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

Welcome to the VBG Group Q3 Report 2025 presentation. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Anders Erkén; and CFO, Fredrik Jigneus. Please go ahead.

Welcome to the quarter 3 presentation of VBG Group. I will try to give you a short summary on quarter 3, and Fredrik will later on give you all the details about the numbers, and I will come back with a few words after his presentation. So overall, revenue continued to grow, and we have 4 consecutive quarters with growth despite currency rate headwinds. Revenue increased by 7.5% compared to the third quarter of 2024 and adjusted for currency and acquired volumes, sales increased with 6.3%. And as many exporting companies, of course, we had a negative impact of the currency rate differences of approximately 7.2%. What's important here that is all divisions showed growth within all 3 geographic areas, like North America, Europe and rest of the world. Interesting is that the most important segment within Mobile Thermal Solutions, what we call the side-by-side segment, increased by 30% in local currency and the school bus segment with 13%. On top of that, the Defense segment within Truck & Trailer Equipment increased with 35% compared to third quarter of last year. We managed to maintain our gross margin and the group delivered a solid EBITA margin of 12.5%. The operating result should have been better, and it was burdened by SEK 11 million by warranty cost of onetime character and ramp-up effects within division Mobile Thermal Solutions. Operational cash flow reached SEK 136 million, which creates a good platform for future growth. And I think one of the most important thing in the quarter that is looking forward, our order intake increased by 10% in the quarter compared to quarter 3 2024, where all 3 divisions contributed positively. During the quarter, a new sustainability target was decided, which means that we will reduce CO2 emissions within Scope 3 with 62% until 2040 with 2024 as a base year. And as we have communicated already in the quarter 2 call, on the 1st of July, we acquired the German company, Malmedie, one of the worldwide leading manufacturers of specialized mechanical coupling technology for niche industrial segments and applications and especially in port, crane and steel mill segments. That was a short summary. And now Fredrik will give you all the details. Please, Fredrik.

Thank you, Anders. Coming back, the third quarter sales increased by 7.5%. And adjusted for currency and acquired sales, the organic growth rate was 6.3% in the quarter. FX headwind is about 7% still for the group due to the strengthening of the SEK. EBITA amounted to SEK 171 million in the quarter and in line with last year. The EBITA margin declined from 13.5% in the third quarter of '24 to 12.5% in the third quarter of '25. During the third quarter, we received retroactive pandemic support in the U.S. of total SEK 2.6 million that affected EBITA positively. And at the same time, we made reservation for advisory costs for SEK 2.8 million relating to the Malmedie acquisition. The operating result or the EBITA should have been better, as Anders said, as it was burdened by SEK 11 million by warranty costs of onetime character and ramp-up effects in division MTS. Operating cash flow amounted to SEK 136 million in the third quarter compared to SEK 153 million in the third quarter of '24. Higher working capital tied up, especially in accounts receivables is the main reason for that, but also lower underlying result. Earnings per share amounted to SEK 3.87 compared to SEK 4.49 last year. We'll now go through third quarter with some touchdown on each divisions. Trucking -- we start with Truck & Trailer Equipment. Sales for the quarter increased by 8.6% compared to the previous year and amounted to SEK 370 million compared to SEK 341 million. Adjusted for FX and acquired sales volumes, organic growth amounted to 4%. Demand for coupling products has continued to be high. Defense segment has grown by 35% in the quarter, and the market for trailer components in Europe moved sideways on a low level during the third quarter. EBITA for Truck & Trailer Equipment increased in the third quarter compared to the previous year to SEK 66 million compared to SEK 52 million in the previous year with an EBITA margin of 17.9%. The result in the quarter was positively affected by SEK 2.6 million relating to retroactive COVID support in the U.S. Mobile Thermal Solutions, sales for the third quarter increased by 1.7% compared to previous year and amounted to SEK 718 million, with Italytec contributing with a larger part of the increase. Adjusted for FX and acquired volumes, organic growth increased by 5.8% in the quarter. EBITA for Mobile Thermal Solutions amounted to SEK 76 million, and the EBITA margin decreased to 10.6% from 13.6% in 2024. The result in the quarter was negatively affected by SEK 11 million relating to warranty cost of a onetime character and ramp-up effects in North America. Ringfeder Power Transmission, sales in the quarter increased by 23.7% compared to the previous year and amounted to SEK 280 million. Newly acquired Malmedie contributes according to plan. Adjusted for FX, organic growth was 11.4%. EBITA for Ringfeder Power Transmission increased to SEK 36 million, and the EBITA margin amounted to 12.7%. Ringfeder Power Transmission, excluding Malmedie, is primarily affected by product mix variation between quarters. During the third quarter, cost in connection with the acquisition of Malmedie affected the P&L with SEK 2.8 million. The acquisition was completed the 1st of July in 2025 and has positively effect on both sales and operating margin. Given the market development in North America for our products, the proportion of North American sales has decreased over the last 4 quarters but has now started to stabilize and increase and amount to 52%. Sales outside Europe and North America increased by 21% in the quarter. The acquisition of Italytec in Brazil is the large portion of this growth. For the first 9 months of 2025, the cash flow became -- came in lower than comparable last year. The result is the main reason for that, but also higher working capital tied up, especially in accounts receivables. After the third quarter, we have a net debt position if we adjust for pension liabilities and leasing commitments of SEK 591 million. During the first 9 months, we have acquired Italytec, Ledson and Malmedie, which explains most of the changing cash position. VBG Group has still a strong financial position that can be used to develop the group going forward. ROOC amounts to 30.1%. The decrease in the last quarters are relating to the acquisition in the land in Toronto and the 3 acquisitions, together with somehow somewhat lower EBITA compared to '24. This KPI is not a pro forma, which means that Italytec, Ledson and Malmedie contributes only with 8, 6 and 3 out of 12 months in the rolling 12 months EBITA. Thank you, and over to you, Anders.

Thank you, Fredrik. Just to finalize this, looking ahead, I do anticipate continued market volatility and geopolitical tension, but we have an organization that is agile and responsive to changing conditions. Overall, while tariffs remain a challenge, their net impact on our operation is marginal. The organization has made a fantastic achievement compensating for cost increases due to tariffs with price adjustments, and we will continue to do so. Unfortunately, the situation continues to be unpredictable. And as many people say, it ain't over until the fat lady sings. As a good example of the unpredictability that was on the 18th of August when another 407 HS codes were added to the steel and aluminum tariffs. That is, for us, an administrative burden to really push that forward in the chain. And as you all know, the U.S. administration announced an additional 100% tariff on Chinese goods from 1st of November. Let's see what will happen in the end of the week, but this is what we work with every day. On the other hand, we are committed to capitalizing the strong order book going forward. As I mentioned, order intake increased by 10% during the quarter. And as mentioned in the quarter 2 call, the 3 acquisitions made in the first 6 months will contribute with another SEK 100 million of revenues in quarter 4 to margin levels above group targets. With our financial strength and decentralized organization, we are really prepared for what lies ahead. Through our cash-generating divisions, we are committed to complementary acquisitions as well as investing in organic growth. This will lead long term to continued sustainable profitability. Thank you very much for listening. Now we are open for Q&A.

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

It's Gustav here from Nordea. Maybe just to start off here a bit on a high level to get a bit more sense of the organic growth. Is it possible to just split out the 6% here in terms of how much is price versus how much is volumes or some sort of ballpark figure?

Good Morning, Gustav. Yes, it's -- if you look at the 6.3%, I would say roughly 2%, 2.5% is related to price adjustments and the rest is volume going forward.

That's perfect. And if we go more into the side-by-side, if I heard you correctly, you said it's increasing 30% year-over-year. Is it possible to say how much is organically there? And can you also, sorry, elaborate a bit more on the market, why it is turning so positively?

Yes. As you remember, Gustav, we had really a slowdown in quarter 3 2024, and it continued in quarter 4 2024. And the reason for that was the destocking operations in the distribution of, I would say, all manufacturers of side-by-side in North American market. And I mean, we can say it's the U.S. market. It's somewhere between 90% and 95% sold in the U.S. market. This process continued in quarter 1 and the beginning of quarter 2, 2025. And we can see now ramp-up effects or an increased demand. And it's related to, I would say, 2 things. Of course, the destocking, but also for us that the take rate of HVAC systems in the side-by-side is growing. That is the base for the strong demand in the side-by-side. And of course, if you look on a high level, interest rates have come down in the U.S. now. And of course, there is a private sector in this as well. And still inflation, even though it has picked up in the U.S., it's still on a marginal level, I would say. That are the main reasons behind the excellent pickup.

That's very clear. Is Italytec also included in this 30%?

No. Italytec is not included in the side-by-side. It's more -- the Italytec is really related to the Brazilian market, and it's mainly agriculture and construction applications for Italytec.

That's perfect. And then if we turn to the bus side and comment a bit more on that market, it sounds like it's growing 13%, you said here year-over-year. Can you give a little bit more color on this market and also the development or the dynamics between transit bus versus school bus, how those are performing?

So to make it clear, it's the school bus segment that is growing 13% in the quarter compared to the quarter 3 2024. And we can see a continued demand on -- continued growing demand on the school bus side. And it's related to more HVAC and also to still electrification part where we have higher revenues per system. And as we have mentioned, the transit bus segment for us, we have a slower pace within that based on that we are phasing out from -- with the Nova contracts in the U.S. market. They have moved into Canada. We still have them as a customer. But for us, the transit bus segment is slower compared to the other segments.

That's very clear. And sorry, just the last one here, and then I get back in line. Just regarding Truck & Trailer, I mean, we've commented -- or you commented on the trailer market bottoming out here for quite a while. Now it sounds you are incrementally more positive that it's actually seeing some growth. If we then turn to the truck part of the business, it sounds like on Fredrik, that you are a bit positive towards that market as well. And of course, you have 3 to 4 months visibility. But can you just comment a bit on where we are in the truck market?

I think it's important to understand the truck market and especially the European market. I mean, we are not into the tractor segment, which is probably 60%, 65% of the volumes in Europe. We are more in the artic trucks. And this is driven mainly by the infrastructure projects. We have a really good order on hand, a good -- and of course, we have extended our range in the last year. So we sell a higher proportion per system to each truck in this segment, so to say. And as I mentioned in the summary, we can see a good trend in the defense segment, which has grown by 35% in the quarter compared to last year. And we all know that the order books are really nice going forward in this. So infrastructure and the military segment is driving the demand in this [ excellent report ]. And of course, as we have mentioned before, the Australian market has been very, very good for us, and we see a good visibility going forward in the Australian market.

The next question comes from Jonny Jin from SEB.

I think I will start with a question on MTS. Good to see back organic growth there. But I mean, a follow-up on the bus segment. I think you mentioned in previous quarter that you had a larger customer that is winding down operation affecting volume negatively. We touched upon this a little bit. But could you say something how much the drag was in this quarter if we try to pinpoint the underlying growth in MTS operation?

It's hard to say, Jonny. It's probably around SEK 20 million in this quarter, roughly, my guess. I'm not 100% sure, but in that range, I would say.

Okay. That's perfect. And then coming -- given the stronger demand you see now on the contact side-by-side, could we expect a stronger mix and margin as well going forward? Is that a fair assumption?

I would say that it's a similar mix. It shouldn't have an impact on the gross margins with the product mix in this case going into quarter 4. That's my view on the situation at the moment.

Okay. Okay. But I mean, looking at the margins in MTS, it has been a little bit volatile in the last couple of years. So I mean, going forward, what kind of margin can we expect in this segment? Can we expect that once you fill the utilization and such that we can get back to the sort of 13.5% you did in 2024, coming years? Or what is a fair level, would you say?

I would say, as we have communicated before, Jonny, the -- this division is driven a lot by volumes. So I think it will slowly, slowly come back. And when the margins pick up -- when the volumes pick up, the margins will come with it as well. So it's -- the loss in margin is mainly related to the volume decrease.

Yes. Yes. Okay. So I suppose the 13.5% you did last year is a reasonable level if you can come back to volume growth ahead as well.

Absolutely. This is the interesting thing with going to work or flying around that you have so much opportunity and potential in this company. We will work every day and every week to improve our margins.

Yes, that's clear. And then speaking of volumes and growth in that segment, I mean, you also come from a very high level and then it has been a little bit destocking and now you seem to be back on growth again. So I mean, what sort of normal growth levels ahead I assume in this segment, would you say, your best guess?

I think if you look at the long-term perspective, we think we will grow by somewhere between 4% and 5% compound average growth rate over the next 4 to 5 years. And that's also driven by a higher HVAC proportion in the side-by-side segment. But somewhere between 4% and 5% compound average growth rate.

Yes. Okay. That's clear. Just one final from my side. I mean, coming back to your order outlook comments and the positive order development, which sounds to me is broad driven here, and you sound a little bit upbeat in the near term. So given that comparables are roughly similar here as well, is it fair to assume that we can expect an acceleration in organic growth ahead? Is that fair to say, what you say?

I think we are positive about the future. And if we look with our visibility 3 to 4 months, we can see that we have -- we will have a growth in quarter 4. That's -- and as we see it in the beginning of October now. It's -- but all of us are experienced, you never know what will happen in December. It's a short month, but October, November looks good.

The next question comes from Lucas Mattsson from Inderes.

If you could provide some color on aftermarket sales performance this quarter and perhaps outline your strategy a bit for driving aftermarket growth going forward?

Can you repeat the question? We lost you in the beginning there.

Yes. Sorry. Can you hear me now good?

Absolutely.

Great. No, I was wondering if you could provide some color on aftermarket sales performance this quarter and perhaps outline your strategy for driving aftermarket growth going forward?

I mean we had a solid performance when it comes to aftermarket sales, especially in the Truck & Trailer Equipment part, also on the bus business in the U.S. on the MTS side. And we call the aftermarket business MRO on -- in Ringfeder Power Transmission, and that was solid. We are ranging somewhere between 23% to 25% in aftermarket business. We see opportunities in certain segments to improve that, and that is mainly availability. And of course, part of the product range to -- but availability is the driving force in the aftermarket sale for us.

Yes. That's very clear. I was also wondering, have you noticed any notable changes in customer sentiment or customer behavior since the end of this quarter, either positive or negative?

No, we haven't seen -- I mean, in the last few weeks, no, we haven't seen any big changes. It's running smooth, I would say, in the start of October.

Yes. Okay. And lastly, you mentioned an ongoing recovery in order bookings. What capacity or supply chain constraints, if any, of course, could limit your ability to sustain growth going forward?

I mean it's -- as you know, it's a supply chain here. And I think we have ramped up our internal capacity at the moment, so we can deliver. But of course, when you ramp up 20%, 25%, 30%, you have issues with some suppliers. And of course, we are working intensively with that. But with these hockey stick improvements, which is positive, there will be 1 or 2 suppliers, which will not be able to manage, but we don't see that we lose any orders by this. But -- and I think we will take a few weeks before we are really ramped up in the whole chain. But I don't see it as a main issue at the moment.

[Operator Instructions]

Anders, we have some written questions. We have one question here, if we can elaborate a little bit about the new factory in Canada. I can take a part of that. The new site in Toronto that will consolidate 3 existing production sites in Toronto develops according to plan. We are now having the foundation ready. We will start raising the building within the coming next 3 months. And the plan is for the production site to be clear and done for us to move in, in the beginning of September in 2026. And hopefully, during summer 2027, the production will be up and running in the production site. Anders, we have a question regarding the organic growth, how much of the price increases are relating to tariffs? We spoke about that the price increases and the split are somewhat, 2% to 2.5% and the rest is volumes. It's a little bit hard for us to break down the price increases perhaps just relating to tariffs. But what we have said before, the impact is marginal for VBG Group. I think we are done there.

Then I say thank you very much for attending this presentation. Thank you very much for the questions, and we stop by that. Thank you very much for today.

Thank you.