engcon AB (publ) (ENGCONB) Earnings Call Transcript

Hello, everyone, and a warm welcome to engcon's Q3 results presentation. My name is Anne Vagstrom, and I'm Head of Communications and Investor Relations here at engcon. And with me today, I have our CEO, Krister Blomgren; and our CFO, Jens Blom, who will present the results. After the presentation, we will have a short Q&A session. You can ask questions in the telephone conference or by posting them on the web. So with that said, I will hand over the word to Krister.

Thank you, Anne, and I will go through the third quarter. And we will start with a short introduction to engcon for you that doesn't know that much about us yet. engcon is the global market leader in tiltrotators. We're having 45% market share. And engcon was founded in 1990 by Stig and Monica Engstrom. Both of them are still the biggest shareholders and Stig is still active within the company, mainly within R&D. The yellow marked countries are the markets where we have active sales with a plan how to grow the market and boots on the ground. It is total 16 markets from Americas to Australia. Other markets, we are more opportunistic, like South America and East Europe. We sell to them, but we don't have a clear business plan for each market there. Net sales 2021 was SEK 1.5 billion, and we are approximately 400 employees. The Nordic region is still the dominating region with more than 50% of our revenue. But the other regions is growing fast and we expect them to be -- become bigger and bigger then. We have 2 factories, one in Stromsund, Sweden, where we are also having our headquarter. And other one is in Poland, Niepruszewo, and that's close to Poznan, close to the German border. And our business model is that we buy components and we assemble them at those factories that we talked about there then. And if we come into the Q3 business highlights, we see that we're having a strong order book with a backlog that provides a good basis for a stable future earnings. We have supply chain and higher production level from end of Q3. And we still see that we can have further improvements on both supply chain and the production level then. Nordic orders for Q4 2022 and Q1 2023 is already included in order book and they are coming earlier since we're having this strong order book, they're placing the orders early. And that's been the trend since Q3 2021 when the customers saw that we had a longer lead times on our production then. We can see we're still having high order activity in Americas and Asia, Asia we're seeing it. We also see that the price increase compensate for inflation and energy surcharges and we're gradually reaching the full effect of the price increase. We will probably see that in Q4 and Q1 then that we're getting the full price increase that we made during 2022 then. If looking on the Q3 figures in brief then, we're having a strong gross margin and a stable profitability. On the order intake, as we expected it to be lower since the big order intake earlier this year and Q3 and Q4 last year, especially for the Nordic market. And also our extraordinary big order book creates long lead times in tiltrotators that may affect our growth markets when they are more used to get the tiltrotators within a couple of weeks, not waiting a few months and so on. But it's also long lead times on excavators that also make everything a little bit on hold. But also, of course, that our customers are waiting to see what the macro outlook will be. I mean we still have the war in Ukraine, we have high inflation and we have a higher interest rate. So that needs to maybe be stabilized a little bit to move on. But we are still proud of having 19% on year-to-date on order intake increase. Net sales, we have our best third quarter ever, even if we had some supply chain disturbance with some key components that have delayed our ramp up of production, which have led to a backlog and a big order book that we will work on during Q4 to hopefully be back on a more normal lead times during 2023. Normal lead times for us is like 2 to 6 weeks. And our net sales have been growing 25% on year-to-date and 11% during this quarter. Our gross margins have increased. So we see that the price increase have started to kick in. We still believe that we have some room left for improvements there also. And with the higher gross margin, we're also getting a higher EBIT margin than compared to earlier quarter this year then. And we're still on a high level on return on capital employed. And now coming in to a little bit more on business and financial development and I will continue a few slides before I hand over to Jens Blom. And then we're looking on the order intake and net sales development then. Backlog and supply chain programs affected, as I said earlier, the net sales for the quarter. We have managed to get more components from late September and also prepared for increased production in Q4 and 2023 then. As we see, the order intake decreased 5% and 11%, if you're looking on it organic and currency effect was SEK 21 million on the order intake. On net sales, we increased 16%. And if you're looking organic on it, it was 11%. And there the currency effect was SEK 17 million. Order book with a higher volume and longer delivery lead time provides conditions then for stable earnings in coming quarters. And Q4 2021 was extraordinary high order intake because of the longer lead times and the big price increase that we did on 10% from the 1st of January there. So that was really sticking out and you can see that also on the diagram right there then. So we're targeting normalized production levels and lead times in the beginning of 2023. And that's a key thing for us also for the markets further away then. Well, we have a stronger demand outside Nordics and Europe. And if we're looking on the Nordic then, we can see, as expected, the Nordic having a dip from high level and long lead times last year that led to early orders. Net sales depends on, of course, the earlier order book that still keeps it on the sales on a very high level. Orders in Q3 mainly for 2023 that normally would have come in Q4 or early in Q1. So it's a special year with the order intake, definitely. Europe, if we're looking on Europe on year-to-date, we are up 20% on the order intake and up 31% on the net sales. We're having a little bit weaker quarter and that might be an affected of the longer lead times that they are normally expecting shorter lead times, it can be affected of that, but also that we've been having bauma and only ordering after shows in that way then. If looking on America, still good order intake for the quarter, up 24%. Order intake year-to-date is up 54%. Long lead times that slowed down the net sales. The decrease of 8% is because that we had a huge order intake in Q2 and we have been able to produce it, and we are shipping it over, but long lead times in factory and long transportation is that what is order in Q2 will be delivered in Q4. And the same thing here, the customer expect normally shorter lead times and we're working on that. Asia-Oceania, good order intake, still 26% in Q3 and year-to-date is 45%. Net sales and order intake affected by the lead times here also that we have also needs to ship things over there to get it out in a better way. Net sales year-to-date in Asia-Oceania is 35% up. So we are still delivering good in all the markets. Europe is also -- no. If we then looking on how it's looking globally and thoughts and for the future and so on. I just been coming on from bauma in Munich, Germany, bauma is the biggest exhibition with infrastructure machinery and it was really positive exhibition with tiltrotators in more or less every booth, of course, not only engcon's, and it was even a couple of totally new brands, example from Turkey. But we think that's good for the future growth. People are thinking, talking and seeing tiltrotators everywhere. And the feeling is a little bit similar to what I saw 6 years ago with the fully hydraulic pickup in every booth and everybody was talking about that on the bauma show. We know now how much they have been growing in German-speaking countries after that. So I think this is a really positive sign that we saw on this show regarding that. And we also believe that the Nordic market is a little bit more depending on the excavator sales. But for the other regions, it's more a penetration case. And if we're taking in France like an example, we know that there are approximately coming out 18,000 excavators in our range every year to the market there. We, together with our competitors, have a penetration rate of approximately 10%. So we are selling around 1,800 tiltrotators per year there. Even if the excavator sales would drop 20% and will be approximately 14,500 excavators, we still have a good opportunity to grow. So there are in that way, no excuses for us to be able to grow on the new markets. And it's the same case in the U.S. where it's coming up 80,000 excavators every year, and we only have a penetration rate on 1%. So there are still plenty of room to grow even if there would be down in sales of excavators then. So we believe a lot in that that they could compensate for the more cyclic Nordic market then. We also saw a positive report from Volvo that they still see a strong order intake on the construction machinery in their Q3 report. And also been to U.S. 2 weeks ago and the feeling is that the construction industry is still very strong there. And hopefully, they also start their infrastructure investment soon there. So over to Jens.

Thank you, Krister. We're going to look a little bit short on the EBIT and EBIT margin. We ended up on SEK 104 million in the third quarter compared to SEK 91 million last year and that's a growth on -- with 14%. And if we look at the margin, we end up on 25% compared to 25.3%. We have also a slight effect of forecast for the group business system of SEK 6 million compared to SEK 1 million. So overall, we presented a strong EBIT given the challenge that we have had with inflation and the supply chain. If we look a little bit closer on the profit and loss, as Krister mentioned, we were on SEK 416 million in net sales, which is really strong. And our gross margin is 45%. We can see that we are compensated for the higher cost for goods sold. If we go a little bit down, we see the selling expenses is SEK 53 million, which is higher than last year. And the reason for that is we have more boots on the ground, mainly on the U.S. and North American market. Further down, we can see that the R&D expenses is lower. And the reason for that is the expenses for the third-generation tiltrotators is posted in the balance sheet as an investment. So if we look at the bottom line, we have an EBIT margin pre-IPO on 25.2%. And on the rolling 12, we are ending up on 22.2%. We'll take a little bit closer look on the capital structure. As you can see, we are having a higher level of capital tied up, ending 30.7% of net sales. The main reason for that is a higher level of inventories. And the reason for that is that we are securing vehicle components and also longer lead times. And what we can see now is probably the end of Q4 we will be in a slight higher level of the inventories. And that's to meet the delivery plans for the more remote markets at the beginning of 2023. But even if we are tying up a little bit more capital, the cash flow has improved. We are going from SEK 35 million to SEK 63 million. That's a really good and strong improvement for us. And then we are looking a little bit on the return on capital employed. We have a really good number here, 54.9% and that's an effect of high profitability and efficient handling of the capital. And this combines with good operating cash flow gives us a stable foundation to meet the next upcoming quarters. And I will thank you for your attention, and I will hand it over to Krister and he will summarize the quarter.

Thank you, Jens. And we will go through our financial targets and we are performing in line with our financial targets. We are actually above all financial targets of looking on year-to-date. Growth, we have 11% growth for the quarter, but we are above target on year-to-date with 25%. For the quarter, we have a backlog bigger than normal because of supply chain issues. It's better now with the supply chain from late September. Profitability, we are on a good gross margin level, which is an effect of that the price increases have started to kick in. So we have increased our gross margin for this quarter with approximately 3% compared to previous quarters this year then. So that's really good. We still have some room for the price increases to reach full effect and of course, depends on what's happening with the component price and so on for the future quarters. Capital efficiency, as Jens mentioned, a really good level, 55%, and we now also are above our goal on capital structure with 38% compared to 35%. That is our goal then. And if we're moving on then to summary and outlook. Still an extreme ordinary -- extreme order book with a lot of orders for 2023 already. We have managed to get more components, as I mentioned earlier, from our suppliers were on a higher pace since late September to work on minimized backlog and shorten the order book. We believe that we will have more normal lead times in 2023 then. On bauma, you could see that more or less all the OEMs had electric excavators planned to come out on the market late 2023 or 2024. These machines will be perfect with our third generation of tiltrotators. We have been delayed in planned series production to Q3 2023 of the Generation 3, but they will be ready for when the electric excavators coming out to the market. The delay is mainly because of problems with supply chain for our prototypes that we want to have out in field tests before we go into pre-series and serial production. We have the financial strength and flexibility to manage market challenges. We are monitoring the possible Nordic cyclical decline in excavator sales, even if we see positive signals that it will not be as deep as people have talked about. The new market should be able to grow even if the excavator markets decrease, as I mentioned earlier, like the example of France and U.S. Solid earnings and profitability with the headroom for improved production capacity and lead times give us also a good opportunity for the future. And the extraordinary order book provides conditions for stable earnings and good margins coming quarters. Expected full effect from 2022 price increase in Q4, and we're going to do an additional 5% increase from year-end or from the 1st of January then. We will also make sure to produce during Q4 for inventory to the markets far away to shorten the lead time to make sure that the customer can get the goods or tiltrotators in more normal lead times there. We believe that that's important in the new markets where they don't plan ahead like they do in the Nordic market for buying tiltrotators then. So we are long-term optimistic and continuous focus on innovation despite the uncertainties ahead. And if looking into a little bit more key market drivers on -- for the industry. We see that we, engcon, and the tiltrotators industry are in a strong position to meet those global industry shift that we are seeing ahead then. And again, the feeling after bauma where we're meeting with OEMs and there was a big focus on tiltrotators on the show, it's a clear sign that it's more people than us. We believe that the tiltrotators is the solution for a lot of key drivers within the construction equipment transformation then. One example of labor shortage or the war for talent is in the developed world and it was one customer I talk from U.S. that told me that thanks to that we have tiltrotators, people want to work for him because it makes the work much easier and more fun because it's really hard to get good labor in the U.S. and he saw this as a big advantage to get good labor to -- that he have tiltrotators. And he have 7 tiltrotators already now and he keeps buying them to all the new machines he's getting into the industry. We also see that the excavator becomes a tool carrier and replace other machines and I talk to one manufacturer excavators about the risk that they will lose other construction machine sales because of that excavator is replacing the other construction machines. And his answer was that that's why our machines have to be prepared for tiltrotators so we don't lose also the excavator sales starter brands that have prepared the machines for tiltrotators. So we see the trend is that the OEMs are looking to prepare the machines. They see that excavators is the fastest-growing machine within the yellow industry, and they need to jump on the train and everybody is more or less on that and will be -- want to be ready for tiltrotators and making it easy for making the installation of tiltrotators. So it's a lot of things pushing in the right direction within the construction equipment. And they work on this change and it will change the industry in that way. And we're also having so many advantages if you're looking in sustainability part where we reduced the need of fuel with 6,000 liters fuel for 300 metric tons machines. We also increased the safety both for the driver and the person around the excavator. So that's also key things that they are working with. And we also see that they need to increase the productivity, like in the U.S. lack of labor. And also if they start doing the infrastructure work, they will have lack of machines, and they need to get their productivity up and we can increase the productivity with an average 25% if you're using a tiltrotators. And if you then also using full hydro quick couplers in the tiltrotators, you become the tool carrier and you can replace other machines and that also saving both money and increase the productivity then with that. So we still believe in the tiltrotators and we believe that the shift will come. And it's definitely after being on bauma, the feeling is really positive that that will come. And we also will have CONEXPO coming up in March that hopefully will have the same positive feeling then for the North American markets. So with that, I hand it over to Anne for more Q&As.

Yes. Thank you, Krister and Jens for a great presentation. So we will now open up for questions. You can ask questions in the telephone conference or by posting them on the web. We will start with questions from the telephone conference. So operator, please go ahead with the first question.

[Operator Instructions] The next question comes from Kenneth Toll Johansson from Carnegie.

Yes. So a question on the outlook for the Nordics. Orders were down there. And if we take into account the price increases introduced earlier this year, the volume order intake in terms of volume must be down by 50% or even more. But you also said that you're getting some signs that maybe the downturn isn't going to be as severe as some people talk about. So can you elaborate a little bit around that? And also to add to that, I know that last year, when you raised prices from January, then you had a very strong order intake in the fourth quarter ahead of the price increases. Now you're increasing prices again in January. So are you expecting a better order intake in the fourth quarter than in the third in the Nordics?

First, trying to answer the question regarding the Nordic region, then I think it's been a lot of order coming in early on the Nordic region. We are on a pretty good level. And as you mentioned, of course, with the price increases, there are big drop in units then, and that's no secret regarding that. But we are on a pretty stable level on -- if you are looking on year-to-date on sales and so on, on it. So they're not coming up more excavators this year in the Nordic. It's actually coming -- probably coming out less already this year because with the problem of getting supply chain problems, the OEM has been having on producing excavators then. So that's a little bit -- those signs that we talked about for the upcoming year that probably will come out more or less about the same number of machines next year in Nordic and Europe as it's been this year because it's a lack of machines this year that people are waiting on. So that's one positive sign for us for the next year that it will be more or less the same number of machines. And in the Nordic, I think it also will be a big order intake coming in Q4, but not as big as it was last year because people will wait a little bit more to see stabilization made on the inflation and on the interest rate and so on, trying to so they can make a good calculation on what price they need to have to the market if they buy a new machine and so on. So that's a couple of key things. And maybe sort of I lost one of your questions, Kenneth, there.

Yes, but you answered many more. So I feel happy on that side. Yes. So another issue is you talked about supply chains that you had some disruptions in the -- earlier in the quarter, but then those ones were resolved and you had good production rates at the end of the quarter. So was it a specific supplier that had problems? And can you talk a little bit more on that? And also if there are risks that supply and issues will come, yes, next quarter as well?

Yes, there were a couple of suppliers that we have problems with and one major award that we again, needed to produce and then put everything out of the factory and when that part came, we were putting it on again, and we needed to put it into the production line again. And that's really slowing us down, of course, but it's still better than doing like some other companies need to do to close everything for a week because they don't get that part. And so we decided to keep on working like that. And now the trend has been so far good, positive, but there are no guarantees. There are still just in time, things coming, and we're getting more components, but we don't get estimate as we want to. We still are limited by it, but it's on a higher level.

Okay. And that means that the order book that you have right now, it will stretch into Q1 next year, at least for Europe and the Nordic?

Yes, absolutely, with also the expected order intake in Q4, absolutely, Kenneth, it would be like that.

[Operator Instructions]

It's Agnieszka Vilela at Nordea. I have a couple of questions. Maybe starting with the comments you put on the Slide 3, telling that the Nordic orders for Q4 2020 and Q1 2023 are already included in the order book. Should I interpret it as the orders that you book in Q3 that the deliveries are for this quarter Q4 and Q1?

Yes. I mean the orders that came in Q3 are mainly going to be delivered in 2023, if that they might -- from the Nordic countries, Pacific, then they are either in Q1 or Q2, I would say that they will be produced.

Okay. And is it so that the customers still in Q3 placed this kind of advanced orders knowing with long delivery times because of the fact that the supply chain has been unstable? Was it the main reason you believe?

Yes. That's -- because normally they would place those orders in Q4, but those -- there were some orders that came now than in Q3 because they know now what type of machines they will get the dealerships in Sweden and so on. So that's why they didn't place this order to secure that they get tiltrotators in time. And that's the challenge we have with the countries outside the Nordic, and that was the problem we got, as we mentioned, I think in Q2 report a little bit regarding that the countries further away or that are not as developed as Nordic, they are not used to order in advance like that. They are used to order when they're getting or when the customer gets them once the tiltrotators. And because the penetration rate is 90% plus in the Nordics, so they know that if they're going to sell a machine, it's going to be tiltrotators on it, and they know engcon have a 50% plus market share in the Nordics, so. And that and need know how to order it.