Falck Renewables SpA

F:AA4

Earnings Call Transcript

[Operator]

Welcome to the Ferronordic Q2 2024 report presentation. [Operator Instructions]

Now I will hand the conference over to speakers CEO, Lars Corneliusson; and CFO, Erik Danemar. Please go ahead.

[Lars Corneliusson, executive]

Thank you. Hello, everybody. This is Lars Corneliusson here and welcome to this presentation of the second quarter results for Ferronordic of 2024. So we see continued strength in the U.S. in the quarter. Overall, we had 62% revenue growth and that is driven by the addition of the U.S. operations, operating results minus SEK 4 million.

Net profit decreased to minus SEK 81 million and that was mainly as a result of exchange rate losses. Net debt increased slightly to SEK 1,671 million after obviously the acquisition and consolidation of balance sheets in the U.S. operations and total equity then decreased to SEK 1,627 million.

If we talk about the U.S., it's continuing to perform well. We had a revenue of slightly above SEK 700 million in Q2 with an operating margin of 7.3%, SEK 51 million. We saw the market in the U.S. the first 5 months was going down slightly from a very high base in '23, 6% lower.

We, however, delivered more machines to customers and obviously then we gained quite some market shares, actually. And as we saw the construction season started during the quarter also, we saw utilization of the rental fleet improving and also demand for aftermarket increasing. However, in Germany, we had a challenging quarter. Overall, the market grew by 11% for our own deliveries of new trucks in units declined. Aftermarket business, however, is stable despite high level of actually, absence among our mechanics and quite a lot of work-in-progress moving into Q3.

One important thing in Germany we talked about is our cost reduction program and we see now that we are expecting the result of that saving of approximately SEK 60 million from the end of Q2. We believe we are there. In Kazakhstan also challenging in Q2. The economy is still growing, but the market for construction equipment declined.

So due to the slow sales and Germany and Kazakhstan inventory are still too high and we will work to normalize those stock levels throughout 2024. So very brief on financials, as I said, 62% to close to SEK 1.1 billion with the U.S. SEK 700 million, German revenue down minus 44% to SEK 332 million and Central Asia, then Kazakhstan down to SEK 56 million. Profit contribution from the U.S. operation, SEK 51 million. German decreased to SEK 27 million and in Kazakhstan to minus SEK 1 million.

If we take -- go to the next slide, a bit more on the operations. The market for construction equipment in North America is historically around 52 million to 56 million -- sorry, thousand units. Our area then covers approximately 80% of the North American market. In the quarter actually, we estimate that the market for larger construction equipment or general purpose equipment segment has decreased by 27% in the area by a decrease in crawler excavators and articulated haulers.

However, our own sales actually only then decreased by 7% compared to Q2 '23. And obviously, we continue to gain the market share that we started doing in Q1 and we see solid -- actually demand continues despite the drop in 27.

In Q2, there is a lot of activities going on. And we sold 70 new units, 25 used units and also 10 units that were converted to sales from rental and also service and parts business remaining strong in Q2 '24. So basically, 39% of the revenue came from after midmarket business and 11% related to other sales, mainly rental, so 50% then from equipment sales. So continuously good performance and looking good in the United States.

If we go to Germany, the total market then for heavy trucks increased by 11% in Q2 and increased by 3% in the first half year despite the economy indicators pointing downwards for quite some time now. In our own area, the -- it was increased by 22%. And then that's, again, approximately 18% of the total German market.

Our own new truck sales decreased by 65% to 101 units. This was compared to a strong Q2 in '23. And this is a result of us maybe not responding to the price competition that we saw in previous quarters as the supply starting to -- from a low supply base to maybe an oversupply base, we saw price competition from certain competitors in the market and we refrain from acting to that and we obviously lost market shares.

What is very, very positive, though, is that a greater share of our new truck sales were rigid trucks and they generally have a much better potential for service and part sales going forward. So the main competition was in truck tractors, which are running on the highways. Used vehicle sales performed better and declined 10% to 80 units. And we are continuing, obviously, to decrease our used trucks inventory and a rental fleet to reduce capital commitment and focus on how these operations can support new sales and the aftermarket business in a weaker market. And aftermarket sales were broadly flat year-on-year. Aftermarket sales share of revenue, up 19 percentage points to 43%.

So also, we launched the efficiency program to make our business in Germany more efficient and resilient. Obviously, we need to get to an absorption level of 100%. So that means that how much of the fixed costs we can cover by the gross profit from growing aftermarket business.

And we're looking into all vertical, horizontal administrative units. We reduced the number of regions, removed a number of middle management roles. And we -- unfortunately, the program has taken more time and cost more than we initially anticipated, but we are confident now that starting from end of Q2, we see an annual saving going forward of SEK 60 million.

And obviously, we continue to work on streamlining the organization and at the same time, continue to invest in our aftermarket business and in e-mobility. When it comes to Kazakhstan, Central Asia, as I said, fairly strong economy. Going forward, we see supportive government investments, but the equipment market stays challenging. We estimate that the total market might have grown by 9%, but it's complex tender structures, Chinese competition and the lack of funding in the market that creates hurdles for premium segments and premium brands.

So our sales in Q2 decreased to 11 units and used equipment to 12 units and we saw a slight decline in aftermarket sales. We do have a higher [indiscernible] inventory in Kazakhstan, as I mentioned and we work to normalize that and we expect to have that normalized by the end of 2024.

So next slide, we see our U.S. network where we're active in -- we have 13 outlets and we're active in a number of states in the Midwest. And as I mentioned, so far, so good and it's looking good going forward as well. German network look like this. We closed 1 sub-dealer, the only one we had actually in May. So now we have 21 outlets in Germany. And the Kazakh network, we have 7 outlets and a place like this in the geography.

So by that, I hand over to Erik for some more on economy and the financials. Please, Erik.

[Erik Danemar, executive]

Thank you very much, Lars. I start off as I usually do with a bit of the macro context. A number of indicators one can follow below the GDP level, but GDP is also really a macro indicator of the activity of the economy and that trickles down to the construction industry.

So starting in what is now our biggest segment or biggest market, the United States, we had 2.8% GDP growth in the second quarter and more than 2%, 2.1% is expected in 2024. That's still a good strong growth. Meanwhile, core PCE inflation is trailing lower, so it was 2.6% in June.

You may have heard that the CPI yesterday was reported at 2.9%, which was the lowest reading in quite some time. So very high likelihood now being priced in by futures for a cut next month by the Fed from the current level, which is a bit above 5%, so potentially some interest rate cutting there, providing a bit more liquidity into the economy.

Germany, very different picture, sluggish in Q2, negative 0.1%. Lars said that the market was up, so it was. But really, we look at industrial production. We look at Purchase Managers' Index and IFO, which is the business sentiment and they're all still pointing negatively in Germany. So sentiment is still not there. But there is an expectation for a turn in GDP, as you can see, positive reading and with inflation lower. The ECB is taking steps to lower the rates. So we are hoping for a bit of the revival coming to the German economy. But at the moment, it's been fairly sluggish going.

Kazakhstan, strong growth, still in '23 reported and still expected in 2024, even if less so from 5.1% to 3.1% inflation rate there, very high by our standards, but much lower from where it was. So it continues to trail down and therefore, also the central bank rate. That is not unimportant. I mean, Lars mentioned hurdles in the market for construction equipment and funding conditions in the market, funding for local customers is one of the problems in Kazakhstan.

Moving on to the numbers. Lars has discussed how the business was doing. This is how it's reflected in the numbers. Starting with a more of a top view of the situation, we can see that revenue, yes, is up 62%. That's much driven by the U.S. acquisition. The business now for the group, 65% of revenue is U.S. So that's about 2/3, a bit more than 1/4, 30% is Germany and Kazakhstan is about 5% of the total.

If we look at the revenue mix, a bit more than half is equipment and trucks. So new equipment sales really and used and aftermarket being high in this quarter, clearly driven partly by lower revenue in Germany and Kazakhstan than we would expect to see there. So just below 40% and then 9% other in other, you will have mainly the rental income from the rental fleets in the U.S. and also in Germany.

If we look at the single indicators that they're mostly driven by the acquisition of the U.S. So that's why you would see the big increases in gross profit, SG&A and the other metrics. I would rather maybe look in the table to our left of the text there and on the right side of that we see, again, strong U.S. performance, lower EBIT margin, but still very healthy at 7.3% and a SEK 51 million operating profit from that revenue of SEK 707 million.

Germany, a big decline in revenue, as we have discussed and it's very much driven by the truck sales and that feeds through to a significantly lower gross profit, SEK 35 million lower than the same period in 2023. And with a cost base that then in the quarter still remained too high.

Again, this cost program that we have been driving since really mid-November last year, we estimate we got to where we wanted at the end of this quarter, the second quarter that is, but still through big parts of the quarter, our cost base remain too high. And on that lower sale and gross profit, that balance just doesn't make. So we need to get the revenue up again and then see the fruits of these cost cuts that we've been working hard on to reach in Germany.

And then Kazakhstan, a negative minus SEK 1 million on the operating profit line. So less impact from Kazakhstan. But of course, we want Kazakhstan to be a positive contribution to the group as a whole as it was in the same period of last year, as you can see, of SEK 7 million there and we believe that there is indeed more potential in Kazakhstan. So when we take group costs into account, we end up at negative SEK 4 million in the period versus the positive number that we posted in the previous quarter.

So below operating profit, worth noting that we're seeing the other side of foreign exchange. In the first quarter, you may recall that we had a significant positive effect of a weaker Swedish krona or rather a stronger euro and dollar versus the Swedish krona. In this quarter, we had the opposite effect. And therefore, foreign exchange losses also dragging the net results, the net income down.

This slide is really taken from the report just to show how we report the different segments year-on-year. Worth maybe commenting as well, you will see there an increase in the group overhead costs, but it's really -- it was the release of a provision as we wrote in our report last year. So I highlight that for you, that that lowered the group costs in that period last year.

Moving on to the balance sheet. Again, a lot of it driven by the addition of the U.S. if we look year-on-year, some FX effects also there having impact on what the balance sheet looks like. Looking at some of the separate segments at working capital, Lars mentioned that we're still too high in Kazakhstan. We are. Net working capital is down there, both on lower receivables and lower inventories. But again, we want to trim that inventory position further to be more efficient in our return on capital as a whole.

Germany different, but share some similarities, still too high working capital there as well. There, we have a small increase, but the inventory is lower there and it's more a reflection of the lower revenue when we look at it as a percentage of revenue. And in the U.S., you have a more normal inventory situation arguably at 15% there. The net debt increased. Part of that is driven by transfers from payables to debt in the U.S. as part of inventory or moved from inventory to the rental fleet in the U.S. So that's what I probably would mention on the balance sheet. Happy to take your questions on that.

Further on, looking at the EBIT dynamics year-on-year. Last year, we were at minus SEK 10 million. And we see the very positive contribution. So this is, again, mind you that the difference versus last year, we didn't have a U.S. in the second quarter of last year. So this is pure Q2 2024, therefore, plus SEK 51 million.

In Germany, we have a negative result and dynamic versus last year as we do in Kazakhstan, again, a positive SEK 7 million last year versus the negative SEK 1 million of this year. And then we have a negative effect on the headquarter as well. So despite this very strong contribution and performance in the U.S., we're not there yet in Germany, clearly and that needs to be become a contributor also as we plan to make it for the group as a whole and also, of course, bring Kazakhstan to positive contribution levels.

A quick look at the net equity and our NAV to show you where the net assets are, we see that we have trade and receivables at your far left there and then a meaningful inventory position. And then you have the U.S. rental fleet, which I remind you, it is rented, but it's also used for so-called sales conversions in the U.S., meaning customers buy out vehicles from the rental fleet.

And then we have property, plant and equipment, which also contained the German rental fleet in that piece, actually. And then you have, of course, property, plant and equipment in more traditional sense or buildings, fixtures and fittings and infrastructure. And then you have the liability side. So still a healthy NAV there for the group as a whole.

And with that, I hand back to you, Lars, to say something about the outlook.

[Lars Corneliusson, executive]

Yes. Thank you. So looking forward, we are -- obviously, we're optimistic about our expansion into the United States and the further opportunities we see there. It's the second biggest market in the world for construction equipment and we continue to see a dynamic economy and a significant need to upgrade the country's infrastructure with extensive federal and state programs for those investments.

And they should provide them a stable foundation for construction equipment demand, even in case of a broader fluctuations in the general economy and in particular, maybe in our area, we see further large construction projects, including data centers, battery plants and logistics centers that have started or are about to start, quite some gigantic projects actually planned and starting up.

And what we see in Germany is that it remains weak. The economy and the market sentiment is negative. And as we've talked about, we are taking actions to make our organization and cost structure more resilient. We believe, however, in continued strong demand in the aftermarket business and about the long-term potential in the German market.

And we are continuing to promote e-mobility and sustainable transport solutions and we believe very much in the opportunities they provide us with. And also Kazakhstan, it's a small part of our business, but we continue to see long-term potential in the country.

So I think that was about what we wanted to present to you. So I open up for questions, please.

[Operator]

[Operator Instructions] The next question comes from Anders Akerblom from Nordea.

[Anders Akerblom, analyst]

I have a few questions. Just firstly, on kind of what you mentioned about the cancellations and kind of orders in the German market. Could you give any flavor on where in the quarter this has occurred, if it's kind of an accelerating pace towards the end of the quarter or kind of at the start and something of a catch-up? So kind of just the timing of this?

[Lars Corneliusson, executive]

Well, I mean, Anders -- by the way, it's Lars here. I mean, our business, it doesn't happen in the quarter. It happens over time and you have deliveries and you have things changing over time. And so this is really something that hasn't occurred maybe in the quarter, but in previous quarters. If anything, I would say that we saw a correction in the quarter, maybe more positive, if I put it that way.

I mean, we saw already last year, we mentioned that, that the market -- the supply chain is normalizing and you come from a situation of undersupply to a situation of normalization or possibly even oversupply and then certain competitors behave in different ways and we decided not to join them.

I think we create more credibility among our customers through long-term take your responsibility and creates better relations with your customers, not to join that, which can lead to cancellations from certain customers and it did. And we saw a result of that in the quarter from some things that possibly happen before the quarter. So everything else equal in a way like it does in our industry, it should potentially not have that big effect going forward. But in the quarter, it was hitting us badly really.

[Anders Akerblom, analyst]

Yes. No, that's fair. Kind of on the competitive landscape then in Germany and how competitors have been behaving. Could you kind of specify a bit what they have been doing to kind of support sales and more in detail what kind of the market losses have been due to and how you intend to kind of win this back going forward?

[Lars Corneliusson, executive]

Well, I think we've done the right thing. I mean we've been focusing on getting the deals where we see a long-term potential in the aftermarket, meaning in the rigid trucks, which are the trucks, it's the tipper trucks, it's the forestry trucks, it's the waste trucks that are running around our workshops and have good long-term potential in the aftermarket. Whereas maybe in the tractor market where the aftermarket potential is less and the price competition is higher and -- but the volumes are quite significant, that's where we've seen the biggest battle if I put it that way.

So we've been focusing on getting a better mix in our population and creating a more sustainable future for us without risking relations with our customers in the tractor markets for a short-term market share gain, if I put it that way.

[Anders Akerblom, analyst]

Yes. No, that sounds fair. But kind of on the consequence of the more muted sales in Germany and in Kazakhstan, you comment on stock levels being too high. I mean we saw an inventory write-down here, I think it was after Q4. What's kind of the risk of that going forward?

[Erik Danemar, executive]

I think maybe I jump in there, yes. I mean in the Q4, we took a look and it was a specific product group there that we did take a impairment or write-up on. And you know, Anders, this is sort of an ongoing process. Every quarter, we go out to our sales force. We go out to the used team, the team that works with our used vehicles or machines and also to the rental fleet.

And we look. So I think inevitably, the longer equipment is in inventory that that risks increase, but we try each quarter to take again a critical look of what -- where we are versus the book values we carry at. So I think that's again a process that will happen every quarter and we'll just have to see where we are there and we have that view now as well.

[Operator]

The next question comes from Adrian Gilani from ABG Sundal Collier.

[Adrian Gilani Göransson, analyst]

Yes. I'd like to start off in the U.S. business and regarding your sort of optimistic view on the expansion opportunities in that region. But then contrasting that with the fact that in the near-term future, you still have some fairly high leverage following the Rudd acquisition. So are you focusing in the near-term on reducing that before further U.S. expansion? Or are you open to doing bolt-on acquisitions in the near-term, even with the higher leverage?

[Erik Danemar, executive]

Maybe I'll start, Lars, and you can continue. I think, Adrian, I mean first thing to say just, I mean, in general, hard thing to give guidance on. I think it's part of our core strategy to look for expansion opportunities. But that said, I think we've said before that we took on Rudd, it's a big piece. We're very excited about it where, I think, it's working very well to integrate it into the rest of the group and it's performing very well.

But we also said that we want to sort of digest this now. And we still have a lot of focus on getting Germany in order to perform well and contribute to the group. Same thing for Kazakhstan, but again, Kazakhstan is a smaller piece.

Now is there room for any bolt-on acquisitions? I would say our core case is, again, to work on the integration now and to focus on getting Germany and contributing to the group. Then we would need to look, Adrian, at the specifics of a potential acquisition. I think it also depends there what's the cash flow contribution of such an acquisition? Would it fund or more itself? Well, then if one could look at it, it would be more of a turnaround, maybe it's a bit further afield in the future to look at rather than in the immediate near-term. That's probably how I would put it.

[Adrian Gilani Göransson, analyst]

Okay. That's very clear. And then on the sort of federal infrastructure programs in the U.S., do you see any political risk to these given the elections coming up? Or would you say that the current programs are fairly safe regardless of the outcome of the U.S. election?

[Lars Corneliusson, executive]

Well, I mean, if we should believe what both parties have done and what they are saying, they are intending to continue these investments and they are needed. So at least on -- at least from that, we don't see a big risk, frankly speaking. No.

[Adrian Gilani Göransson, analyst]

And nothing from your customers directly either, sort of hesitate -- any hesitance on investing ahead of the election, if that is okay?

[Lars Corneliusson, executive]

Well, I mean, there is probably, Adrian, as in any country, there are some hesitation maybe on investing just ahead of an election. But there is not -- that's a very common thing that happens in any market any time. But not long-term, we don't see anybody talking that there should be a problem with that really. No.

[Adrian Gilani Göransson, analyst]

Okay. And then in Germany, just you mentioned that the savings program reached full run rate at the end of Q2. Are you able to quantify how much that impacted during the quarter so that we can get a picture of how much the costs can come down sequentially in Q3 compared to Q2?

[Erik Danemar, executive]

I think that would be difficult for me to do, Adrian. I mean, I think the easiest way, I mean, to look at it would be that we have achieved, if you would take this SEK 60 million that we referred to, and sort of -- I really think, I mean, the best approximation would be to draw sort of a sloping line from November last year or potentially from end of December rather. And that's sort of how we work through it. Of course, it hasn't been like that, but I think it would be the most reasonable approximation for you.

[Adrian Gilani Göransson, analyst]

Okay. And just a final question, also a bit of a detailed question on the savings program. You said that it's costing more than you initially thought. And I just looked at the Q1 report, you booked a SEK 23 million restructuring provision in the Q1 report, but I couldn't really find sort of the equivalent number in the Q2 report. Are you able to quantify how much extra restructuring costs were taken in Q2?

[Erik Danemar, executive]

We are not giving a number there. I think it's a cost that come again with the time that has taken more rather, Adrian, than further provisions that we need to make. So if you remember, we initially targeted to be done in Q2, so somewhere in the middle and then it dragged out until the end of it. So that's probably more what I would look at. In the sort of rearview mirror, it's taken longer and that implies more cost, carrying the burden of cost we had longer if that makes sense, so...

[Operator]

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

[Lars Corneliusson, executive]

Yes, we have received some questions via e-mail. One is contracting services, which seems like it did not work out in Kazakhstan. Is that correct? And what lessons can you draw? Are the odds better in the U.S. for Rudd? If so how come?

And so far, that's a correct statement. We haven't been able to start working on contracting services in Kazakhstan for many reasons and one of the reasons is that we haven't really been able to convince customers to pay for what -- to make those investments into productivity that the services entail. They are not free of charge and they cost more, but they also give much better return for the customer.

But as the economy is such at the moment and with high interest rates and quite shortsighted, unfortunately, as we talked about, it's a difficult sell so far in Kazakhstan. So we haven't been able to do that. I mean, obviously, in countries where situations are different, both in the U.S. and potentially also for expanding electrification in Germany, it's a different story.

So we're -- we have that in our future plans. But at the moment, we're focusing on making sure to develop what we have and looking forward to developing other services in our countries as well.

Another question is, could you provide an estimate of the remaining capacity in your German service workshops before you reach an optimal utilization level?

And that is a very good question. That's something we are working on every day. And it's a very complex question because it's so many factors going into that question. Obviously, it's a matter of, first of all, demand. How many trucks are out there, how much can we sell to them and how good are we at selling everything we can? And then you have a supply question, do we have the right mechanics? Do we have enough mechanics? Do we have qualified mechanics enough, do we have equipment enough, do we have well-prepared workshops that can -- do we have shifts enough, how do we work?

So it's -- I can't say that, but clearly, we are still not there in full efficiency rather than utilization, I would say, in our network. So we still have a way to go. We have done a lot. We have -- in the last couple of years, we have increased productivity and efficiency and also had a better utilization. But to give a number there, I think, is very difficult. But there are still opportunities in the existing network for sure to grow.

And then there is a question -- quite a detailed question on one of our partners or partners -- competitors or colleagues in the U.S., a Volvo dealer, but rather a question on how the structure of the dealer network looks like in the U.S.

And it is quite fragmented at the moment in the last couple of years. There's been a consolidation in the market. And one of the reasons why we are there is because we're part of that consolidation and that's why it makes the U.S. interesting is that, that it is a consolidation that we believe will continue and that's why we see future opportunities in continued expansion really. So there are plenty of opportunities. That's what I can say regarding that question.

Were there anymore, Erik?

[Erik Danemar, executive]

We had one question about the increase of rental fleet in the United States over the year, what the drivers is behind that? Do you want to take that one or...

[Lars Corneliusson, executive]

Yes. I mean, that's -- it's a very good question and that's because we see opportunities in growing the rental fleet. And particularly, we do that in the excavator segment because the market in the U.S. is such that for certain products, that's how you sell. You actually -- customers are first renting the machines and then they buy them out from the rental fleet. And that's how the market looks like and particularly so in the excavator segment.

And we want to grow our share, both in terms of sales in excavator segment, but also obviously selling more aftermarket subsequently and that's why we have deliberately increased our rental fleet in the excavator segment to take more market share and so far we have been -- as you can see from the numbers, we have been successful in doing that. So that's the reason.

[Erik Danemar, executive]

And there is another question from the same sender. Even though the aftermarket share has increased in Germany of revenue, the gross margin decreased compared to Q1. What is the reason behind this?

Maybe I start. Lars, you can add on to it. I think, yes, typically, you would see a relationship, the bigger share of the total revenue would be aftermarket. Aftermarket has more margins, you would drive up the average margin. And that happens. But I think in this case, the decline in the overall revenue driven by equipment sales or truck sales rather, used and new, was too big.

And you also had a margin effect in that part, which Lars has discussed some of the price pressure that filtered through and even some of the cancellations we had. So correct assumption about higher aftermarket share, higher gross margin. But in this case, the overall mix was such that we didn't see that effect. It didn't help.

So that's on that question, I would say. And I think that's in terms of e-mail questions that I have, Lars. I don't see anything more. So if there are no more questions from the audience, if there is, please ask us now. Otherwise, we will pass back to the operator.

[Operator]

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

[Lars Corneliusson, executive]

All right. Thank you very much and thank you for listening in to this presentation. And have a very good day. Thank you. Bye-bye.