Falck Renewables SpA

F:AA4

Earnings Call Transcript

[Operator]

Welcome to the Ferronordic Q3 2024 Report Presentation. [Operator Instructions]

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

[Lars Corneliusson, executive]

Then we move to Slide #2 here and we continue to see strong performance in the U.S. and that led us -- was much contributing to a 77% revenue growth. We had an operating result that increased to SEK 2 million. If we exclude a one-off effect of an impairment of inventory in Germany, it was SEK 32 million. Net debt of SEK 1.792 billion and that is after the acquisition of the U.S. operation and also partly driven by an expansion of our rental fleet in the United States. Total equity of close to SEK 1.5 billion. And we also presented on October 2 new financial objectives on our Capital Markets Day. So we move a little further and speak more about the U.S. The operations there are continuing to perform well. We had revenue of SEK 686 million, operating profit of SEK 53 million, which then gives us an operating margin of 7.7%.

We had lower machine sales. Actually the market is slightly down from high levels in '23, but the revenue was higher also than in last quarter and that is we had a good mix, we sold a large machine. We do have a higher inventory and a higher rental fleet, which is in line with our strategy to take market shares in the excavator segment mainly. So U.S. looks good. In Germany, the market is declining big time by 40% in the third quarter. Our own deliveries were down by 60%, which we had a high comparable quarter in '23. But the market is down, the economy is not going well at all and we see price pressure. We've had previous customer cancellations of orders and obviously, as you might know, we are having too high stock which we are making efforts to reduce. And we then took a decision to make SEK 31 million impairment of inventory in Germany to allow ourselves to be in line with market as it is at the moment.

What is very positive in Germany, however, is that we see good development on some of the underlying factors really. Service and parts business continued to increase by 6%. In the quarter we saw order intake of new trucks improving and we saw the electric rental business, which was developing positively. We also saw the results now of our cost reduction program and we are in line now with the annual target of savings run rate of SEK 60 million per year. In Kazakhstan, we had a better quarter as well with sales of new machines in units, which increased to 21. I come back to the numbers a bit more there. So summary on the next slide here. Revenue, as I said, 77% up to SEK 1.141 billion. U.S. of SEK 686 million. German revenue was down 35% not as much as deliveries of trucks thanks to a good performance in the aftermarket to SEK 372 million. And Kazakhstan revenue is up 19% to SEK 82 million.

And that then gives us an operating profit of SEK 2 million. So obviously a good contribution from the U.S., but also the German underlying development is positive although the impairment obviously created a decrease in the operating profit in Germany. And in Central Asia, we increased from 0 to a positive SEK 3 million in terms of operating profit. We had big foreign exchange losses in the quarter and therefore, the net income decreased to minus SEK 88 million. And as I mentioned, net debt then increased to SEK 1.792 billion and again this is mainly of course the acquisition of the American operations, but also our attempt to increase our market share in the rental fleet in Germany through excavators and to take market share in a very prospective market for excavators where we see opportunities to grow.

So if we take some more operational highlights in the U.S. Historically, the market is around between in North America totally 52,000 to 56,000 units for the Volvo products that we are representing. Our area covers approximately 8% of the North American market. At 9 months the market for GPE segment, larger construction equipment, in total North America declined by 10%. It was slightly more decline in our area by 21%. But if we compare then Q3 '23 to Q3 '24 despite the decline in the market, we increased our sales of new machines and conversions of machines from the rental fleet by 2% and obviously then we're taking market shares. We also saw good sales of Sandvik drills in the quarter. So all in all in Q3, we sold 61 new units, 10 used units and 36 units were then converted from the rental fleet to sales. Service and parts business relatively stable in Q3.

And that gives us a mix of 49% of revenue related to sales of new and used equipment and conversions, 11% to rental and 40% to service and parts. In Germany, as I said, the total market is down 40% in the quarter. In our area it's down actually more by 47% and we had a big fall in our deliveries of new units. But again we saw order intake of new trucks for future deliveries then obviously started to pick up in the quarter, which is positive and we see some signs that activities are going in the right direction in our industry. Used truck sales in units also down. That is a deliberate choice that we've taken in this downturn now to decrease our stock of used trucks and also our conventional rental fleet. So that's in line with what we want actually. And then price competition from a supply-demand imbalance and the margin pressure then triggered a decision to impair [ parts ] by SEK 31 million.

But again very positive, we see a continued demand for service and parts and our aftermarket services may grow strongly actually. So we could actually sell more service and parts if we had more educated and trained mechanics out there. So aftermarket demand is still high. If we then talk about our efficiency program in Germany, which we launched in Q4 '23. We launched a program to make our organization in Germany more efficient and resilient and obviously 1 key objective is to increase our absorption level, which means how much of our fixed costs are covered by gross profit from the aftermarket business. which is a very, very important target for us as our market is usually more stable and actually even in a downturn usually continues to grow if we perform well. And we are now at a level where we can expect SEK 60 million on an annual basis starting in Q4.

We believe that we actually [Audio Gap]. We continue to invest in our aftermarket business and in e-mobility. In Central Asia, the economy and supporting government investments at least just made on infrastructure investments coming up, but the market for construction equipment still remains challenging. Structure of tenders, competition from mainly Chinese equipment and lack of customer funding is creating hurdles for the market to grow. Still in Q3, we expect that -- we believe that the market has grown by roughly 9%, 10%. We saw an increase in units to 21, but that was partly at the expense of gross margins, and used equipment of 8 units. So service and parts business actually declined in the quarter because we saw client business activity decrease. But also we're making in Kazha good progress on normalizing the inventory position.

Actually [Audio Gap] Kazakhstan too, we've had in Germany as a result of the effects of the abnormal situations during COVID when there were lack of supply and then after COVID when there was no customer cancellations, et cetera. And we are almost back to normal when it comes to inventory position in Germany and also in Kazakhstan. We're not there yet, but we're on a good way and I think in Q3, we've made good progress on [ normalizing ] our inventory positions. So we talk a little about the U.S. network. You see where we are here on Page 9. In the Midwest, we have headquarter in Louisville, Kentucky and then we have 13 outlets in 9 states basically. This is a very interesting part of the United States. A lot of the planned infrastructure investments are going to happen in this area and also a lot of private investments in terms of data centers from the tech companies are being built or planned to be built. So it looks -- we're positive about it.

And as you might know, we are not that only distributor from overseas in the area, but also other strong brands like Hitachi and Sandvik as we mentioned, Link-Belt Cranes and Bergmann, smaller articulated trucks. And obviously the United States is the world's second largest, we should say, market for construction equipment and again substantive infrastructure investment programs planned or have been started actually. As for Germany, our network currently looks like this. We have 20 outlets in Germany. And in Kazakhstan, we have 7 outlets spread out like you can see on this map.

And by that, I hand over to Erik, our CFO, for little more on numbers and economic development.

[Erik Danemar, executive]

Thank you very much, Lars. I hope you all can hear me well. As per usual, I start with little bit of macroeconomic context. In the United States, we have seen continued strong economic performance. We had 2.8% GDP growth in Q3 and 2% projected for the full year. As I think Lars mentioned, we've seen some hesitance from customers in the run-up to the elections and we do believe that there is some scope for such a wait-and-see strategy, so to say, to subside and therefore for some projects that have been on hold to be released now following the elections. Inflation still above 2%, but its way down and that's one of the reasons why the Fed has started [Audio Gap] market rates shot up after the election so potentially are pricing in a slower pace or a higher trajectory at least for that. But rates are coming down for our customers and it's good for us. We are predominantly floating in our funding. So it will translate into lower funding cost for us.

Germany, a very different picture, negative growth in the quarter. Flat expected [Audio Gap] as a whole and inflation actually up a bit in October from September, which is unwelcome. But I think also in Eurozone, [Audio Gap] lower rates will probably open up for more rate cuts there. Kazakhstan, relatively strong. We expect 3.5% or not we rather the monetary authority expect 3.5% growth in 2024. Inflation rate is coming down there, but from a high base 8.3%. National Bank still very high at 14.25% and that's also reflected in conditions for our customers. Funding conditions are tight in Kazakhstan. We do feel that is for a lot of our customers lack of access to [Audio Gap]. If we move on to our results for the group as a whole split by our different segments. You can see this slide here very strong revenue growth, but that's much driven by the acquisition of the U.S. of course.

If we look at the split: we're 60% U.S., that's where we were also in the second quarter, 60% of revenue; less Germany and a bit more [Audio Gap] if I remember correctly, 4.5% year-to-date in the second quarter so the first 6 months. Good that Kazakhstan has picked up. We've sold more there indeed. But I would say it's more a reflection of Germany being low. Germany should be higher. And Kazakhstan is more closer to where we want to see it and we believe there's still more potential there. So that's behind I think where we are. We want to see Germany significantly higher also on the new equipment sales and [Audio Gap] happy that the aftermarket is continuing strong. But again we need the new truck sales also to pick up. If we look rather at revenue mix; 52% for trucks, 39% aftermarket and 9% other. In that other, you would have rental income mainly. That's what we have there.

Here as well happy to see a high number for parts and services, those 39%. But also again it's a reflection of a revenue that should be higher and that would in a proportion make aftermarket look lower. But again it should be rather higher revenue. Gross profit much driven by the U.S., up strong both by U.S. volume, so to say, that comes in, but also from strong gross margin performance. So a positive effect on both of those. SG&A up on the addition, but down as a percentage of revenue for the group and again we have an effect from lower than potential revenue in Germany. Higher revenue would push that measure down and that's of course what we're aiming for, for the group to grow our revenue base. Operating margin just above breakeven with that SEK 2 million that we have. Will be higher without that of course impairment that we had in Germany of SEK 31 million.

So operating profit SEK 2 million would have been SEK 32 million without it, which compares to minus SEK 28 million last year. Net income, mind you, is very exposed to foreign exchange moves. In the third quarter the Swedish krona did strengthen against our currencies and by ours, I mean euros in Germany and U.S. dollars in the United States of course. We don't make forecast as you know, but judging by where those currencies are today in relation to the Swedish krona, one might expect that trend to reverse in the fourth quarter. But we shall see how the currencies move going forward. If we move on to next slide, it's largely the same one. I'm just picking this out of our report. So to guide you towards that if you want to see the results for the group by segment. I flag here also those unallocated group costs as we call them, lower than usual.

And in the footnote there, you will see that we had released reserves and accruals of SEK 7.1 million in the quarter. So that's reducing that cost side. And last year we had a similar, it was SEK 6.5 million then, but that's worth noting. If we move on to the balance sheet and starting from the top with our property, plant and equipment. Our fixed assets; up significantly year-on-year and that's really addition of U.S. of course and notably the rental fleet there, the vehicles that we put in rental for our customers and then continue renting or convert. And as Lars mentioned, the excavator strategy and effort we have there being a large part of it. If you look quarter-on-quarter rather so compared to the second quarter, then you see that there is a little different. We had a buildup of that rental fleet in Q1 and through Q2 to the end of Q2.

In Central Asia, which is Kazakhstan, net working capital increased despite those sales, which of course trimmed our inventory. We are making good progress on normalizing inventory in Kazakhstan, but payables came down quicker. We had payables coming due from our suppliers and settled those and that resulted in a higher working capital. Germany slightly lower and sort of balanced effect there between payables and inventory so mostly a receivables effect. In the U.S. an increase in there like in Kazakhstan, but for different reasons, also an effect of lower payables really. So that's the driver there. And then net debt increased by SEK 121 million to SEK 1.8 billion and this is to a large part due to noncash reclassifications of accounts payable to debt. I will come back to that just on our summary slide for net debt. And our equity to assets is slightly lower stands at 31%.

Just the movement in EBIT year-on-year, to summarize that so to say. We started Q3 last year without the U.S. at minus SEK 28 million for the group. Through this quarter plus SEK 53 million from the U.S. lifts the results for the group significantly. Germany minus SEK 24 million versus last year, but again then mind you plus SEK 7 million versus last year without the inventory impairment that we took. Slightly better in Kazakhstan, slightly lower in HQ and we land at the SEK 2 million that we see in the third quarter of this year. If we look at net debt, it can be cut and pieced together in different ways, but this is what it looks like. And what I'd like to draw your probably attention to here would be the SEK 441 million the noncash debt increase. So explaining that briefly. We have payables from our suppliers, mainly Volvo Truck and VCE. For a certain number of days, we don't disclose that. But they're of a different length depending on product and segment, i.e., market.

Once those payables come to maturity, if we don't sell the vehicle and repay the payables before the end of the payables term, the number of days; then they move over to the FS without cash. So we don't get cash from the FS and then use that cash to pay the supplier, Volvo Trucks or VCE for example. It's just transferred so that's a noncash transaction and that can look different to what some people would expect in the cash flow of the financial statements. With that, I would move to the balance sheet and really just a summary, a graphical representation of our balance sheet. Maybe pointing then to the inventory where we had the adjustments this time, as Lars pointed out, a mark-to-market in Germany where we have worked -- we've written about it from Q4 report to reduce our inventory in a market that have had supply pressure, which has translated into price competition and price pressure.

And we have analyzed closely and come to the conclusion that we had to make this write-off as we did in the third quarter. And then I move to our new financial targets, which are quite fresh. As you know, we had a Capital Markets Day on the 2nd of October and there was a Board decision on these financial objectives the day before that. We have set ourselves ambitious targets; doubling our revenue over 5 years, reaching an operating margin above 6% and keeping net debt to EBITDA below 3x. And well, we've made the first major steps on revenue. The operating margin while up has a long way to go. So this is last 12-month mind you so we're not looking at the quarter here. Negative 0.1% and then a net debt to EBITDA at 4.8x, that is excluding IFRS 16 effects.

And with that, I think I'm ready to hand back to you, Lars, before we take questions. Maybe a few words on outlook.

[Lars Corneliusson, executive]

So clearly we're optimistic about our expansion into the U.S. and the opportunities we see there. There is strong demand and supported by a dynamic economy and a significant need to upgrade the country's infrastructure. And there are extensive federal and state programs for doing so and these are needed and are being addressed and obviously we expect that these programs will support demand for construction equipment throughout the cycle. And also other large construction projects; battery plants, data centers, et cetera; in the U.S. Midwest will continue to drive good demand in our markets. In Germany, the economy remains weak. But as we talked about [Audio Gap] to cut costs and make our organization resilient. We experienced and we believe in continued strong demand in the aftermarket business and we are optimistic about the long-term potential in the German market and opportunities in e-mobility and sustainable transport solutions. We see a big downturn now in the market, which we expect to normalize in the future, and we see some signs of that. Kazakhstan represents a small part, as Erik said, of our business; but we see long-term potential in the country.

So by that, I'm handing over for questions and answers, please.

[Operator]

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

[Adrian Gilani Göransson, analyst]

I'd like to start off with a few questions on the German business and you comment in the report that there was an increase in new orders for future truck deliveries in Germany. Can you give some indication on the lead times of these? I mean if orders increase now, when can we expect this to sort of start materializing as deliveries?

[Lars Corneliusson, executive]

Well, I mean the usual delivery times for a truck in usual times. We haven't seen usual times, Adrian, in 4 years. Once upon a time during COVID and that [indiscernible], which is what has created our overstock was that we had 14, 15 months of delivery time for a while and that was then very abruptly cut very short. Now it's more normalized and back to normal, which means that the delivery times are roughly 3, 4 months usually and I mean it depends on customers when they want them. So they can be spread out over a long period of time if it's many trucks because they can't accept all of them at the same time and they don't want them at the same time. So it's very, very difficult to give an exact answer to that. But delivery times have normalized, if I put it that way, which is good to see.

[Adrian Gilani Göransson, analyst]

Okay. Understood. And then you did mention you're now at the SEK 60 million per annum run rate on the savings target. But given that there's no clear improvement in the market yet, are there any plans of continuing to cut costs from these levels?

[Lars Corneliusson, executive]

We're continuously looking into where we can cut costs without of course hurting our possibilities to earn, which is [Audio Gap] and also in sustainable transport solutions. Then, as we talked about, we see actually an uptick now in our order mix. So we have to be careful we're not hurting ourselves too much, but of course we're always looking to see where we can take out more. But we are now and that has been a big job actually to and maybe taking a bit longer than we hope for to come to the target of SEK 60 million savings per year. But clearly we can only hope that we find more opportunities to do that without then hurting because, as we mentioned, we need to invest continuously in our aftermarket business. We need to hire more mechanics because there is demand and we can earn more if we had more mechanics as we write in the report as well. So it's a mixed picture to be honest.

[Adrian Gilani Göransson, analyst]

Okay. And then moving over to the U.S. regarding your prior comments about there being some hesitancy among customers to invest ahead of the election. I understand it's only been a week or so since the election, but have you experienced any sort of shift in behavior or any increased activity since then?

[Erik Danemar, executive]

Adrian, I think it's more a sentiment shift and we're cautious on giving guidance. But I think it's natural that people are a bit hesitant and cautious in these, how do you say, preelection times. And then almost regardless of what the outcome is when the certainty is there, then they are more free to act. They know with biggest certainty what they can expect.

[Lars Corneliusson, executive]

It's also fair to say, Adrian, I mean in general usually kind of seasonality, if you want. In the end of the year, there are usually more conversions from the rental fleet than during the year. So customers are usually renting machines in, let's say, in the beginning of the season in the end of the year. That is a normal cycle, so to speak, which runs every year with or without elections.

[Adrian Gilani Göransson, analyst]

Okay. That's helpful. And then just regarding the specific VCE products that you sell in the U.S., are they for the most part domestically produced or imported into the U.S.? Because I'm thinking of potential tariffs on imported machines and whether that would have a negative impact on Volvo's competitiveness compared to the local brands in the U.S.

[Lars Corneliusson, executive]

No. The majority, Adrian, are imported not all, but majority are.

[Adrian Gilani Göransson, analyst]

You cut out as you were starting to answer the question. So could you repeat?

[Lars Corneliusson, executive]

The majority of the Volvo products that we sell are imported not all of them, but the majority at least for the time being, they are. So that's the answer I can give basically.

[Adrian Gilani Göransson, analyst]

Understood. And the final question more of an accounting question regarding the mechanic of the payables moving into net debt. Just to double check that I'm understanding that correctly. It's a reclassification of an operational item into a financial one. So it makes the operational cash flow artificially boosted you can say. In reality, the noncash adjustments in the financial part should be seen as operational. Is that a fair assumption?

[Erik Danemar, executive]

Yes. I think that's a correct reflection, yes. I mean with indirect cash flow creation the way it's done, this movement, as you say, or reclassification of payables, the reduction in payables and the increase in financial items, yes, would have the effect.

[Operator]

The next question comes from Anders Akerblom from Nordea.

[Anders Akerblom, analyst]

So I have a few ones primarily on Germany. I guess starting off on kind of the order intake that you comment on increasing somewhat. I mean to what extent can we kind of attribute this to a better market more so than kind of a catch-up of some of the postponed or delayed orders in Q2? Is there some effect from that that you kind of bundled together so to speak?

[Lars Corneliusson, executive]

Well, how should I answer that? I think it's a combination of a few different things. First of all, as you can see then, we have lost more sales in this year than the market and we need population in our area to serve because it's in the aftermarket where you make the margins really in our business, in the truck business. But of course customers seem to have woken up. And usually we are quite early into the cycle in our industry. So at least we see bigger activity and replacements that might not have been made are at least being planned to be made, which is a positive sign. So I don't know if I can give you more. And obviously I mean, as you can see then, we see that pricing is an important part of it and that is the reason why we had to make an impairment of our old inventory. Clearly the pricing in the market has changed and that has also had an effect on that we have been able to take more orders for sure.

[Anders Akerblom, analyst]

Okay. I think that's a good segue into something else that I was thinking about, which is I mean speaking of the pricing pressure in the market. I thought you mentioned something about Chinese players now in the call. Could you just elaborate on this? What ends of the market that this pricing pressure is coming from? Is it European-based to some extent or is it mostly the low-priced Asian competitors that are pushing down prices?

[Lars Corneliusson, executive]

Well, in Germany, we don't have any Chinese competitors at all. In Germany, the competitors are basically the big 7 as they are called, which are the European manufacturers. When we refer to Chinese competition, it's mainly in Kazakhstan where they are very active and very successful I should say also. So in Kazakhstan, we have a situation where we are then competing in the premium segment together with the other famous Western brands with our way of going to market with considerably higher pricing, but also higher productivity, higher residual values and efficiency and good service setup to make sure that these machines are working when they should. But in Kazakhstan, there is still a lot of Chinese competition which are successful. In Germany, there is not. So whatever happens in the market is determined by the 7 European players and obviously that is driving the market. And at the moment, clearly we see a price pressure downwards and we have seen for quite some time I should say. We have not been able to respond in quantities to that as you can see in our deliveries and in the impairment that we're taking now, which is an effect of that. But we are playing now if I put it that way.

[Anders Akerblom, analyst]

Okay. So should interpret that in terms of I mean the write-down that you had now and the nonrecurring or recurring nature of that? Should we see that as maybe being you've mostly adjusted to this now in terms of your inventory or could we expect something more there also going forward?

[Lars Corneliusson, executive]

We expect and we hope that this is a onetime effect obviously. Now in a position where we have, so to speak, the future in our hands and we feel that that is what we have done really and we're taking down the cost. We see good progress in the aftermarket and we have an inventory which is in line with the market and we see order intake picking up. So from that perspective, we're actually quite positive although we're not at all happy with the result in the quarter. But looking forward, we clean out a little if I put it that way.

[Anders Akerblom, analyst]

All right. Good to hear. Lastly, on North America and if you could elaborate a bit on I mean the rental fleet obviously is increasing and your progression of taking market share in the excavator segment. It would be interesting to hear what you're able to say there.

[Lars Corneliusson, executive]

I mean in terms of market share, we've already taken a lot of market share this year and we're very happy about that because obviously again we want machines out there to service them and we also want machines to make money when we sell them and when we rent them and when we convert them. So traditionally in the area, the market share for wheel loaders and articulated haulers have been good, but not for excavators and we see an opportunity to grow in that segment. But it's a very -- the way that [Audio Gap] and then most of the times, buying it out after a period of time and that we call conversion. So that is if we want to take market share in the excavator segment, we need to increase the rental fleet to be able to do so and that is what we've done during the year. And obviously then we have and we expect to continue to take market shares not only in excavators, but in other areas as well. But that is how the market works and that's how you do it basically.

[Operator]

[Operator Instructions]

[Erik Danemar, executive]

While we wait for more questions from the conference call, I have 2 questions online. One is whether we can expect to see better cash flow going forward and a strengthening of the balance sheet.

And I think here we are cautious to give forecast. But I think we have increased the rental fleet in the U.S. and that is an important part of our strategy in the U.S. So there will be a rental fleet. I think also plan is now to put these machines into work and then convert them in the future and that will generate cash flows and to some extent strengthen the balance sheet. In Germany and Kazakhstan, as we've said, we are working to reduce the inventory positions in both those countries and are making progress there. So that would also contribute to some extent. In terms of the balance sheet overall, I can refer to our strategic objectives there where we want to keep overall net debt below 3x over the long term and over the cycle and that's what we're aiming towards.

There is a follow-up question on that. Whether we may sale and leaseback some of our properties in our portfolio. That refers specifically to Germany, but I guess it could be applicable to the U.S. as well.

And here I would probably also give a fairly generic answer that we are looking for the most efficient way to use our balance sheet. So if we would find terms that would make sense in that way, then we would definitely consider it. The properties are fairly specific though, that's worth being in mind. It's not sort of residential in downtown Frankfurt or Louisville for that matter. So it's mainly that one looks at portfolio solutions and those kind of structures. But the stock answer would be that we are always looking and wondering how we can use our balance sheet as efficiently as possible.

So those are questions that I got online. Anything else, operator, yet from the conference call?

[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]

Okay. Thank you very much. And thank you, everybody, who has listened in and asked questions. I'm looking forward to presenting the fourth quarter. So have a good day, everybody. Thank you.