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

Okay. Hi, everyone, and welcome to the interim report for Troax Group. My name is Martin Nystrom, and I am the President and CEO of the Troax Group. And together here with me, I have our new CFO, Robert Burning, who joined the company on the 1st of October. And together with me, Robert will go through the quarterly results of the third quarter. I'll start by sharing my screen. let's see if it comes here. Great. So here, we have the presentation as well. So we'll do it -- as always, I'll try to summarize the quarter, then we'll walk through the key events, we'll go through the financial numbers, and then we'll end up the call with the Q&A. So without further ado, let's dive into the quarter. If I summarize the third quarter, I think we had a good quarter from a top line point of view. So we had continued strong growth on order intake as well as improved sales. So we almost got to the EUR 100 million mark in the quarter as well. So our order intake grew by 60% in total. Of that, we had our -- we also saw a sales increase of 51% in total, close to EUR 97 million, and we also had a positive book-to-bill also in this quarter. Our acquisition continued to deliver very well. So the recent acquisitions added 65% to the total order intake, while we were more flattish on the organic order intake side. The deliveries and the sales during the quarter grew by 5% year-on-year. Here, we also have our order book consisting of more orders, which are midsized and large, which means that the usual order to sales conversion cycle is a little bit longer. So on the back of our second quarter, we had a growth of 5%. So very strong and even record high numbers, both on order intake as well as sales during the quarter, which is positive. If I then look to demand, demand continued on the pattern from the second quarter and the first half of the year. So we see a scattered picture both across regions as well as the different market segments. Here, I think it's good to see that our warehousing portfolio continued to grow, particularly in Europe, we continue to see good demand. Also a continuation of the second quarter, which followed into the third quarter is that we do see our data center products and the segment growing strongly, mainly so in North America, but also partly in Europe. So segments going -- continuing to grow strongly. At the same time, we do see the automotive sector in Europe as well as in Asia and China, in particular, struggling also in the third quarter. And we also see the construction segment for us remaining at a low level, even though we believe that we have seen the bottom from our end. If I then move over to the profitability side, I think it was good to see a sequential profitability improvement in this quarter. We ended up at an adjusted EBITA margin of 15.6% in the quarter, which was a mixed bag of outcomes. I think the first part is that our gross margin fell to 36.1% from 38.0% last year. Main reasons for this is that we do now have a less favorable sales mix from a gross margin point of view. We also continue to see cost pressure on raw materials and components in Europe. We started to see that in the second quarter, which has now also become reality more in the third quarter. And we continue to see high transportation costs in Europe. So this puts a bit of pressure on our gross margin in the quarter. Our North American volumes grew. They started to grow already in the second quarter, but we are now also seeing additional growth in the third quarter. Here, we are on a journey ramping up our new Tennessee facility from our old Chicago facility. Here, we've done a good job, I think, with delivering more volumes and satisfying our customers, but we're still having a journey to make when it comes to our margin in North America, and I'll come back to that during the call as well. On the SG&A side, we are having a good cost control during the quarter. I think our organic costs are now declining off the back of what investments and initiatives that we've taken in previous quarters and the increase of our sales and admin cost overall stems from both our acquisitions, which we have added, but also our IT investments. The quarter also includes an adjusted EBITA of EUR 2.1 million due to the relocation in North America. We have had more costs than we initially anticipated connected to our ramp-up. On the net debt side, we continue to be on the high side, to be Troax, but we're seeing a sequential decrease. And of course, this is then a consequence of the recent acquisitions. And during the quarter, we have also reevaluated our earn-out liabilities and earn-out setups. And as a consequence, we've also added EUR 5.3 million to our net debt. So overall, a very strong quarter from a top line point of view. Our margin is sequentially improving, but there is more work to be done on the margin. If I then look and start to do a few deep dives as we usually do, start with North America, where we have now completed the relocation from Chicago to Portland. We did that already during the second quarter. And now we're fully operational and running out of our Tennessee facility. I think it's great to know that our capacity -- our facility definitely adds capacity and efficiency to our group. But at the same time, I realize before we are at the same level and in the same position as we are both in APAC as well as in Europe, there is more work to be done until we realize and utilize and leverage that full potential on our investment. It's pleasing to see that our deliveries during the quarter increased. At the same time, we've done that at the cost of our gross margin. So in the quarter, we had roughly 100 bps relating to additional costs for ramp-up and outsourcing to satisfy our customers. And this effect will -- has gradually come down now during the third quarter, and we'll start to see that declining even further in the coming quarters. And our focus has been through the third quarter as well as into the coming quarters to make sure we run this as a fully stable and also fully optimized facility just like the rest inside the Troax Group. Also, after the quarter, we have now launched what we call Beyond Safety, which is our commercial platform and the commercial platform that we have for long-term growth. And this is, I think, super exciting because now we start to bring in all the different ingredients and the broader portfolio under the same umbrella. Of course, this is great if we can, in a consistent and competitive way, explain what our solutions bring to our customers in terms of customer value, bringing their safety up, bringing their productivity up and also bringing their performance up. So I think this is a great way for us and a great tool for us to continue on our sustainable growth journey. And I think one of the things you'd see today out of this is our new logo type and new graphic profile that we're utilizing also during this call. Thirdly, I'd like to show that we are also strengthening the capabilities as well as the leadership team. So Robert, our new CEO, (sic) [ CFO ], is also on the call. So he joined on the 1st of October to strengthen our finance function. We have promoted Maria Pettersson to the responsibility for both sourcing as well as sustainability, fully in line with our strategy. And I'm also very happy to welcome Linus Karlesand as our new Chief of Digitalization as VP IT. And I think these are all key individuals and key contributors on our journey as the Troax Group. So a warm welcome to all of you into the management team. Then I'd flip to the market development in the quarter. And in this picture, we look at the organic order intake. We look at it year-on-year, and we look at it excluding currency effects. And in total, we ended the quarter with a flattish number, so 0 in total. And as usual, we would look at this through the geographical lens as well as through the segment lens. So if we start with Northern Europe, which had a good quarter and also a continuation of the second quarter, we had a growth of 14% all in all, in Northern Europe. Here, we do see the warehousing segment being stronger, and we also see actually a small uptick in the Construction segment as well. The other segment is also improving in Northern Europe, and this is mainly driven by the data center subsegment. So, all in all, a solid and good development in Northern Europe. If I move over to Southern Europe, where we came in at minus 4%, it's a bit of a mixed picture. We continue also here to see the warehousing segment being positive for us, while we see the other segments being more hesitant. And I think here, we -- in the quarter, we have also had an effect of the automotive segment in particular, driving down the total to the minus 4%. If we move over to Americas, where we had a very, very strong first half of the year, we now see the third quarter, the market has slowed down a little bit. So we came in at minus 22%. Also here, the automotive sector contributes to that decline, while we see the other segments being in the quarter, fairly flat or even declining in some subsegments. I think here, we've probably been a little bit, let's say, unlucky in the quarter with the orders. If we look at the warehousing segment, in particular, that is still a segment where we have a lot of activities and a strong activity outlook even though we were flat in this quarter. Last but not least, we have APAC, which fell 34% during the quarter. And here, I'd say all segments are down. Particularly here, we see a decline in the automotive sector, driven by China and Japan. And we also have the similar picture in the process industry, where we have a pretty strong foothold in the market in APAC. So all in all, we came in organically at 0%, but it's, at the same time, a pretty scattered picture. With that, I'll leave over to Robert to walk you through the numbers in a bit more detail. So Robert, please.

Hello? Can you hear me now.

Yes, loud and clear.

Okay. Good. Sorry for that. Yes. So as Martin said, the order intake in the quarter was at a record level, amounting to EUR 99.7 million, a 60% increase. The organic order intake was flat year-over-year and the structural part was 57% and currency was plus 3%. Moving over to sales development. Our sales amounted to EUR 96.9 million, which is a 51% increase. And the organic element was 5% and the structural part was 47%, while we had a negative impact of currency of 1%. Moving over then to profit and profitability. Our EBITA profit rose to EUR 15.1 million in the quarter, which represents an adjusted EBITA margin of 15.6%. As Martin earlier mentioned as well, we saw higher material costs in Europe and higher logistics costs across the whole business. The margin improved in North America, but we're still not at the same level we want to be at. And we will continue to optimize our operations and strengthen our commercial capabilities. We saw higher SG&A costs and mostly coming from acquisitions and IT investments, but our organic underlying costs actually decreased. We also still see significant potential to simplify admin processes and strengthen our sales efforts. If we then look at the operating cash flow, during the quarter, we had an operating cash flow of EUR 9.9 million, which is an improvement to the first 2 quarters of 2026. The improvement was driven by a solid profitability, while on the other hand, a negative effect from changes in working capital, and that's mostly coming from growing our business. But as we increase our invoicing, our cash flow will pick up during the fourth quarter. If we then move on and look at the net debt. Our net debt ratio decreased to 3.1 during the quarter from 3.3 in the second quarter. The main reason for lower net debt ratio was a higher profitability and it would have been even lower if we wouldn't have done the revaluation of the earn-out contingent of EUR 5 million, which at this stage is a non-cash. As such, the revaluation is positive as we see a stronger performance and contribution to the group from recent acquisitions than originally anticipated. And as our order book turns into invoicing and cash, the net debt will decrease in the coming quarters, and we will reach the levels below our target, which is 2.5. If we then do a short financial summary. Our order intake grew by 60% to EUR 99.7 million, which is an all-time high. Our sales grew by 51% to EUR 96.9 million, which also is an all-time high. And our EBITA profit rose to EUR 15.1 million, which represents an adjusted EBITA margin of 15.6%. Our net debt level decreased to 3.1 as a result of higher profitability. And the adjusted earnings per share increased to EUR 0.25 per share. Yes. And with that, I would hand it over back to you, Martin. Sorry now you're on mute, Martin.

Technology isn't with us today. So thanks, Robert. And I think in summary, I think we look back at third quarter with a very strong top line as in order intake and sales, mainly driven by our recent acquisitions. And I think we also look back at the quarter where we had solid good activity and development, mainly in the warehousing and data center segments. We are also happy that our profitability is on the improvement track, although we see that there is more work also going forward here to be done mainly on the gross margin side. And we're also very focused on improving our North American operations. As we've been in the third quarter, that focus will continue in the next coming quarters as well. We have now a broader safety and productivity portfolio, which is very exciting for us when it comes to future growth as well as diving into more segments and subsegments than we have done before. And we've launched our safety platform, which will be our commercial messaging and as well as our commercial platform to support our continued growth going forward. So with that, we will leave the presentation part of our call, and we will move into the Q&A.

Okay. We have Jonny first.

Hello. I just want to start a little bit with the gross margin. I know that you talked about the ramp-up in the North America plant here, which is impacting, I think you said 100 bps in the quarter roughly. But besides that, I think mix is changing as well. So -- I mean data center, fast-growing part of your business, it's exciting. But what is sort of the gross margin impact from that, as I can imagine, data center projects are larger in size? Could you comment something about that?

Yes. No, I think it's -- I think you're right, Jonny here that our data center business runs at a somewhat lower gross margin. At the same time, we're also having a bit of lesser SG&A costs. So bottom line-wise, it's actually quite good business for us. But from a gross margin point of view, it's true that we get a bit of a dilutive effect in the quarter and also from that business segment.

I understand. I understand.

So it's mainly stemming from the data center segment. I'd say the core of the core actually presents pretty good historical margins.

Yes. Okay. Sounds fair. But I mean it's a lot of moving parts in your gross margin right now. And I just try to understand what's sort of the new normal gross margin for you will be. So I mean, historically, you're performing from sort of average 38% or 39%. As you ramp this U.S. plant here, is it fair to assume we could have similar structural gross margin levels despite the data center has some dilutive effect? Or would it likely be higher or lower, if you understand my question?

Yes. I think our aim would be to improve our North American operations, which could be helpful for the overall gross margin. And if we then look at a little bit the relative size to these different moving parts, I think it's fair to assume that we should get back in line with our informal target of 38% to 40% when that is done, even though the data center segment grows as a share.

Yes. That's fair. Then on the price a little bit. I suppose that you raised prices to try to compensate for the higher raw material cost. Is that right? And secondly, what do you estimate the price impact was on average in your sales? And is it bigger impact on orders?

Yes. So during the third quarter, it's true that we are -- we have done some pricing adjustments already in the third quarter. We will continue to do pricing adjustments now here in the fourth quarter. I don't think the pricing effect during the third quarter on neither order intake or sales was material. So that component will still come during the coming quarters, which is material. Obviously, we have done adjustments on the transportation part, which is, you could say, more of a pass-through to some customers. So there is, of course, a bit of an effect on the transportation part, but it's not the lion's share of the total.

Okay. So in the organic order growth, should we assume there is some pricing, but not so much, maybe 1% or 2% or...

Yes. Probably in that neighborhood.

Okay. That's good. Then I just have one more before I get back in line. I mean, given your mix now, change in mix in order intake, what is sort of the new average lead time in conversion we should expect on group level? Because historically it have been sort of 3 months, I guess. And now -- I mean, how should we view it now? Is it closer to 6 months now given the size of projects? Or do you say something how we should think there?

Yes. No, I think it varies between the different segments, and it also depends on the size of the project. So it is true that the conversion rate for the larger data center parts and the larger logistics part is longer than the bread-and-butter part. So I'd say that we would -- if we have a pattern in the panel business that would be roughly the quarter you mentioned, Jonny, the mix of orders here will likely add half a quarter to a quarter of order to conversion cycle, of course, depending on the exact project, but give or take. So if we looked at within the next quarter as the norm before, we're now moving from 1 quarter to 1.5 to 2 quarters given the current mix. Thank you Jonny. We go with [ Anna Lagerlöf ].

First off, could you maybe give us some comments on the development between Vichnet and the safety barrier units, just to understand sort of the growth in order intake slightly more?

Yes. I think if we look at the total group, I think all 3 acquisitions that we did, so both barriers as well as Vich, all of them contribute to good growth. If we then look at Vich specifically, they are, of course, contributing very strongly to the total number. But I'd say all 3 contribute to growth and the strongest contributor of this growth comes then from Vich.

Okay. Perfect. And because if we look on acquisition contribution in Q3 versus the first quarter, it's quite substantially higher. Just a question on the safety barrier acquisition, could you say that we're seeing sort of a sequential step-up from that being driven by you selling those products more and more on your home sales channels? And in that case, where are you on that journey?

I think we're on a very good journey also with the -- also, I should say, with the barriers. I think here, when it comes to -- if we look at the Vich part that has been very, very strong here now in the last couple of quarters. I think that's a project business that is a little more, you could say, digital in a sense that it's more 1 or 0 whether we're successful. I think the barriers is something we really want to push into our -- all of the thousands and thousands of customers we have across the globe, which also means a bit more integration to our sales organizations as well as to our sales tools. So I think the growth on the barrier side will be more of a gradual growth rather than a very rapid growth. It will still be a good solid growth, but it will not come with the same growth rate numbers sequentially quarter-on-quarter. But we're making good progress on this one. And I'm pretty sure that we will also see more and more of our share of wallet with our larger key accounts being split between the panel business and the barrier business. And I think we have started to see that now both in the second quarter as well as in the third quarter. And I think it's looking promising also for the coming quarters.

Okay. Perfect. Very clear. My final one is on the outlook in Americas, just coming back to your comment on being a bit unlucky in the quarter. Is that mostly related to the warehousing segment? Or should we view this as a sort of lumpiness between quarters for the full region or just mainly within the warehousing segment?

No, it's a comment for the warehousing segment, and it's just, as you say, it's around the lumpiness on how the orders are placed in which quarter and so forth. I think the overall activity and the pipeline in North America looks -- continues to look very, very solid. Thank you Anna. Victor Forss from SB1.

Thank you for taking my questions. Most of them have been answered already. But -- so following up on Anna's question on acquired units. Just wondering, would you say that Q3 is sort of a fair run-rate going forward for the acquired units into Q4 and maybe for next year as well? And then any commentary on roughly what margin acquired units contributed with in this quarter, please?