volumes compared to what we have installed capacity for. We were also impacted by the production transfer in Europe. And in the quarter, we also had some operational challenges and issues in the U.S., which lowers the profitability, and we reported 16.1% as EBITA margin. If we dive into the margin a little bit more, I'd say that the gross profit overall is on an acceptable level. We did have the volume drop, factory transfer and of course, the operational challenges in North America. If we try to dissect this margin a bit more, the temporary effect from the factory move from Poland to Sweden diluted the EBITDA by roughly 100 bps. And in the U.S., due to the hesitancy in the market, we also have struggled a bit with the pricing implementation during the quarter. So in total, this diluted the EBITA margin by 100 bps as well. Here, I'd say we have taken good measures during the quarter going into the fourth quarter. From an activity point of view, I do think we have taken action. Last but not least, supporting the margin is the cost reduction program that we launched in the second quarter, and this is delivering well and as planned. And we do see underlying that the sales and admin costs are starting to come down. During the quarter, we also delivered a strong cash flow of EUR 12.6 million or a cash conversion of 122%. We continue with good discipline in terms of inventory management, how we collect our accounts receivables and also how we pay our suppliers and our accounts payable. And this means that our balance sheet continues to enable investments, both organic ones as well as acquisitive ones. In the quarter, I'd also say that we've done solid progress on several of our strategic priorities and I will come back to that a little bit later during the call as well as during the Capital Markets Day next week. So if we then move into how the markets are moving. So all in all, we reported a minus 7% decline on order intake. If I start with the geographical perspective first, in North Europe, we reported a minus 7%. Here, I'd say all segments, but the warehousing segment are down. Automotive has been down. Construction continues down, process others and the whole North European market was down in the quarter. Here, I'd say the promising sign is that we now start to see the warehousing market waking up and also that we start to see that activity moving into order and order intake during the third quarter. So that makes me cautiously positive about the fourth quarter as well as '26. Moving over to Southern Europe, where we reported a minus 4% on order intake. Here, we also see decline in the automotive and warehousing sectors. But here, there is also a good development on the process side and process is one of the areas where we do think we can gain share and grow in the coming years. So from that point of view, I do think it's good to see process growing in the quarter. I'd say the big disappointment from our point of view is the development in America. We reported minus 26% during the third quarter. Here, we'd say that all the big segments for us are down. So automotive is down, warehousing is down, and others are down. So here, we see a lot of activity and deals not being lost, but it's been very difficult for us to convert this into orders. Then last but not least, we have our APAC region, which was up 66%. So we had a very good development during the first half of the year overall, and this continued into the third quarter. Here, I'd say that all segments and all countries are growing nicely, and we have a lot of green arrows here at the bottom. So good to see the development and the continued growth in APAC. And with that, I'll leave that over to you, Anders, for some more digging into the financial numbers.

Thank you very much, Martin. I start with the order intake development. We reached SEK 62.2 million in order intake for the third quarter, to be compared with SEK 67.0 million in the third quarter of last year. That equals a decline of 7%, of which 6% is organic and another percentage point comes from negative FX. Going over to the sales side. Here, we reached SEK 64.2 million in sales to be compared with SEK 690 million in the third quarter of last year. This corresponds to a minus 7% in sales. Also, here, 6% organically, and another percentage point comes from FX. Moving over to the profitability side. We reached NOK 10.3 million in EBITDA for the third quarter of this year, to be compared with NOK 13.6 million in the third quarter of last year. The EBITDA margin for this quarter was 16.1% to be compared with the prior year's 19.7%. And you can see here on the arrow side that we are trending upwards compared to the first 2 quarters of 2025. Next one. Cash conversion was good in the third quarter. We had NOK 12.6 million in free operating cash flow, which is 122% of EBITDA. And then on the financing side, we have a good financing situation still. So the net debt, excluding the IFRS 16 impact, is 1.0, and it has been rather stable over quite some time now. Next, please. And then just to summarize everything, you have this in the table. I have touched everything here, except for the EPS. Adjusted EPS was $0.12 in the third quarter of this year, to be compared with $0.16 in the third quarter of last year. And with that, I hand over again to you, Martin.

Thank you, Anders. And then to conclude the presentation part of the call, I think we had a very mixed market environment during the third quarter as well, similarly to what we've seen in the past quarters. Despite the order intake growth, I do think there are some early good signs when it comes to recovering in the warehousing segment. We also see some of the key markets in Europe improving a little bit in Central Europe. We do have low volumes, and we are very busy transforming the supply footprint and transforming the group, which has some negative impacts in the quarter of one-time character. And we did deliver a strong cash flow in the quarter. So all in all, a mixed bag of outcomes, but I do think we're also now preparing for being ready when the market recovery hopefully comes. And I do think we will approach that being stronger than ever as a group. Then, before we move into the Q&A session, I'd like to also come back to the financial targets that we have announced earlier today. And we have set ourselves a set of targets for 2030. So when it comes to sales growth, we have set ourselves a target of at least EUR 550 million by 2030, which corresponds to 15% CAGR in sales growth. This is then the total CAGR, so both organic as well as inorganic. On the profitability side, we have set ourselves the target to be at least 20% EBITDA margin over the cycle. On the capital structure, we will continue to have a target of net debt to EBITDA over time, less than 2.5. And on the dividend policy, we have a target to be within the interval of 40% to 60% over time. And I would say on the dividend side that this is not an ambition to lower the dividend. This is a way to enable us to have a stable and steadily increasing dividend over time. So it's not a lowered ambition in that sense. And I'd also like to make a commercial for our Capital Markets Day, which we hold next week in Hillerstorp, will provide some more insights as to the targets, as well as our plans to reach the targets by 2030. So hopefully, I'll see many of you in person next week. Capital Markets Day for us is next week, where we aim to present our strategy and our plan, our financial targets. You'll get the chance to meet some of the group management members, and we, of course, want you to touch and feel the products and see how they are being made, and also, there is the chance to have a Q&A and a dialogue with me, Anders, and some of the key team members as well. So with that, we have come to the Q&A session. So I would kindly ask you to raise your hand and then we'll open up the mic.

I will then start with Jonny from SEB.

Hopefully, your -- can you hear me? Just a couple of questions from my side. I think I would start with your new target. You mentioned you aim to double sales by 2030, and that imply 15% CAGR from 2025 as baseline. What you implicitly say then is the full year sales for this year of EUR 275 million, and that implies now roughly 11% sales growth in Q4, yet looking at the order intake, it continues down in this quarter. So what makes you believe that sales will suddenly go up double digits next quarter? What can you say there?

I think you should see the 2030 target as a long-term target. I don't think you should read into a specific commitment for the fourth quarter. I know you would really like us to hand you the number on the silver platter for Q4. I think you should see that this as -- you should not see this as something we commit to or forecast for the fourth quarter specifically. I think you should look at the longer-term ambition when it comes to this.

Yes, I understand. But it was just that you written 15% CAGR from 2025 as baseline. So that's why I would like some flavor on that.

Yes. No, we could, of course, have put 14.7% or 15.3% as CAGR, but we thought it was a bit more pedagogical to say 15% on average.

Yes. Okay. Yes. And then on of the 15% CAGR you say, how much should we read is organic? Or should we rather read it that you aim to accelerate the M&A going forward as well? Could you please give us a split there, how we should think?

Yes. I think I wouldn't mention a specific number here today on what's organic and what's inorganic. If we go back the past decade or so, we've had roughly 10% organic over the cycle and 2%, 3% acquisitive. We think that nothing has materially changed when it comes to our exposure. I think we will have years where there might be a little more organic than the average. And I think there will be perhaps during this period, years where we have a bit more of acquisitive growth. So we'll come back to that during the Capital Markets Day and shed some more light on what's in there.

Okay. And then another one on the quarter here. You mentioned weaker automotive in Europe and North America. And looking at the order intake, organic seems to -- or growth seems to decline here and accelerate downwards in South Europe and Americas now. So could the warehouse segment really offset that ahead, do you think? Or how should we view given what you see now, the order trend going forward?

Yes. I think a few points on this one. I think when we look at the automotive sector first, I think it's -- I think it's true that we did have a decline in the quarter. At the same time, I think we had pretty strong comparables still in Europe last year. So from that point of view, the drop looks perhaps in the quarter a bit more severe than what we think the underlying market is sequentially. At the same time, the warehousing segment is our largest exposure and also so in Europe. So from that point of view, I do think that the warehousing segment can balance some of the shortfall on automotive. But that would then, of course, require that this is a development that is sustainable. So I think it's probably a little bit too early to say that the warehousing segment can compensate the automotive sector in full. That's, of course, what we're hoping for. In U.S., I think -- or North America, I think the situation is a little different. I do think the market or the decision-making in North America is more hesitant. And I do think that we need to have some kind of external impulse for customers, large scale to start making decisions again before we will see a turn. But for sure, we're really at the bottom of this. And if we put some context to the North American situation, there is a pent-up demand in the U.S., both from '24 as well as '25 in the automotive sector. So I do think that the outlook in automotive in U.S. is probably a little more positive than what we see in Europe for the time being.

Okay. And just a quick final question for me. I think you mentioned some one-off effect here of EUR 3 million in the quarter. If I interpret you correctly, that is affecting orders. So has that order disappeared? Or will it show in Q4?

I think it will be a mix on the orders. And the reason why we have the EUR 3 million is basically that we can't keep receiving orders while we move equipment since this is a very short lead time business. So basically, we do need to cut the orders off for a period of time while we move the equipment. When we then get the equipment up and running again, we can start to we can put the order button on, so to speak, which means that some of those orders might then come in. Some of them might have been lost in that sense during the transfer period. So some might come into Q4, Q1. And otherwise, we'll have the orders coming -- starting to come in for Q1 on this one. Then next would be Anna Widstrom…

Can you hear me okay? Perfect. So I just have a question on the issue that you had in the Americas. What was that due to? And is something that we should expect potentially partly in Q4 as well or...

Yes. So on the U.S., we have a few different topics. The first one is connected to the hesitant market and the fact that we do need to push for price increases. The raw material market is up in the U.S. that has taken a little bit longer time than we first expected. I do think the actions are being made, but before they hit the books, there is a bit of a delay or a cycle in that. So I do think -- we will gradually see that coming down in Q4. To that in the U.S., as you know, we have a pretty old facility up in Chicago, and we are now investing for a new facility in Tennessee. The fact is that the equipment in Chicago is getting old, which means that we have more breakdown, we have more maintenance. And in order for us to satisfy our customers, we also need to partly to do some more costly outsourcing. So I'd say both of these are of temporary nature before we're up and running in Tennessee again.

Okay. And just thinking of some other like costs relating to the move in Europe. Could that be seen in Q4 as well? Or are you very sure that you have done all of these -- taken all these costs already in Q3 now?

Yes. So there are 2 parts of the costs in Europe. There is the costs that are related to the transfer and the move. They are part of the provision that we took in the second quarter. What we're now living through in Q3, and we will have a little bit of that, not as much as in Q3, we think, but there will be also an impact in the fourth quarter given the fact that we're ramping down our delivery step by step and hence, our invoicing. And we are not able to take all the costs out in a linear way, which means that the -- you could say the revenues disappear a little bit ahead of the costs before we're completely out of Poland. So there was definitely an impact now here in the third quarter or parts of that impact will also be will have some impact in Q4, but it's going to gradually come down before we're completely out of Poland up and running by the end of the year.

Okay. Great. That's very clear. My last question is on Asia because it looks very, very strong on the orders that you talked about. And it seems you've talked about broadly in every country, and it seems all of the end segments are progressing very well. Is there a specific country or end market that is standing out even as it's very like strong in general or...

I'd say I'd say all the countries have developed very well for us. I do think -- not single something out, but I do think China has performed really well this year. And I think really, we've gotten all the pieces together when it comes to also supplying and getting the cost structure right and getting the right team on board. So I do think China has performed really well this year. I think we're making really good progress in Korea as well. And we have to extent also done very good progress in Australia. If we look back, we already have a pretty solid and stable business in Japan. So from a growth point of view, Japan is very good, but perhaps a little bit more stable from a year-on-year point of view. Thank you Sorling. And I would like to open the mic for Gustav Berneblad.

It's Gustav from Nordea. So I thought maybe just to come back to the financial targets there and sort of the profitability target because when I look at your website, it basically says that you aim to have an operating margin that excess 20%. And I mean you started reported EBITA first in Q2 2023. So I guess that refers to reported EBIT then. So when you sort of come out with an adjusted EBITA margin target of 20% above, I mean, it sounds like you're almost lowering it. I mean what's your expectation?

Yes. No, that's not how you should read it, Gustav. I think you should read it as the previous level and with the aim to increase over time. So you should not read this as any type of lowering the ambition.

Yes. Okay. That's fair. But I mean, given all the things you are doing now with sort of the consolidation of the footprint, you're also increasing the automation in the U.S., et cetera. It feels like if you -- if we see a normalization, you should be sort of way above 20%. Is that also what you're thinking when you're reasoning?

Yes. I think now we talk about the 20% EBITDA as an over-the-cycle target. Now we're pretty much what we consider to be rock bottom in the cycle. with all the activities and all the actions that we now put in place and also a bit of help from demand from the market, I do think it's possible to go at peak, certainly above. But I do think that before we even hit the 20% number. So I do think over the cycle being at least at 20% over the cycle, I think that's a good first step for the group.

Okay. That's fair. And then I thought maybe just on your comment there on Lag Mix as well. I mean it was an acquisition you did a long time ago. And is it possible to just give some sort of indication where sales are today and also the rationale behind the divestment there?

Yes. I think, first of all, Lag Mix is -- was acquired quite many years back, and it's been a small -- relatively small business in the group. I think we've done a strategic review. And as you know, we're also looking at, you could say, a strategic review of the portfolio. When you look at what the products and the customer base and the commonality with the rest of the group, I think it's fair to say that the Logimix business does not really fit the mold when it comes to where we want to put our focus and where we have our core, so to speak. So I do think in line with increasing the focus, focusing on core and of course, also then related to strengthening even though very marginally the profitability, I think it makes good logical sense to divest Logimix since it's not core, and we do believe that it's a good business, but we don't think that Troax is the right owner for that business.

And is it possible to say anything about what the sales is today?

Yes. It will be -- Anders help me out here.

On the mix side, EUR 1 million a year, roughly, Gustav. Euro, yes.

And then just on the warehouse side, I mean, that's the positive there on your arrows in Europe at least. But it sounds in the wording in the report like it's more tilted towards 2026. So, just wondering, are you really seeing automated warehouse orders coming through right now? Or is the arrow more forward-looking or?

No, I'd say this that we've talked about a gradual comeback of the warehousing segment in Europe, and we've talked about that for a few quarters. I think we've seen for a couple of quarters now that there has been a lot of presales activity going into the warehousing segment. Previously, I've been cautious to say, well, okay, when will this activity turn into orders from our point of view. Now I think we did, in fact, see some of that activity turning into orders in the third quarter. And I do think now we are cautiously optimistic that more and more of that activity will come and turn into orders. Whether that will now start to continue in Q4 or whether more of this will come into '26, I think that's a bit more uncertain. But overall, I think as segment trend, I think we're seeing some positive signs, which we haven't seen in a long time in this space. That being said, I do think, and perhaps a reminder, we had a significant and huge growth going back to '21 and '22. I don't think the warehousing segment will grow at those 30% numbers year-on-year going into '26. But I do think that we are most likely we're past the bottom in this market. That's what I think we see after Q3. But I do think it will be more of a gradual get back than a big catch-up that we saw in '21, '22.

That's very clear. Just one very quick one last one, sorry. Just on your price adjustments here in North America, what can we expect in terms of numbers for that? So is it like mid-single digits you're raising prices? Or is it more?

It's on average, it's high single digits on average.

And is that visible in the order intake today or?

It will be in the fourth quarter, most likely. Let's see if we have more questions coming from someone. Then I got a question in the chat here saying what underlying market assumptions do you have until 2030? What expectations do you have for '26? And when you say you're cautiously optimistic. So when it comes to the market assumptions and so forth, we'll have more of a deep dive in the quarter -- in the Capital Markets Day next week, where we go a bit segment by segment what we're anticipating. But I'd say it's fair to say that we have some of the segments growing more GDP-like, such as automotive and construction. We do think it's over average with a few points when it comes to the warehousing segment as well as the Process segment. So we'll walk you through that in our Capital Markets Day in a bit more detail. And when it comes to '26 specifically, and when I'm saying I'm cautiously optimistic, that comment relates specifically to the warehousing segment compared to 2025. All right. Good. Are there more questions from the call? There's one more. Is the warehousing growth expected to be e-commerce? And I'd say it's both e-com as well as conventional warehousing. So it's a bit of both, even though they have different characteristics. But part of that is assumed to come from the e-com space, yes. All right. That concludes the interim report for the third quarter. I'd like to thank all of you for calling in. And hopefully, I'll see some of you in person next week at the Capital Markets Day. And if not, I'll see you in a quarter's time. Thank you, and bye-bye.