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

Welcome to the VBG Group Q1 Report 2025 presentation. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Anders Erken; and CFO, Fredrik Jigneus. Please go ahead.

Very, very welcome to the VBG Group presentation on the Q1 report 2025. Just a short recap of our decentralized divisional organization. From left to right, we have division Truck & Trailer Equipment, mainly active in the, as you know, the Truck & Trailer segment and the European market. We have in the middle, our largest division, Mobile Thermal Solutions, active in the HVAC applications for mobile applications and with the main market in North America. Last but not least, our third division, Ringfeder Power Transmission acting in mechanical power transmission, motion control in several industrial applications. If we step into the quarter 1 report and I will give you a brief summary how we see highlights of the quarter 1 report. As we look back at the first quarter of 2025, we have experienced some headwinds in the business cycle, most notably in North America and Europe. The escalating trade war has introduced a layer of uncertainty and unpredictability to the market. Overall, as you can see, revenue declined by 12% compared to the first quarter of 2024, which is a tough comp since it was all-time high, with a reduction concentrated into 3 key segments: first, the compact segment within Mobile Thermal Solutions off-road business in North America; secondly, a major bus customer that has phased out production in the U.S., in the transit bus segment; and third, the semi-trailer business in Europe. These 3 areas alone accounted for more than 80% of the total decline. Outside of these, the rest of the sales have remained largely in line with quarter 1 last year. However, there is a bright spot worth highlighting that sales outside Europe and North America increased by 25%. This growth not only offset some of the decline, but also gives us a more balanced and stable geographic footprint. If we look at the quarter, month-to-month, we can say that the start of the quarter was challenging primarily due to supply chain issues affecting some of the bus customers and the postponement of certain project orders within Ringfeder Power Transmission. However, I'm pleased to report that the sales picked up gradually as the quarter progressed. Despite the weaker demand, we have managed to maintain our gross margin and this is really a strong effort by the organization, thanks to strong cost control and favorable changes in our product mix. The strengthening of the Swedish krona at the end of the quarter had a negative impact of SEK 8 million on our results. Nevertheless, the group delivered a solid EBITA margin of 13.1%. And if we include -- exclude the SEK 8 million in currency differences, it would have been SEK 13.7 million. We also made 2 strategic acquisitions this year that support our long-term growth. In January, we acquired Italytec the leading domestic supplier of HVAC systems for off-road vehicles in Brazil. This acquisition, a perfect complement to our Mobile Thermal Solutions division, strengthen our position in South America, expands our customer base and opens up new segments, including in agriculture and construction. In April, we further broadened our offering with the acquisition of Ledson Lights AB, a company specializing in modern sustainable vehicle lighting for both B2B and B2C markets. This move strengthens our presence in the accessories and aftermarket business. In summary, while the quarter began with challenges, we have taken meaningful steps to stabilize our position, diversify our footprint and invest in future growth. So Fredrik, could you give us the details, please?

Yes. Like Anders said, despite the headwind in the business cycles, lower sales volume, especially in North America, we can see a resistance in our gross margin due to our ability to adopt our production capacity. Our EBITA margin declined from 16.9%, which is the best quarter ever in VBG Group history in the first quarter of 2024, down to 13.1% in the first quarter 2025. In the end of the quarter, SEK started to strengthen and have an impact on the group, especially in Truck & Trailer Equipment but also on financial items where we reevaluate our loans, et cetera, et cetera. We'll now go through the first quarter with some touchdowns on each division. Truck & Trailer Equipment, to start with, sales for the division decreased by 1% compared to the same quarter last year. As announced in previous quarters, it's the European semi-trailer market that has declined and causing the division's sales decline. After 8 consecutive quarters of decline, we now can see that it's bottomed out and the sales trend is positive at the end of the quarter. Strong sales in Australia and New Zealand, in combination with the slow European market, gives a favorable product mix and the division delivers a strong margin for the quarter. The FX effect from the strengthening of the SEK, especially towards euro at the end of the quarter, affects the profit and loss with SEK 6.4 million negatively compared to the first quarter last year. This is relating to revaluation of the balance sheet items like inventory and accounts receivables. Moving to Mobile Thermal Solutions. Sales decreased by 18% in the quarter, and this is mainly due to 2 reasons: the decline in the compact segment and a slow start for the HVAC system to the transit bus market. Customers in the compact segment still experienced a slow market and the bus producers in the U.S. had supply chain issues, mainly related to lack of seats in the beginning of the quarter which decreased the sales for us in the beginning of the quarter. Sales picked up in the end of the quarter and will continue to pick up during quarter 2. Moving to Ringfeder Power Transmission. The division sales decreased during the quarter by 11%, adjusted for FX and acquired sales of 11% -- 10%. First quarter started not so favorable way where some project orders were postponed mainly for the German and European market. The quarter had a not favorable product mix contributed to a weaker EBITA margin compared to the first quarter in 2024. We can see an increased order book compared to the first quarter '24, which will have a positive impact on sales at the end of the second quarter and beyond. Given the market development in North America for our products and the proportion of North American sales has decreased over the 3 last quarter and now amounts to 50% of total sales. Sales outside Europe and North America increased by 25%. The acquisition of Italytec in Brazil is a large portion of this growth. This growth not only offset some of the decline, but also gives us a more balanced and stable geographical footprint. Note that we have an aftermarket business of approximately 23% of the group sales on average. Despite the lower volumes in the first quarter, we are glad to see that our activities to reduce capacity in production has been successful, which shows in our resistance in gross margins. For the first quarter of 2025, the cash flow came in lower than the comparable quarter last year. The result is the mainly reason for that, but also higher working capital tied up and especially in accounts receivables due to the pickup of sales in the end of the quarter. After the first quarter, we have a net debt position if we adjust for pension liabilities and leasing commitments of SEK 163 million. During the first quarter, we acquired Italytec. VBG Group has still a strong financial position that can be used to develop the group going forward. And like Anders said, in the beginning of the second quarter, we acquired Ledson Lights and strengthened our position of safety on road products. Our KPI ROOC has decreased from a level of almost 40% in first quarter '24 down to 34.1%. The acquisition of the land in Toronto in October '24 is the larger explanation for this decrease together with somewhat lower EBITDA compared to 2024. This KPI is not a pro forma, which means that Italytec just contributes with 2 out of 12 months in the rolling 12 months EBITDA. Over to you, Anders.

Thank you, Fredrik. If we look at our future focus, we can say, as we navigate through the second quarter of 2025, global developments continued to post challenges. Geopolitical uncertainty and the trade wars, particularly linked to the ongoing U.S. tariffs, remain a top concern for us. These factors are shaping the market landscape and influences our strategic response. It's clear, like many other companies, that the topic of U.S. tariffs have been front and center this quarter, especially given that over 40% of our sales are generated in the United States. Fortunately, we are well positioned with 3 production facilities located in the U.S., which gives us a solid foundation to manage these headwinds. When it comes to impact, our off-road product segment will see minimal tariff impact as these air-conditioning systems are USMCA qualified. And you probably remember the old NAFTA agreement and this is the new one, USMCA, that will -- are in practice until 1st of July 2026. To counter these effects of increased cost in steel and aluminum, we will implement a modest price increase in the low single-digit range starting May 1. The bus segment in the U.S. will have a more -- a larger impact mainly due to import of some Chinese components. To mitigate this, we will introduce price increases in the mid-single-digit range, also effective May 1. And the organization has really taken good initiatives around this. We have started to write letters already in March to our customers and this has gone out. The majority of the customers will have a single line on the invoice. Some customers will have it included in the list price and there are one customer who wants a monthly invoice. So everything is prepared for the 1st of May price increase. Overall, while tariffs remain a challenge, the net impact on our operations will be marginal as you see all these consequences. Looking ahead, I do anticipate continued market volatility and geopolitical tension. However, we remain cautiously optimistic. Our stable order book going forward, coupled with our strong cash flow and solid balance sheet provides a robust platform for long-term sustainable and profitable growth. We will maintain our dual approach to growth. On one hand, we are committed to complementary acquisitions, strategically expanding our reach and capabilities. And as we have announced in previous quarters, we aim to make 1 to 3 acquisitions per year. And as you have seen, we have done 2, but we continue our search in this area. On the other hand, we are investing in organic growth, which remains a key priority. A clear example of this is our performance in the first quarter, where we achieved, as Fredrik said, 25% growth outside Europe and North America. This was, of course, largely driven by our broadened solution offer and the acquisition of Italytec in Brazil, which continues to attract new customers and open new market segments. In closing, as a summary, our financial strength, customer-focused innovation and strategic flexibility ensure we are well prepared for what lies ahead. Sustainable profitability is just not a goal, it's really embedded in our DNA. By that, we end the presentation, and we are open for question and answers.

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

It's Gustav here from Nordea. If we start off in Truck & Trailer and more specifically the latter there, you comment on seeing the semi-trailer market, some signs of demand having bottomed out. You've talked about in a while here, but now actually picking up slightly. Can you give more flavor on that?

No. I mean, thank you, Gustav, for the question. But as we see, we have had 8 consecutive quarters of decline. And it's -- we can see signs now in the end of the quarter, beginning of the quarter 2 that it's picking up, but of course, from low volumes. As we have indicated before, this will not be a quick ramp-up. I more see it as a gradual increase over time. But it's, of course, connected also to what Volvo is indicating with its increase in production capacity that tractors and semi-trailers will continuously increase in Europe over the coming quarters. And I think Volvo is the best business intelligence that we have and that they foresee and they stand with a forecast of improvement over the coming quarters. And we can see that gradually by the order book and by the sales.

Yes. Okay. That's very clear. And then when it comes to the sort of compact off-road segment and the weakness you are seeing there, is it still related to sort of the inventories in the distribution chains? Or has something else happened why you sort of continue to see the weaker demand?

Our conclusion is that the slow inventory cuts that have been done in the distribution chain has now sort of finalized. And it's more that it takes some time for demand to pick up. That is our view of it that the inventory reduction in the chains have finalized.

Yes. Okay. Perfect. And on MTS here, are you seeing any signs of prebuying from customers, would you say, in the quarter?

No, we can't see that. And as Fredrik mentioned, we had a really tough start of the quarter basically on supply chain issues by some customers related to seats. And we have a really strong order book going forward in this area. But again, I think it's -- I repeat myself and as many have done, I mean, it's the 2 words, uncertainty and unpredictability when it comes to the U.S. market at the moment. But with our visibility in the next coming months, we see a good and stable order book going forward.

Yes. Okay, clear. And then just continuing on the price hikes you are making now. What are you hearing or what's the general response from customers when you now have announced the price hikes?

I mean, it's, I wouldn't say bad expression mainly, but it's flying under the radar. All customers in the U.S. are well aware of what's going on and the impact of tariffs. And we have been calculated on product level, and we are also fairly transparent with our customers. So at the moment, it's -- the response is understanding that is -- and as we can see on the off-road side, I think it's very marginal price increases that we do. And on top of that, we are selling from our Toronto facility free on board or ex works delivery terms. So it will have a marginal impact. The larger impact is on the bus side, and then we are talking about mid-single-digit price increases. But of course, looking forward, I mean, we are a part of this and it's hard to say what the indirect effect will be on the demand side. It's clear from our perspective that it will drive -- it's not just us. It's -- I think, everyone will try to offset the tariffs with price increase. And what will happen with the customer demand, that is something that we have -- it's hard to explain. And as I used the word unpredictability, I think, of course, we have the 10% tariffs now, what will happen after July 9 when this is done, it's hard to say.

Makes sense, makes sense. And then just, sorry, the last question also here on Ringfeder Power Transmissions. You comment on a slow start here, but the increased orders during the quarter. And can you give any more comments on that? And also the weaker mix, is that something we should extrapolate also here in the short term or...

No, no, no. As -- if you follow Ringfeder Power Transmission in -- over some years, it's ups and downs related to project orders and so on and also product mix. And if you go back to quarter 4, it was the strongest quarter ever in this division. And now we had a really slow start, but order intake is strong and it's a lot of project orders in the pipe. So it will be up and down for Ringfeder Power Transmission, but we see it positively.

Okay. Then we have some written questions.

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

Now we have some written questions. To start with, are you aiming for more acquisitions during 2025? I know that already 1.5 year ago, you announced that you struggled with organic growth and that you need acquisition-driven growth. Like Anders said, we have a goal to make 1 to 3 acquisitions a year. We need to add around SEK 500 million, SEK 600 million to the group each year, and this is what we work intensively with all the time. To start with this first quarter, we have made 2 acquisitions in Italytec and Ledson. And we are focusing on the growth target for VBG Group. Question number two, are there plans to diversify into markets other than Europe and North America? Yes, we have a target for us to grow outside these markets, which means, for us, in Brazil, in India and so on. And relating to that, we made an acquisition in 2023, where we purchased Rathi Transpower in India. And now we also made an acquisition in Brazil with Italytec. So we have focusing on outside Europe and North America. And the last -- and in the quarter, we grew by 25% outside North America and Europe. The last question, are you aiming for more -- which are the main initiative to increase the after-sale position? Is there a long-term percentage compared to new sales?

I think this is a strategic really important question for us, and we are working intensively with the aftermarket or after-sales position both when it comes to product development, but also it's highlighted in our acquisition funnel as well. I have hard to explain our target, but at least it should be somewhere between 25% and 30% over time. By that, we have no further questions, and we thank you for the participation, and we end the conference call now. Thank you very much.

Thank you.