Falck Renewables SpA

F:AA4

Earnings Call Transcript

[Operator]

Welcome to the Ferronordic Q2 presentation for 2023. [Operator Instructions].

Now I will hand the conference over to the CEO, Lars Corneliusson; and CFO, Erik Danemar. Please begin your meeting.

[Lars Corneliusson, executive]

Good morning, everybody. This is Lars Corneliusson speaking, and very welcome to this presentation of our second quarter 2023. So if we move to the first slide, I would say, we call the report continued focus forward. We saw on the group level a good revenue increase with 68%, and we saw strong growth in revenue on both operating segments.

Operating results improved from SEK 10 million minus last year to -- and -- sorry, improved to SEK 10 million, minus an operating margin to minus SEK 1.5 billion and obviously, as we've been talking about before, we continue to look for new market opportunities.

In Germany, new truck sales in units increased by 33% and which was in line with the market that actually now starts to see a better supply situation than the previous three years and the market then recovered and grew approximately by 30%. We saw a positive operating result in Germany of SEK 2 million, and we continue our investments into sustainable transport solutions.

In CIS, the growth was even bigger, and new equipment sales increased by 183% in units, and we had a good product mix. And then revenue increased to 200% and operating profit, 180% to SEK 7 million. And in Kazakhstan, we are exploring opportunities to offer contracting services. So all in all, 68% revenue growth, 65% operating profit growth, minus 1.5% operating margin and earnings per share increased by 166%.

So if we take the next slide, please. Obviously, we're focusing on Germany, Kazakhstan and on our next growth opportunities in Germany. We continue to increase sales of both trucks and aftermarket and had our second quarter now with a positive operating results. And we continue to work closely with partners and clients to further promote sustainable transport solution.

In the quarter, we delivered five electric trucks to customers, and we launched our first charging infrastructure project at a customer location together with a partner. And also importantly, we were awarded by the German government subsidies of up to EUR 23 million for up to 117 electric trucks. This is, of course, important for the future potential of this area, and we're very happy about that, and we will make sure that we use them in the best way possible.

In Kazakhstan, as I said, sales of both new and used equipment increased sharply, still on a low level, but the increase is, [ as I could see ]. We're starting to get traction with our way go to customers working with full setup with good service with part supply that is better than others and we are increasing nicely in cash tax [ tone ], we see good opportunities to further grow and increase our business in Kazakhstan. And we're also -- as we talked about, closely, customers and partner working with to develop our customer offering. And hopefully then, we will be able to offer, for instance, contracting services in Kazakhstan.

We go to the next slide, please. Yes, quick summary financials. Revenue up 68% to SEK 674 million, German revenue, up 58% and where we actually saw also truck sales up 1%, but also good aftermarket sales growth of 30%. In the [indiscernible], we talked about 200% growth to SEK 80 million. And thanks to a good mix of the equipment that we sold, we saw revenue up 400% on equipment and aftermarket sales up 17%.

Group operating profit increased to a loss of SEK 10 million and we still have a very strong balance sheet that provides options. We have 62% equity-to-total assets and a net cash at SEK 539 million.

Okay. If we take the next slide, please. As we talked about the total German market for heavy trucks increased in the quarter by 30%, and Tractors grew more 42% and Rigids by 13%. And again, the market grew mainly as supply improved to meet a pent-up demand that is still there for sure. But it's good to see that supply actually now finally is improving and allowing the market to absorb the demand that is still there. In our sales area, the market increased by 27%, and our sales area then represents 18% of the total German markets. So our new truck sales in units increased by 33% to 267 If we include LCVs, the increase was actually 42%.

As for used vehicles, it also had a good growth. We grew 134% in units and we sold 89 units, but pricing is tighter as greater supplier exerted pressure on margins. This is quite logical when supply of new trucks is improving that the used market becomes a bit more pressurized when it comes to pricing because there are more used vehicles out there in the market. And we saw good growth in the aftermarket by 30% which, of course, is a combination of organic growth and the acquisitions we made in the last year.

We saw also a good increase in the gross margin to 12.3%. This is on product mix and also price realization. We take the next slide, please. In the CIS, this is basically Kazakhstan we -- the Kazakh market, obviously, is supported by Kazakhstan's growing role as a regional hub big infrastructure projects and strong commodity prices and also becoming a hub for many of the things that previously were transported through a bigger country to the north. It goes to Kazakhstan and Uzbekistan and further -- further west from China to Europe nowadays, and we've seen increased activity totally in the market, I would say.

And however, excluding Chinese wheel loaders that had a big, big drop in the quarter, the Kazakh market for construction equipment declined by 8% in Q2. However, the market for road construction equipment almost increased 3x in the quarter. And that's, of course, where our sweet spot is -- is one of our sweet spots for sales is in the road construction market. And our sales then increased 183%.

Now we're talking about 17 units, which, of course, is a very low number still in such a big market like Kazakhstan. And we have the same growth in used construction equipment and the same numbers sold. Again, good product mix, so this 183% turning to 400% in revenue and an aftermarket sales increase of 17%. And with such a strong sale of equipment -- such strong growth in equipment sales, the gross margin inevitably is decreasing due to that change in revenue mix. And again, we are looking hard, and we're working quite extensively with exploring potential project work in Kazakhstan, we see long-term potential for contracting services in Kazakhstan. We still have a way to go to implement the articulated whole concept in the market, it's still a small market, and we believe that we can do a similar job as we did in Russia with actually creating that market and showing customers how to use those fantastic machines in the best way in -- particularly in gold mining, it's the sweet spot for these equipment but also in other applications of this. So we are focusing a lot on doing that.

Okay. Next slide, please. Business development. We had an opening ceremony of our purpose-built service and sales hub in Hanover, CO2 neutral, a fantastic facility and customers are very happy. And our employees are also very happy, which is equally important, obviously. We continue to work closely with partners and customers to promote electric trucks, now we continue to set up our organization for Sandvik. Again, in Kazakhstan, we focused to further increase customer focus in the organization, also setting up further the organization and service support for Sandvik, in Astana, we have this workshop now with a focus on road construction and again, we're exploring contracting services.

And for the group, obviously, we are actively looking for new markets and business opportunities. Clearly, we want to grow in and expand our current footprint and geographic footprint as well.

Okay. Next slide, please. So this is now how the map of Germany is looking like. You see that we have made a number of transactions, a number of acquisitions since 2020, when we then took over around 10 workshops from Volvo and 2 workshops from a private dealer. And we now have 21 outlets in Germany and the math looks like -- look like this.

On the next slide, we have a map of Kazakhstan, obviously, not the same density of network in Kazakhstan. We have 7 outlets. We're continuing to look for expansion opportunities. But it's good to see that we get now traction of the thinking of of high productivity machines, high productivity, service, high parts availability and making sure that we can improve the productivity of the customers' business and we are on the right track here, as you can see from our growth numbers, and it's very, very good to see. And there is still a lot of work to do for us in Kazakhstan.

Okay. Next slide. I think by that, I'm handing over -- yes, I am to Erik for the economic development. Please go ahead.

[Erik Danemar, executive]

Thank you, Lars. Yes, first starting with a bit of economic context, the environment we're working in on. In Germany, we had a marginal growth in the first quarter, negative in the second quarter according to the numbers we've seen so far. Expected around zero for the full year of '23. So the economy is slowing in Germany.

At the moment, IMF is expecting a positive growth in 2024. So just north of 1%. So a bit more in the economy next year. Inflation rate was elevated in 2022, as we know, remains high at 6.2% in July. And the rates, interest rates, as we all know, follow that trend. So were raised again in the quarter by [ 50% and 25% ], so climbing higher. And that is something that we see a bit more hesitation potentially due to funding costs and uncertainty about the economy.

Kazakhstan, a very different picture more than 3% growth in '22 and expected more than 4% in this year. And as much as 5% in the first half of this year, we have local data on which is yet to be confirmed. And then again, expected strong growth in '24. Inflation rate is high, but lower, very high by developed market standards. But again, it has come down from 2022 to 14% in July. Probably helped by a stronger currency, so importing at lower prices, which dampens inflation.

And of course, rates being high, 16.75% is still the Central Bank rate in the local currency. So that's above where the inflation level is, and that rate has not been changed, although again inflation is lower. So different macroeconomic context in the markets where we operate.

If we take a look at the income statement overview noting again, the currencies in both countries have strengthened. Income statement effect year-on-year, about 8% in euros, balance sheet, 10%. And for the Kazakh tenge similar, 7% and 8%, 7% on the income statement. That's the average rate for the reporting period. So the second quarter I'm referring to. As Lars mentioned, strong growth on the revenue side in both markets. And mainly driven by the new equipment sales trucks in Germany and construction equipment in Kazakhstan, but also strong aftermarket growth in Germany.

So slightly rebalancing the group revenue mix, 88%; Germany, 12% CIS, which is now currently Kazakhstan only, I believe we were around [ 85.15% ] in the previous quarter, so slightly more tilted towards Germany. The mix also probably slightly higher on the equipment and truck side, given the strong growth there, so aftermarket only 26%. And then we have -- which is mainly rental business and in Germany, that would be.

Gross margin, slightly higher with that product mix. It is driven more by the product mix that we have got out into the market and a healthy price realization. SG&A is higher in absolute term, but lower as a share of revenue and you can see also on this slide sort of where we have the dynamics, so to say, and carry still a big part of the group costs when we look across and that is the capacity that we're holding for business development.

And I would mention there, Lars has spoken about contracting services. In Kazakhstan, something we're looking into. We have, of course, the electric rental in Germany and, of course, the potential for entering new markets as well. which also takes capacity on the group level. Operating margin increased from last year to less of a negative number of SEK 1.5 billion, operating profit at minus SEK 10 million, helped by a reversal also on the group level when we look at the group costs of a provision we had made in the previous year.

Below EBIT, it is very much a reflection of the dynamics of the Swedish Krona against relevant currencies, mainly euros, but also dollars as it were, I will revert slightly on that. This slide, I include only because it's -- we want to stress to the market how we changed the reporting from last year. So you compare -- you can compare like-for-like. So you will see operating profit line here below EBITDA and on that line, you can compare like-for-like. So Germany, plus 2 this year, minus 7 last year. So positive dynamics of [ 9 ] but if you would go back to last year's report, you would see the operating profit after group allocation for Germany in Q2 '22, i.e., the minus [ 10 ], but again, now as we report, we report the underlying segments, meaning Germany and CIS before allocation of group costs and then the group costs separately. As you can see here, the unallocated group cost columns that we have included here. So that's why we have this slide.

Trending operating results and margin. We, of course, were aiming to continue to show that trend up. And we are working hard to resume it to continue the positive trend. But in the quarter, we were lower in the previous quarter. But then again, significantly higher than last year. And again, continuing the work in Germany to get the most out of the aftermarket and get the fleet out there so that we can get a bigger gross profit and also keep costs in check. In a Kazakhstan, somewhat similar picture. We yet again, we want to continue to try and trend higher, of course. And indeed, again, if we look with some seasonality in Kazakhstan less so in Germany, I would say. Then year-on-year, again, we're showing improvement, but we would like to show over periods as well, consecutive periods, I mean, quarters growth. We do see big potential. Again, if you look at the actual numbers of vehicles, we still have a very long way to go in Kazakhstan, and that is in a way, a good potential that we still have to unlock in Kazakhstan and indeed the region.

Looking at the balance sheet briefly. Again, worth noting here that part of it is FX effects, stronger both Euro and Tenge. When it comes to PPE, there is almost all of it in Germany. So here, it's really more a Euro that can be considered driver.

Looking year-on-year, of course, you would still have in Q2 last year, the Russian subsidiaries. So there that explains the decline. If we look in terms of working capital, then we see high working capital in Kazakhstan also as a percentage of last 12 months revenue -- again, with the growth in the sales that we have posted so far this year, it is natural that we also acquire more inventories to meet the opportunities or capture the opportunities that we see in the market share and by getting our machines out also growing the aftermarket.

In Kazakhstan, sorry in Germany, net working capital actually decreased slightly, but inventories are higher. So it's actually an effect of higher payables and lower receivables in the quarter, we collected more from customers on the receivables side. Net debt decreased -- sorry, net cash that is, SEK 142 million to SEK 539 million. I have a separate slide on that one. But we paid the dividend, of course, SEK 109 million. And then we had CapEx and the increase in inventories that I mentioned are factors driving that. Still strong balance sheet here, 62% equity to assets. Part of that is driven by the FX effects, again, mainly on the euro.

Moving to this slide to look at especially the net cash position, started out at SEK 681 million. We have the dividend payment, as I mentioned, CapEx of around SEK 102 million. That being in more detail around 1/3 of that was SEK 33 million investment into the rental fleet in Germany, the conventional rental fleet and SEK 29 million going into the electric potential, their rental business and then we have this slight actually working capital release on a group level despite, again, the increase in inventories and an FX effect and the balance there of other items in the mix.

Also tracking NAV for the group, a very meaningful their cash and equivalent position that is held mainly in euros, a big part in U.S. dollars and a smaller balance in Swedish krona. Trade and receivables and then the inventory position. I mentioned the majority of that, around 2/3 is in Germany. And then we have -- sorry, not meant to change slide there, Property plant and equipment, again, really, the majority of that is in Germany and is then tied up in network and rental fleet as well. Other assets, and then we have the liability side with payables and borrowings in roughly equal distributions there. So that's what builds up our NAV and equity position.

And with that, Lars, I pass over to you for some words on the outlook.

[Lars Corneliusson, executive]

Yes. Thank you. So if we're looking forward, we see the German market remains firm. And as we talked about constraints in the value chain have eased and the market has grown on increased supply to cover for pent-up demand. However, we also see growing uncertainty about the economy, higher funding costs and inflation make customers more cautious, obviously, about placing orders for future delivery and I would say what we probably can say, that we see is a normalization of the market finally after three years of an abnormal delivery situation. And obviously, customers noticed that as well. So I think this is a reality, not a big thing. I think maybe it's even a good thing going forward, we see a rapidly growing interest also in electric transport, which is very, very encouraging.

Obviously, customers also here want to see visibility on the economy and on the rollout of charging infrastructure. So obviously, we follow the market outlook closely. Longer term, we remain optimistic. Our sales areas, as we all know, in the heart of Europe transport business, and benefits from commercial activity routes across industries and countries. And being part of developing sustainable transport is a strategic priority for us, and we're working very hard and wide in developing and accelerating that transformation.

Our operations in Kazakhstan continued to develop nicely. We continue to seek opportunities to grow our product and business portfolio. Obviously, demand for construction equipment is supported by Kazakhstan's growing role, and it's a regional hub. It's infrastructure projects and strong commodity prices. So we believe that the underlying conditions and business opportunities in both the German and Kazakh markets are strong. And we continue, obviously, to explore business opportunities outside our current markets.

So by that, I think it's time to hand over for some questions, please.

[Operator]

[Operator Instructions] The next question comes from Adrian Gilani from ABG Sundal Collier. Please go ahead.

[Adrian Gilani Göransson, analyst]

Adrian here with ABG. A couple of questions from my end. First of all, in Germany, given that, as you said, supply has now improved and there is this backlog of demand should we expect similar growth figures on equipment sales in Germany for the second half of the year as well?

[Lars Corneliusson, executive]

Okay. I can take that, Adrian. Yes. I mean the demand is -- the pent-up demand is still there. I can maybe say that, what is happening now is that the supply is actually finally catching up with the demand, which is good. It will not last forever. But it will sooner or later come to normalization of that equilibrium, so to speak, which in the long run is a good thing. So if I can answer your question, we still -- the demand is still there.

[Adrian Gilani Göransson, analyst]

Yes. That's helpful. And a bit on the time line. I mean, what's your best estimate of when we will see this equilibrium when this backlog will be worked down, so to say?

[Lars Corneliusson, executive]

Adrian. I can't tell you, but it's still a long way to go. That's for sure. But as you saw, I mean, we saw an increase in the market of 33%. And as we said, I mean, last year, it's just the fact that more trucks are being delivered because the demand was there last year as well, but supply was limited.

[Adrian Gilani Göransson, analyst]

Okay. And on CIS, I mean there was a significant drop in the gross margin here. And you mentioned the mix effect as a factor. But just to clarify, is the mix effect, does that explain the entire gross margin drop? Or are there any more factors at play that we should keep in mind?

[Erik Danemar, executive]

I think that's the main factor Adrian, that you cannot use for us, so to say, there is always also factors in terms of the product mix, right? So different machines come with different margins and different deals with different clients. But I think that's sort of there, you should expect an average over time, bigger machines, bigger margins, smaller machines, smaller margins typically. And again, the biggest factor here is the mix that machine sales grew so much more than the aftermarket.

[Adrian Gilani Göransson, analyst]

Okay. I understand. And then on the group costs, these came down a lot since last quarter. And I remember that you did mention last quarter that those were elevated, but are the Q2 costs of SEK 19 million at group level. Is that sort of where you expect to be going forward?

[Erik Danemar, executive]

So I mean, group costs were underlying slightly lower in second quarter than first quarter. But again, if you look at the SEK 19 million that you would see in the report, you need to be aware that there is this reversal effect, which is netted off there. And that was about SEK 6.7 million. There was a reserve that was reversed in this quarter. So it is sort of slightly lower than in the first quarter, but not as significantly as that effect has it to.

Again, I mean, we're working to, to contain costs. But I've also mentioned we are that the strategy is in to go into new markets to have capacity for contracting services and also to develop electric. So I think you should probably look at this quarter and then our efforts to contain, but that's probably the more realistic trajectory in the second half of this year.

[Adrian Gilani Göransson, analyst]

Okay. That's helpful. And I guess, ramping off with a more general question on the strategy ahead. Given that you are sitting on this oversized cost base at the moment and the net cash position has been shrinking for a few quarters, are you still sort of fixed on using the cash that you have for a major acquisition and expanding into new markets? Or are you also looking at the option of distributing the cash to shareholders and just scaling down the cost base for smaller operations instead?

[Lars Corneliusson, executive]

No. Our strategy is the same. We want to grow our business, we want to expand our business, and that's what we are -- where we are working very hard on at the moment.

[Adrian Gilani Göransson, analyst]

Okay. I understand...

[Erik Danemar, executive]

Also, Adrian, like Lars said, I mean, our strategy is to grow the business and develop these new areas and again, go into new markets. And Also, I mean, part, of course, of the -- that reduction in the net cash position is a buildup in inventories. And that is a reflection of market opportunities. But on some level, depending on how quickly we can grow, one may also expect maybe the working capital level as a percentage of revenues. Again, it depends on the future growth potential also to to maybe normalize at slightly lower levels.

[Operator]

The next question comes from Victor Hansen from Nordea.

[Victor Hansen, analyst]

Lars and Erik, it's Victor. A couple of questions. So today, you're talking right about -- [ write ] some about your contracting services, and you mentioned investing in an organization for the area. And I know that you don't have any current contracts ongoing. But I think it would be interesting to hear more on your thoughts on this topic of contracting services because it seems to me like you have some ongoing discussions, which have made you committed to more costs. Is this something you can confirm? And perhaps also, if you could tell us what your costs are now for your contracting services organization, perhaps on a quarterly run rate basis, that will be interesting.

[Erik Danemar, executive]

I think, Victor, when it comes to commitment, then I think it's natural that when we have a sort of firm commitments, that's something we would make a disclosure or release on. So at this point, it's still developing that potential and making sure that we can deliver kind of services in -- at this point, it's Kazakhstan we're referring to, it could be sort of outside there as well, but that's what we're looking on looking at the moment.

We have sort of a lot of experience in gold, among others, mining generally, and there is a lot of opportunities there in Kazakhstan. And when it comes to sort of costs, I also -- I mean, we haven't made any sort of particular disclosure there. So I would probably stick at this point to saying or reiterating what we have said that. This is something that we're building capacity for. But for example, we're not taking on operators until we would have a project. So it's more management and building the sort of infrastructure on an organizational level to be able to offer sub-services. But I'll refrain from giving any sort of specific numbers there. And again, when it comes to actually committing then I think that there would be sort of a proper disclosure on that basis. So at this point, it's developing the potential getting to speak to the customers where we see that potential and looking for opportunities in the market.

[Victor Hansen, analyst]

Okay. we will look out for more information ahead then. And my next question here, so you had an impairment of a couple of millions on some of your receivables. I'm wondering what this is related to and if there possibly could be more to come from the same customers or similar?

[Erik Danemar, executive]

No. Well, I mean, I think that's giving guidance. I think probably you first have to consider sort of the macroeconomic situation, I think again, in Kazakhstan, we're seeing sort of a strong outlook. In Germany, more of, I think, uncertainty. We're not seeing issues yet. As we say in the report, the market is firm. It's a strong market, but we're seeing more uncertainty about the future. But I think it's not sort of a reason to expect that to be a trend at this point Victor, think if that is something that we should make the corresponding provisions for such a future, and we don't see the reason at this point to do that.

[Operator]

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

[Erik Danemar, executive]

Maybe I can start here. I had some questions coming on e-mail. One was with regard to something we touched on already. SG&A costs and growth in that area. And I think one thing to say is on the S side of the SG&A, of course, that when we see very strong top line growth, as we've done in both segments, that comes with sales bonuses and sales commissions. So that's one of the reason why you would see SG&A go up when sales go up. And correspondingly, then you would see it come down when if sales would come off.

And beyond that, it is the group overhead as well. And here I mentioned I mean, contracting services, electric, rental capacity areas that we think are very exciting and want to have and build capacity for the opportunities that we see there. And of course, the work we're doing to identify the next market, and we're right that we're looking at some specific opportunities indeed. And that comes also with some costs, legal, et cetera, which are not capitalized. So that I would say with regards to that question. Another question from online or e-mail is.

Where we see that new market whether it's Europe, elsewhere in the world or emerging markets?

And I mean, we haven't been giving details here. So that should be communicated to the whole market at the same time. I think what we have said is that we are actually looking at opportunities globally, so to say. And then what we're saying, we're looking for somewhere, of course, where it makes a good match with our capacities and capabilities. And that may give some dictates for the geography.

In addition, we have also communicated that we're looking for more mature opportunities. Germany was loss-making when we took over it more of a turnaround, maybe you could argue, whereas here, we've said that we're looking for a more mature business, which is cash flow generating.

Also a question further on contracting services with regards to our expectation on returns and capital -- return on capital there. Again, I'll be cautious, we don't give specific numbers there, but we always said that it should be accretive on a turn on capital basis. And it has been historically, it's a business that does tie up capital in the equipment to a different extent depending on how that equipment itself is contracted. But beyond that, it's relatively good returns on the fixed assets that we would carry in that business. And that's with regards to the question that I have seen. Lars, I'm not sure if you have anything to address otherwise I'm good there, there's no more further questions from [indiscernible].

[Lars Corneliusson, executive]

Yes. I think there was a question referring to how do we work with Sandvik and mobile to ensure that machines are not going in back door to a big country. And clearly, we have a very, very, very solid and stringent compliance method when we sell. We investigate each and every customer. If we talk about Kazakhstan, it's -- we're talking 17 units, all equipped with GPS trackers and so on and so forth. So -- and for us, obviously, we want the machines to stay in our market because we want to make money on the aftermarket on them. And that's where we make the bulk of the market, and that's how we actually go to market. We present a package rather than just selling a machine. There are others that can do that much, much better. We sell a complete offering and that's what the customers are buying. You wouldn't buy a Volvo machine, if you can't expect high-quality service and good parts availability and 24/7 support. So we are -- in that respect, we -- our business model as such or attitude or what we should call it helps us to make sure that everything is in accordance with all procedures and regulations.

I don't know if there are any more questions.

[Operator]

There are no more questions from the teleconference.

[Lars Corneliusson, executive]

Okay. Then I say thank you very much, everybody, for listening in. I hope to meet you again when we present Q3. So thank you very much, everybody.

[Erik Danemar, executive]

Thank you.