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

Hi, everyone, and welcome to the interim report for the second quarter for Troax Group. My name is Martin Nystrom, and I'm the President and CEO of the group. Today, I'll walk you through the quarter, the financial outcomes and the key events before we open up for Q&A towards the end. I will start by sharing the presentation. So without further ado, let's dive into the quarter. The second quarter was a record strong quarter from a top line point of view. The group reports a 51% increase, and our sales grew by 23% and I'm particularly pleased, of course, by the fact that we saw order intake growing both organically as well as through our acquisitions. Our sales increased by 23%, driven by our acquisitions and our organic invoicing declined in the quarter, which was due to the order of the order mix that we had in -- late in the first quarter where we had several midsized orders with longer lead time and also with deliveries going into the second half of the year. It was also pleasing to see the North American deliveries picking up pace after a slow start of the year after the transition of our inventory and our pick-and-pack operations from Chicago to Portland. Overall, I'd say we had a strong quarter, but I would also say that it's difficult to predict the demand in general. But there were clearly positive signs and areas that I would like to highlight. During the quarter, we saw a solid recovery in the warehousing segment, both in Europe as well as in North America. And we also experienced solid activity and orders from the data center segment. On the more challenging side, we continue to be impacted by the challenging situation in the European as well as the Chinese automotive sectors. If I turn to profit, our adjusted EBITA profitability came in at 13.0%, our gross profit was in line with the last year's levels despite the lower organic volume. And I would say we have had a transition quarter in North America and also we have our acquisitions not being fully ramped up yet. So from that point of view, I consider this to be a good outcome given the delivered volumes that we had in the quarter. Our sales and administration costs rose as a consequence of our acquisitions. So we have added costs from our acquisitions. We have upgraded parts of our IT infrastructure and completed that. And we also had integration activities from our recent acquisitions in the quarter. Organically, I'm pleased to see that our sales and administration costs went down compared to last year. Our net debt level came in at 3.3%, which is on the higher side for the group. And the 2 main drivers are the -- is the dividend payout as well as that we have reevaluated our earn-out commitments from the 3 acquisitions we made late last year and beginning of this year. And I would say here, as our orders turning to deliveries and our operational cash flow will increase and then also this ratio will come down gradually towards the end of the year and through the second half of the year. If I then start with a few of the key things in the group. I would say, a clear highlight for us in Troax in connection to the quarter's ending is that we have now ramped up our new facility in Portland, so close to Nashville in the Nashville area. And we are, by that, also closed production in our Chicago facility. And I think this really marks a new era for Troax in North America, where we will be able to serve our customers better. We'll be able to have more efficiency through our automated production and our best-in-class practices, but also from having a leaner organization. And with our new operations, we will have greater capacity. Of course, we will have world-class automation and we will utilize all of the best practices that we have from other parts of the group. At the same time, we have also adjusted our go-to-market model a little bit in the U.S., which will allow our customers then to access the full range of relevant solutions across all the different states. And I'm very happy to see now the group strengthening our position significantly and also improve our competitiveness. And I think that bodes well for both future growth as well as for market leadership in North America. The acquisitions that we made of D-Flexx as well as Stommpy in the fourth quarter now forms our foundation for our flexible barrier line, which gives us access to a larger share of our customers wallets. And to date, we have experienced great interest in these solutions, and we're also busy with the integration to make this work as true solutions in 2 parts of the group, both on the sales side as well as the operations side. And I would say these solutions have had a strong and good start in the group, and we and I are very excited to see what the future holds in terms of profitable growth coming from this new product line. The third highlight comes from the core of the core. And here, we have launched the world's first machine guarding mesh panel, which is entirely made from recycled and reused material, and we're also using low emission steel to produce this. And I would say this is a very tangible and concrete step in our work to reduce the climate impact across the value chain. And with this product, it makes the same safe job as a normal Troax panel, but it comes with a less -- with more than 70% lower carbon emission footprint versus the standard without compromising on safety or the performance. And I think this is a great example of where we can bring innovation into our products and also to show that we are truly the world leader when it comes to mesh products and machine guarding. And I think this is also a great example where we bring sustainability and safety performance go hand in hand. If I then turn to the market development, and this is the slide where we walk through how the different segments and the different geographies are developing. As usual, we look to the market through 2 lenses. So it's the geographical lens as well as the market lens. If I start with the total, we had an organic growth of 14% in the quarter, which I consider to be a very strong number. If I look to Northern Europe, we are back on the growth path with 13% year-on-year growth. The growth primarily comes from the warehousing sector as well as general industry which we can say here also is partly related to data centers. And we also saw some green sparks in fact, coming from the construction sector with the -- with our storage solutions. The automotive sector in Europe continued in North Europe continued to be soft in the quarter. In Southern Europe, the situation was a little bit different. So we had a decline of 11% on orders in Southern Europe. And here, I would say, both automotive, partly processing as well as general and industry were slightly softer. Then I'd say the exclamation point of the quarter is North America with an order intake growth of 84%. And here, of course, we should note also that the comparison quarter wasn't 1 after Liberation Day back in 2025. Nevertheless, we had a strong quarter. Order intake-wise, the automotive sector grew after some 2 soft years, but we also experienced activity, both in warehousing as well as in the processing industries, taking us to an 84% increase. Last but not least, we have the organic development in APAC, which continues to be somewhat slower. Here, the compare is rather strong from last year. And the order intake decline of the 14% is predominantly driven by the automotive and process industries in China and Japan, which were soft in the quarter. As said, turning then to order intake overall. Very strong also a record level. We -- and our order intake in total amounted to EUR 98.3 million, which corresponds to 51% increase. If I look at that organic, we had plus 14% structure, very nice contribution with 37% increase, and then we had a bit of currency headwind with minus 1%. Moving over to sales. Our sales amounted to EUR 84.2 million in the quarter, which is a 31% increase. The organic element here was minus 8%, and this comes back to the order mix back in the first quarter. We will see that order intake from Q1 partly being then delivered into the second half of the year. The structural part was 31%. So good progress in our acquisition. And also here, we had a currency impact of minus 1% taking the total to plus 23%. Moving over to profit and profitability. Our adjusted EBITDA profit rose to EUR 10.9 million in the quarter, which represents an EBITDA margin adjusted of 13.0% and I would say, given the lower organic volumes, both in EMEA as well as in Europe as well as in APAC, I think this is a good outcome. We've also had our most intense quarter when it comes to transitioning our Chicago operations to Portland. And we've also done great progress when it comes to integrating our newly acquired businesses into the group. So I think this is a solid outcome for the quarter. Going forward, I'd also say that I expect some of the raw material prices to continue to develop, not only in the -- in North America, but also in Europe. And here, it's important that we're continue to be agile on the pricing side. Moving over to operating cash flow, which came in at EUR 0.8 million, which is an improvement than in relative terms to the first quarter. And here, it's -- it's obvious that having strong growth mainly coming from them from our acquisition, it ties up a bit of cash flow in working capital. But as the -- as we get the deliveries going during the second half of the year, we will increase our cash flow during the second half of the year. Turning to our net debt development. Our net debt increased to 3.3 during the quarter from 2.7 in the quarter before. The main reasons for this is the dividend payout in May as we have every year and also reevaluation of the earnout contingent of EUR 11 million, which at this point is noncash. As such, this reevaluation, I think, is positive because we do see stronger performance and, of course, contribution to the group from these acquisitions than we originally anticipated. And as our order book turns into invoicing and cash, the net debt will decrease during the second half of the year and aiming for levels which are below our target, which is 2.5 net debt to EBITDA. So if I summarize the key figures, our order intake grew by 51% to EUR 98.3 million. Our Sales grew by 23% to EUR 84.2 million. Our EBITA profit rose to EUR 10.9 million, which represents 13% EBITDA margin adjusted and our net debt level increased to 3.3 after revaluation of our earn-out continues. And last but not least, the adjusted EPS per share increased to EUR 0.12 per share. So in summary, we had a strong development in the second quarter, and we passed a lot of milestones relating also to our strategy. I think we see some really encouraging signs in multiple important segments and segments such as warehousing as well as data centers. At the same time, the future continues to remain difficult to predict and predict with certainty. Our broader safety portfolio, including the flexible barriers in the data center solutions continue to gain traction in the market. I think we had a strong evidence of that in the second quarter and which also bodes well for coming quarters and coming years. We started our North American new manufacturing production after an intense project, and this is truly a milestone that will improve our competitiveness and also profitability in North America going forward. And I'm also very happy that we now operate from a stronger platform overall in North America. And overall, I'd say the recent investments, acquisitions and operational improvements definitely also provide a stronger foundation for continued growth as well as profitability. And we will -- without saying continue to execute relentlessly on our strategy to make sure that we are in the pole position when our customers have needs and demands when it comes to industrial safety. And with that, I would like to end the presentation part of this call, and I would like to open up for Q&A.

So if you have a question, -- please raise your hand, and I will call your name and we will unmute the microphone. We will start with Jonny Jin from SEB.

Yes. Starting with the strong orders here. I want to break down the drivers a little bit closer because they are looking very impressive here. So -- can you maybe give a little bit flavor of sort of the mix between large orders driving the growth? Or was it more sort of smaller bread and butter if you focus in Americas, for instance?

Yes. I think overall, we had growth in all these 3. I think what stands out in the quarter is predominantly growth of what we would consider midsized orders. So it's not the mega orders that grew the most. I think if we look at North America, in particular, we saw increase both in the bread and butter but we also saw an increase in the midsized and with a few examples also large orders. I think it's -- in North America, I think it's been more of a broad-based growth, which is probably what I consider to be the best mix of things.

Understand.

From a segment point of view, what's growing the most, if we take North America is warehousing combined with process that I said before.

Understand. Understand. So there's no like, sort of say, timing of effect or any sort of one-off orders. This is sort of a representation of the underlying business and business of bread and butter.

I think this is a good representation of where we are for the time being. As with every quarter, there could, of course, always be 1 order that comes into the quarter or gets postponed into the next, but there is nothing out of the ordinary in this quarter from this point of view.

Perfect. That's clear. And then M&A contribution seems also stronger here than expected. Was vision as the main driver for that? Or -- what is happening there? Is there any timing effect there? Or is it sort of just taking market share better than expected? Can you give some flavor there?

Yes. I think all 3 acquisitions developed well. Then obviously, wish is the largest of the 3 companies we acquired. So from that point of view, they are contributing more in that sense. When it comes to --, I think we are very well positioned to capture the growth in the data center segments, both with data center solutions as well as with the wire trace and cable trace. That is the strength of [indiscernible]. Also, I would say that the flexible barrier side develops well, but from a lower baseline in that sense. So from a growth point of view, they are all 3 delivering very nice performance in the quarter.

Understand, understand. And then I had a question on cost and margin side of things because, I mean, even if we adjust for a sort of extraordinary high costs to your factory movement and such. It looks to be a little bit higher also if you compare it to Q1 here. So can you maybe give us some flavor what is happening on the cost side, if there's something you want to highlight there? And -- is this sort of the fair cost base we can assume going forward as well? Or should it come down or up materially from this level? And also, like, can you comment something about -- it's very good to see that your orders are coming now and as they are utilized in your factory and such and convert it to sales. Can we expect sort of an EBITDA margin in line with your sort of historical past of yes, above 18% EBITDA in H2 already? Is that a fair assumption?

Yes. I think if I start with the cost levels, I think on -- if we break that down a little bit, if I look at the gross profit side, I think there is more -- there is and the gross profit level is stable as such. I think that's given that we have lower organic volumes, I think that's a good outcome. I think though that there is more still to be done, definitely coming from North America, and I think there is also more a bit more optimization that we should be due particularly in Europe, and that relates to a large extent still that we still have some improvements to do from the transfer from Poland to Sweden. So I think there is more optimization to be done on the gross profit level. Of course, volume will help our gross profit as well when we -- as we start to invoice. On the SG&A side, I think this quarter contained I think organically, we are seeing lower costs. So the costs stem from our acquisitions. They come into the group with the higher relative level. So as we -- as we grow the businesses, the cost will not necessarily follow. In the quarter, we also had some cost of course related to the U.S., which is one-off, but we also had some extra cost for IT, which will not be the case every quarter going forward as well.

So the IT cost, they -- how much were they -- they are not included in the one-offs in this quarter. How much were there?

No.

How much did it...

We're talking about a couple of hundred thousand euros in this case.

Okay. And they will disappear in Q3.

Somewhere towards the end of the year.

Okay. Okay. And sorry, the M&A, I understand that M&A -- there could be more cost year-on-year. But sort of if you compare to Q1, Q-on-Q, is there effect of seasonality on the new acquisitions that affect the cost base or

No, not really. I think the increased SG&A cost on the acquisition side is more related to business volume than anything else since we have some commission base in that -- so I think it follows the -- you could say it follows the invoicing side more than anything else.

Yes, yes. But do you think historical EBITA margin levels, is that reachable in second half of this year already if you are converting these higher orders in your new cost and factory structure.

I think we will make sure that we invoice as much as possible. We'll do that as efficiently as possible. And then we will hopefully also see some stronger profitability coming out of this machine. But let's say, predicting whether that's going to be all visible in Q3 or all visible in Q4, I think I leave that to you to guess a little bit -- but it's fair to say that Troax is a high-leverage business with volume and nothing in that equation has fundamentally changed in the last couple of years. So I think it's fair to at least make that assumption.

Sounds exciting.

Then next question would come from Gustav Berneblad. We will mute your mic.

Yes. Good morning, Martin. I thought maybe just to build a bit more on Jonny's questions here also to get a bit more conviction here in the short term and the order conversion and what we have seen in Q2. I mean if we just look at Q2 orders. I mean, are there any orders that are sort of stretching into 2027, would you say?

We have parts of deliveries going for data centers, which are, to their nature, a little bit longer order to delivery or order to cash than the usual bread and butter business. So if we look at -- if we take the core as an example, it's a very stable, steady, pretty short-cycle business. Then when it comes to the warehousing projects usually a little bit larger as well as the data center, that cycle is prolonged. So when we have more of midsized, large warehousing and more of data centers, that cycle will then be stretched out a bit. So some of what we took in as orders now, for example, leading to some of those last deliveries will then fall into beginning of '27.

Okay. That's very clear. And is it possible to say how much is related to data center and also midsized or larger warehouse orders of the order intake you present today?

Yes. I think if we take the data centers, we're closing up on the 10% of the group's total on orders I should say.

And warehouse where that is sort of mid-sized or as you define it?

So the warehousing segment is a mix of large, midsized as well as, you could say, smaller, what I used to call bread and butter. On the midsized orders, we would probably have somewhere between 25% to 35% of that segment is made up by midsized for the time being.

Okay. That's very clear. And then maybe just to move into Americas a bit here. Just to also here get a bit more conviction in the new factory and so forth. I mean are you I mean, as your press release stated you are fully up and running now. And Chicago is completely closed. So we should not expect any dual costs or anything here in Q3 or -- is that correctly?

We should not be expecting any dual cost in Q3 from a move or a transfer point of view. So I think that's a very good milestone then when you start to ramp up a new facility, of course, there -- we always have a plan, but I also know that it's not just turning on a switch and then it goes from nothing to 100% overnight. So of course, there will be a learning curve before we hit the optimal way of working in the U.S. We have some 70, 80 new colleagues that needs to be trained. We have a machinery that needs to be optimized and flows that needs to be optimized. So there will be a gradual the gradual effect of our North American operations will come here during the third and fourth quarter. But I think the big -- the big milestone has now been passed up we've switched the production away from Chicago and close that production.

That's perfect. And just -- sorry, is it -- is there a risk? Do you see a risk of a sequentially lower volumes in Q3 compared to Q2 due to the ramp-up in America specifically?

Yes. I don't think the risk is on the volume side as such because during the transition period, we've also built an outsourcing supply chain. So I think from a servicing and customer and from an invoicing point of view, I think from that point of view, we should be in a better shape than we were in Q4 and also in Q1 for that matter. I think this is -- this will be a question of how much of that efficiency will get to the bottom line eventually. And how fast can we run and ramp up the efficiency in the new plant. And that's difficult for me to have a firm opinion of today when we just got going, so to speak.

That's fair. Just a final one, a very short one, sorry, everyone. -- you comment on some orders having longer lead times in EMEA North here that you took the end of Q1 that is stretching into H2. Is it possible to quantify this just to get some sense of what is coming through extra here in H2?

I could probably get back to you with a more firm number Gustav. But I would say it's -- of the minus 8% we recorded in now in the quarter, I would say the majority of that comes from these orders or pretty much all of it. Then next in line would be Daniel Lindkvist.

Sorry. Now now I got my phone working in. Congratulations on a strong report. Change is drastic, fantastic numbers this time around. I had most of my questions answered, but just quickly, I mean, you entered this quarter with a significant back order backlog, especially in the North American market. Is that still in place, you would say, judging volumes, it should be?

Yes. So in North America, we had troubles in the beginning of the year with our pick-and-pack operations that we moved first. We have gradually started to deliver out of that backlog, but we're not fully there yet. And the main reason for that is, of course, that we have had strong order intake, and we have also had to prioritize a little bit among all of the customers in orders when we still haven't ramped up that capability fully. So there is still some of that backlog that technically needs to be delivered here during the second half of the year.

And also perhaps in with weigh into Q3?

Yes. Yes. Correct.

And then just -- I mean, we tried to gather things up. What have you done in total, if we just look at the headcount, how much has been reduced the last year if we exclude the acquired units approximately?