VBG Group AB (publ) (VBGB) Earnings Call Transcript & Summary

Welcome to the VBG Group Q4 2024 Report. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Anders Erkén; and CFO, Fredrik Jigneus. Please go ahead.

Very welcome to the presentation of the Q4 report for the VBG Group. Just a short recap of our organization, our decentralized organization where we run the business in 3 different divisions from left to right, truck and trailer equipment, mainly in the truck and trailer business in Europe; Mobile Thermal Solutions, active in the heating, ventilation and air conditioning business for small volumes in off-road and bus business. Last but not least, our division, Ringfeder Power Transmission, active in many industrial segments. So before we jump into the quarter 4, just a short recap of the full year 2024. We saw a strong first half of the year, but there has been a headwind in the business cycle in the second half, mainly in North America and Europe. Despite this, gross margins have strengthened, and we have achieved the second-best revenue and operating profit on an annual basis. So as you see, we reached SEK 5.579 billion in revenues with an EBITDA level of SEK 843 million. The cash flow from operating activities is breaking a record with an outcome of almost SEK 800 million. In addition, the earnings per share increased with 3% to the record level of SEK 23.52, which means that the Board of Directors proposes an increase of dividend to SEK 7.25, which is 30.8% of profit after tax. We have a strong balance sheet that creates the conditions for continued profitable growth, both organically and structurally. So Q4. Demand continued on the same level as Q3 2024 with a revenue reduction of 12% compared to quarter 4 2023. There are basically 3 segments that contribute to 90% of this reduction. Number one, the compact segment within Mobile Thermal Solutions off-road business in North America; number 2, a bus customer in the U.S. phasing out production in the U.S.; and number 3, which we have commented many quarters now, the semitrailer business in Europe. The rest of sales is basically in line with quarter 4 2023. It's worth mentioning that sales increased by 17% outside Europe and North America, which gives us a more stable geographic footprint. It's also positive to see that the order intake grows in mid-single percentages compared to quarter 4 2023, which will have a positive effect during quarter 2. Despite weaker demand during the quarter, the gross margins continued to strengthen, largely thanks to the efficient cost management and positive product mix changes. The group has reached an EBITA level margin of 15.2%, which is in line with the group objectives. We have, during the quarter, sold off our office building and land in Denmark with a positive net effect of SEK 9.8 million. This is part of the green transition in Denmark, where the local community will build a district heating plant and reduce itself from natural gas consumption. What pleases me the most in addition to the growth in the order intake is that we had a record-breaking cash flow from operating activities of SEK 294 million during the quarter. It really shows that we have the processes in place and show resilience. In January, we acquired the Brazilian company Italytec, which is the market-leading domestic supplier of heating, ventilation, and air conditioning systems for off-road vehicles. It's a complementary acquisition for the Mobile Thermal Solutions division. With the acquisition, we strengthen our position in South America and gain a broader customer base, and enter new segments such as agriculture and construction. We can go to the next slide. And this is just a summary of all the details and you can see on the graphs the development as well.

So despite the lower sales volumes, we strengthened our EBITA margin from 15% to 15.2%. In the quarter, we had some one-off sale of building in Denmark, but also costs relating to the acquisition of Italytec. If we adjust for these one-offs, the adjusted EBITDA margin amounts to 14.7% in the quarter. We will go through the fourth quarter with some touchdowns on each division. Truck and trailer equipment, sales for the division decreased by 11% compared to the same quarter last year. As announced in the previous quarters, it's the European semitrailer market that is declining drastically and causing the majority of the division's sales decline. A capital gain of SEK 9.8 million pertaining to the sale of a warehouse and distribution property in Denmark has a positive impact on truck and trailer equipment's EBITDA result for the fourth quarter. If you go to Mobile Thermal Solutions, sales decreased by 20% in the quarter, and it's mainly due to 2 reasons, like Anders said, the decline in the Compact segment, but also Nova phasing out its operations in the U.S. Customers in the Compact segment have adjusted their inventory levels in the distribution chain by 15% during the third and fourth quarter, which has affected the factories with more than double that. Now at the end of the quarter, we can see that the order intake is picking up and increasing, which will have a positive impact in the second quarter and beyond. Ringfeder Power Transmission, the division sales strengthened during the quarter by 13%. Adjusted for the currency and acquired sales, it's an increase of almost 8%. The fourth quarter is the single best in terms of sales and operating profit for Ringfeder Power Transmission. The quarter had a favorable product mix that contributed to the strong EBITDA margin. With this slide, we just point out the geographic spread of our revenues. And we are, like Anders says, proud that we are picking up growth in India and Brazil. Despite the lower volumes during the fourth quarter, we are glad to see that our activities has been successful, which shows in a slightly increased gross margin and a stable high cash flow. For the full year 2024, we strengthened gross margins, and we have had a very good cash flow. The result is, of course, the main reason for that, but also good control and monitoring of working capital tied up. After the fourth quarter, we have a net cash position if we adjust for pension liabilities and leasing commitments of SEK 88 million. During the fourth quarter, we acquired land in Toronto for SEK 55 million. And despite that, VBG Group has still a strong financial position that can be used to develop the group going forward, like, for example, the acquisition of the HVAC manufacturer, Italytec in Brazil. The ROC has decreased from slightly above 40% down to 38.1% and the acquisition of the land in Toronto is the main reason for that.

Thank you, Fredrik. As many other companies, we work intensively now with our sustainability reporting. We are prepared, and we will, during the year, also announce a Scope 3 target, but all in all, our preparations for the CSRD reporting is in place, and we have started to measure a lot of data points connected to that. One highlight is that we can now say that we have about 153,000 tonnes of CO2 emissions that we will work with. And for our employees, we reduced the number of accidents by 20%. So future focus. Of course, there are continued concerns that global factors such as geopolitical uncertainty and generally weakened demand may affect developments. I think we all follow the news when it comes to tariffs for imports to the U.S. First of all, we are well-positioned with 3 production plants in the U.S. And secondly, we sell Works and FB free on board from Canada to the U.S. in our largest floats to the U.S. And the most important thing, we are committed to pass on the increased cost like we did in 2018 when the steel and aluminum tariffs were imposed. As a conclusion, though, I expect continued market volatility and geopolitical unrest. However, the growing order intake makes us somewhat optimistic. And our continued strong cash flow and balance sheet should set a solid foundation for our ongoing commitment to sustainable profitable growth, both organically and structurally. We will continue with complementary acquisitions. We have mentioned before, we want to do one up to 3 acquisitions per year, and we will continue with that. We also put a lot of focus and resources on organic growth. In quarter 4, we grew the business by 17% outside Europe and North America, and we will continue to find new geographic markets. We continuously extend our customer base, mainly due to our extended solution offering. And the last thing, we are committed to sustainable profitability. That is our DNA. So by that, we are open for questions.

[Operator Instructions] The next question comes from Gustav Berneblad from Nordea.

Maybe just starting off here with Truck and Trailer Equipment. I mean, organic decline of some 11% year-over-year. You're right that it's driven by the trailer market and the couple of businesses sort of holding up relatively well. But I mean, 11% is still quite a lot. But despite this, the margin is closer to 20%. So I was just wondering, is this sort of all driven by the project mix? Or are you actually seeing the cost savings here coming through?

Hello Gustav, I think the main reason behind this is the product mix. But of course, we have done proactive and active activities in order to lower our cost base. But the product mix has the biggest impact in EBITDA margin.

Would you say that we should expect sort of a gradual pickup in the cost savings here going forward or?

I would say continuously, we will see cost savings. But I would say that it will flatten out during the year, but we expect the big cost savings on the material cost side this year.

And then moving on to the trailer market. Are you seeing any signs of improvement there at all? Or is it basically the same as we've seen previously?

It's basically the same, but the delta compared to previous quarters is gradually shrinking. And I lived in the dream that this is the bottom. Yes, it's the bottom at the moment, but it will take probably in the end of Q2 before it turns. And my firm belief is that it will not be a catch-up effect. It will be a gradual increase from low numbers.

And then moving on to Mobile Thermal Solutions here. I was just wondering, I mean, you comment on seeing a demand tailwind from the Inflation Reduction Act here. And I mean, obviously, we are seeing a pause here to that. So I was just wondering if you already now are seeing any shifts in demand, excluding the comment you make about Nova and the off-road segment.

Basically, we are, at the moment, increasing our customer base, mainly in North America, and it's getting wider. And as I commented in when -- or Fredrik commented, when it comes to Mobile Thermal Solutions, it's basically 2 segments that are declining. It's number one, the compact segment on the off-road side, and it's one customer, Nova, moving out of the U.S. at the moment. The other business is stable -- in a stable position, I would say.

And then I was just wondering, I mean, you have increased the prices quite a lot these last couple of years within MTS, I believe. And I mean, how willing would you say are your customers for you to increase prices even further if we see tariffs come through? Would you say that you will sort of see a pressure on profitability? Or are you just seeing that you can pass on all of it?

As I mentioned, we go back to 2018 when the President of the U.S. imposed tariffs on steel and aluminum at that time, and we managed to pass on all of that. And we are prepared even on the bill of material level, whatever it takes, we will put a separate line on the invoice to pass on the increase in tariffs. So we are committed to do that, as I said. But as I mentioned, just quote to understand, our main flow from Canada into the U.S., whatever will happen on March 12, that is that we sell Ex Works and free on board from our factory. So it's much up to the customer to take care of the tariffs. So you understand.

And just a final question for me. Just regarding Ringfeder Power Transmissions, I mean, obviously, here, a very strong growth organically by 8% here. Is there anything -- for starters, what is driving this? And do you expect this to continue also going forward? Or is this sort of temporary for Q4?

As we have mentioned many times, it's a lot of project-based initiatives within Ringfeder Power Transmission. But we see a continued order intake increase, and we have good hopes to continue on this level for 2025. The interesting thing is, yes, we have a lot of projects. As we have mentioned many times, we are now introducing our Rati products from India in our global sales channels, and we already see effects of that now. And of course, the product mix has a big impact, and we can see that in our customer segments that it looks really positive.

The next question comes from Jonny Jin from SB.

I just want to start a little bit on the gross margin here for the group. It looks to be very, very strong here. I was wondering, could you break this down a little bit what drives this? Is it mainly mix? Or are there other reasons as well like efficiency gains also starting to shine through as well? That's my first question.

Yes, of course, there is a positive product mix as we have communicated, but we have done really efficiency gains during quarter 3 and quarter 4 continue with them. But the big boost has been during quarter 4 when we have reduced head count and a very good product mix. And we have had a good flow in our production units with no hiccups, so to say. So that contributes to the excellent gross margins.

And then just to follow up on the comment around the order intake development there. Would you say that you saw a clear pickup or a shift here during the quarter where you saw a stronger end to the quarter? Or was it more stable? And would you say that this momentum, so to speak, has continued here in the beginning of the year?

Yes, it's a relevant question. We saw a pickup in the end of the quarter 4, and we can see that it's a good trend in the beginning of the year as well. And that will have impact, we believe, in quarter 2.

And maybe I missed this during the call, but would you say that this order pickup, was driven by all 3 segments? Or was there any particular segment that drove this pickup?

It's the pickup is in all divisions, but mainly within Mobile Thermal Solutions and Ringfeder Power Transmission.

So I mean, following up on the Mobile Thermal Solutions side and the inventory situation there, how far would you say that the inventory destocking has come down? Is it fair to assume that this will be -- the destocking would be finished during the first half of the year? Or how would we -- what is fair to expect here?

I think the destocking in our customers' distribution channels, it has been a plan now for more than 6 months. And we see that it comes to an end during quarter 1. We already see that about 15% has been destocked in the distribution channel. But it has had a bigger impact than on the factories of our customers with, as Fredrik mentioned, basically the double decline of the demand.

And then just shifting one final one from my side, going to -- you said entering or you're investigating new markets as well and the M&A side with the strong balance sheet, et cetera. Could you shed some comments how the M&A pipeline is and what particular markets would you be interested in that case?

First of all, we look for complementary acquisitions for all 3 divisions. And it's clear that we focus on our growth in all continents. It's the best fit for us that is the most important thing. And when it comes to the pipeline, we see growth in the pipeline when it comes to potential acquisition candidates in our pipeline.

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

I think there has been some questions related to our acquisition in Brazil. This is a complementary acquisition, and we have been in contact with this company for many, many years. We see this as a good step for us to step into the off-road sector in Brazil. And of course, we have made an evaluation and we have tried to set up a greenfield, but we see that this is a perfect fit for us with the strong position that this company, Teletech has on the market. So by that, thank you very much for your attention, and we stop the conference call right now. Thank you very much.

Thank you.