engcon AB (publ) (ENGCONB) Earnings Call Transcript

Good morning, and welcome to engcon's Q2 Report Presentation. My name is Stig Engström, CEO. And with me today, I have our CFO, Marcus Asplund. Let's take a look at what's happening during the quarter. One thing has probably not missed anyone's attention, the CEO change that took place on May 1. My main task is to bring engcon back to the financial targets adopted by the Board, 20% annual growth and 20% EBIT margin. I have begun the journey towards those targets and identified some focus areas. I will go into them later, but it's about optimizing the product around customer needs, focusing on efforts on the right markets and creating the right conditions for the company's core functions and of course, ensuring strong cost discipline throughout the company, including decrease of stock levels. We can conclude that it was a good quarter. Revenue was strong and the margin shows a recovery, also including a SEK 13 million restructuring cost. It's a good result, which shows the strength of our business model. At the same time, I know we have more to give. Now begins a new chapter in an old story with focus on the core areas that built the company quickly, strongly and profitably back to basic. Let me explain this a little bit more in detail on the next slide. So how will we reach the 20/20 targets? It's never a good idea to do everything at once. It's about doing the right things in the right order. On the journey, I see the following areas as the most critical. We need the right product to the right market. Our most advanced solution in the Series 3 platform for mature markets with hardest competition. Simpler configurations is good enough to open the doors into markets where many customers have not yet bought their first tiltrotator. Growth where the conditions are right. You don't cross the river to fetch water, the same goes for sales. In the Nordics, where the construction activity will come back from low levels and on the key European markets where awareness is rising, penetration is low, and we already have the competent salespeople that can act. This is where we focus our efforts going forward. At the same time, we must build capacity for the next level in production and purchasing. Strömsund and Poland work well for today's volumes and with smaller investment, we can reach 3x today's level. The ERP change took a lot of time from all of us, not least within production and purchasing. We can now use that time for process improvements in purchasing and prepare our production facilities. We will look into every part in the organization to prepare the business for the next level. Focus on cost control and capital tied up. Cost control must run through the organization and capital must be directed where it creates the most value. I'm not satisfied with our stock level in certain markets. We have taken actions and we can already see effect. The engcon's spirit has always been the key to our long-term success. And it's about the whole organization, taking responsibility and innovative thinking close to our customers, and that is what we are returning to. I'm tired of all empty discussions regarding the most important questions for our planet, sustainability and especially CO2 emission. We have started our transformation for decreasing use of fossil energy. We have a clear ambition to step-by-step "turn off the fossil tap", and we have already taken local action in that direction. I hope others, companies and politicians, et cetera, will follow. To make this work, the whole company needs to support what really drives engcon forward, development, marketing and production. Everything else in the company should make it easy for these functions to do their job. That's how we remove unnecessary complexity and get back to speed. This sounds boring, but it's also everyday industrial life is about. Dig where you stand, a principle that defines both our core product and how we should operate as a company. Let me briefly comment on the quarter. Marcus will deeper from where he stands in number, but this is how I see it. Net sales is increasing with 13%. The growth comes close to home from the Nordics. We also see some support from Europe. It's in these 2 regions I see engcon greatest potential going forward. Order intake, also driven by the Nordics, Europe is weaker. During the quarter, the global situation has not been very helpful, not least given what's happening in the Middle East. The uncertainty is spilling over to the economy in general and especially oil prices and customers are becoming careful. After conflict comes peace and what has been destroyed must be rebuilt. We expect higher levels over time when the conditions are in place, not least in Europe. Machines from North Europe will be sent out and the prices for used excavators will increase. That's good news for new machine sales in the Nordics and close to 100% of those needs a new tiltrotator. Gross margin. The gross margin is affected of a large share of sales in the Nordics, where the competition is toughest. We adjusted prices during the second quarter. The main effect will come in the third quarter with some delay due to dealer agreements. We are also reviewing our product portfolio and purchasing R&D processes to improve this level over time. We have, for a long time, sold products with extra everything, but only with the price of a standard. This is sometimes necessary, but we need to find the right balance. EBIT margin. The margin was affected by restructuring costs related to organizational change, improvements that in the right direction, but we have more to give. The coming changes are intended to lift this level over time and take us towards the 20% target. I have strong hopes that by the end of the year, we will see a clear and stable trend with profitability moving in the right direction. Return on capital employed, 40% is in line with financial targets, and Marcus will talk more about this. Here, we see the development over time. The direction is clear. The bars are moving on the right way, both for order intake and net sales. Net sales reached a record level for the second quarter. Order intake was also at a high level, but leaves a little bit more to wish. After a good start 2026, it's calmed down again in March. The last 2 quarters were very strong, partly due to prebuying around year-end, which has led to somewhat calmer period now. And as I mentioned earlier, the geopolitical situation has not been very helpful. Both sales and order intake are above SEK 2 billion on a rolling 12-month basis. One quarter can go up or down, that's normal. But over time, this shows the underlying strength of engcon's business. Let's start close to home in the Nordics. Net sales continue to grow strong and we have passed SEK 300 million. The year started with a strong order book, which have we worked through during the spring. Sweden is the strongest right now. Customers and dealers are more positive, which created a strong pre-buying effect at the end of last year. Excavator sales are increasing clearly around 20% to 40%, depending on model. This is what we now see coming through in our deliveries. In Norway, we have seen increased sales to key dealers, even though the market is fairly weak at the moment. Order intake is not developing at the same pace. Sales have not fully come back everywhere, like in Finland, but there are some positive signals also here. The market in Sweden has become more positive and these are more willing to place orders earlier. Last year, we did not see the same confidence. Right now, we are still waiting for the start. The quarter is good, but the engine is still not running on all cylinders. In the Nordics, in general, we expect higher construction activity and more machine investment after several weak years. The Finnish economy has been developing weak, and we hope to see a return here. In Denmark, the economy is a lot better, and there is also extra penetration to be captured. We also expect more impact from price increases during the second half of the year. Moving over to Europe. We see a somewhat weaker period in a long trend of positive development. The weaker development in the quarter is partly about timing, no significant orders in the Dutch region, campaigns in earlier quarters making this a little bit slower, some customers waiting for upcoming trade fairs. The world is uncertain. The situation in the Middle East is making customers more cautious. In the long term, the potential in Europe is huge. Europe has some of the world's largest excavator markets, yet most operators have still not experienced their first tiltrotator. We have spent years creating the conditions to capture this potential through marketing, by training skilled people in our sales companies and by building a strong partnership in the Dutch region. Coming back to dig where you stand, it is on the key markets in Europe, we should focus our efforts going forward. Benelux, a small region geographically where world travels fast across borders. Penetration is already the highest in Europe. We are close to the point where the growth can accelerate quickly by itself. U.K., a large excavator market with around 20,000 machines per year, partly characterized by large rental fleets and the local quick hitch "pick up the pin" standard. By focusing development on these products, we open up a significant potential market. France, we have done a good job in the North, where penetration is higher. Many customers there understand the tiltrotator concept and our attachments. In the South, there's still a lot of work left to do. DACH: We have a strong partner in SIRIUS degree and OilQuick Germany. Together, we have quickly built momentum in Europe's largest excavator market. Americas and Asia-Oceania. Sales in stable but low level, reduced expectations for 2026 and 2027. Huge markets, but a lot of work to get volumes and sales and the profitability up, -- focusing now on established stable teams in our sales companies and give support and service to our existing customers. In Japan, we participated in the CSPI-EXPO in June, a lot of tiltrotators in the show and increased awareness. The tariff situation in the U.S. market makes nothing better. We will make some changes in our product portfolio to better up to these virgin markets. Our good contact with the OEMs will continue, but we also will reduce our stock levels. And with that, I'll leave the word to Marcus to go through the numbers.

Thank you, Stig. We delivered strong net sales in the quarter. This marks a record high revenue level for any second quarter in our history. This record Q2 top line of SEK 594 million was achieved despite the persistent negative currency effect we have become accustomed to talking about in previous quarters, although we're starting to see the currency headwinds diminishing. This is even more true further down in the income statement, where we actually see a small tailwind through positive revaluations of balance sheet items at the closing rate. Gross margin came in at 38.4%. And as Stig mentioned earlier, a large part of the sales increase comes from the Nordics, and that affects the market mix. We make well-funded commercial decisions every day, but at the same time, this is also the region where competition is toughest and that naturally leaves a mark on the margin. That said, I do believe this is a low level with an upside from here. Last time, I talked about the price increase we have introduced up to 5% on an average order. Since a large share of sales is still going into the Nordic market from a longer order book, we are yet to see the effects from that. Also, the agreements we have with larger dealers should start to show in pricing from July onwards. Selling expenses are SEK 5 million lower than last year despite the higher volume. The main explanation here is trade shows. Bauma, which was in Q2 last year and CONEXPO, our main trade show this year was in Q1. Our administrative expenses rose with SEK 12 million due to decisive corporate restructuring actions implemented to sharpen operational efficiency. In total, selling, general and admin came in at 19%, and we can see that we're getting some operational leverage from a higher net sales. However, to be fully satisfied, I would like to see this ratio move closer to 15% as a first milestone. The rollout of the third-generation tiltrotators leads to lower level of capitalized R&D expenditure. However, total R&D spend as a percentage of sales remains at the same level as last year, both for the quarter and year-to-date. At the bottom line, EBIT came in at SEK 102 million, corresponding to a margin of 17.2%. All things considered on an okay level, yet the result clearly influenced by the strong sales growth in the Nordic as well as the restructuring measure carried out during the quarter. To see our true operational momentum, we look at the normalized margin. Adjusted for the SEK 13 million in one-off restructuring costs, we achieved 19.4%, proving we are steadily closing the gap to our long-term financial targets. Putting this into perspective, I think this is a solid result. We are up 8% compared with the previous year. And even with the restructuring costs included, we are still ahead of most quarters along the way. To me, that says a lot about the strength of engcon's business model and our products. And as Stig's road map is gradually rolled out, I also feel positive about the profitability development going forward. Cash flow from operating activities improved, driven primarily by higher operating profits and positive changes in net working capital, for example, inventory. We began seeing the positive effect of improved net working capital management towards the end of the quarter, as Stig mentioned earlier. Following that, the return on capital employed reached our long-term sustainable target coming in at 40.1% and 41.6% adjusted. And on that note, I'll pass it back to you, Stig, to summarize and give us the outlook.

Thank you, Marcus. Even if we can do so many things better, we still deliver on an okay level. My and our main job is to clean up in our processes and not expand more than our resources. The Nordic market is a mature market, and here, we have to fight for market share with our top-level products. The tiltrotator market will follow excavator sales to almost 100%. But I'm very positive to a recovery after several years with low investments and that the housebuilding business is coming back. On top of that, we have a great opportunity to sell used machines, including tiltrotators to East Europe when that time comes. In the rest of Europe, the penetration is low. So here, we can increase our business regardless level of excavator sales if we do the right things. Besides the market and sales, we have to come back to the internal engcon's spirit, a flat organization, delegated responsibility, a big portion common sense and most of all, having fun. This has worked for 30 years and will work also in the future. Together with this, we will set up a concrete target for our sustainability work that everyone can understand and accept. Small steps for mankind, but a big step for the (climate). Dig where you stand makes efficiency and cost savings with a tiltrotator and for engcon. And with that, I leave the word to the operator to start the Q&A.

[Operator Instructions] The next question comes from Agnieszka Vilela from Nordea.

Stig, you mentioned some hesitance in the market demand due to the oil prices and the Middle East conflict, which affected your orders in Q2. Can you tell us what kind of orders growth do you expect now in H2 in the second half of the year? And also what you see so far in July?

We have a wet blanket on the market because I think under everything, this is really positive signal from most of the Nordic and European markets, but something is holding them back. And I'm quite sure, I can't tell you when it's going to happen, but it will absolutely be better when the time comes and the East and the West crazy guys have stopped shooting at each other. That's the problem. And I think if the oil price will be stable, and we can have a better situation there. I think they will open up for us, definitely.

And you think that it will benefit both your trend in Europe and in the Nordics when that happens, yes?

Absolutely. In the Nordic, I see we are talking a lot of house building companies, and they are really positive, but we have not seen it on the machine investment. And we know also that the machine investments have been low for 3 years. And normally, these customers, they want to buy the new machines. So they are waiting. And from the exhibition, I also visiting this summer and this autumn, this spring, I mean, I also heard a lot that half of the dealers, they think that it's already coming the boom, but some are waiting for the boom. So I'm certainly positive for the Nordic market. And as I also said, in the European market, we have so much to do besides the new sales. We have so much machines that not have been come together with the first tiltrotator yet.

Yes. And then maybe just on your strategy, like it looks like you maybe deprioritize a bit Asia and Americas. What should we expect in terms of your orders development there in the coming kind of midterm? Do you think that you have enough presence still in these markets to still be able to drive positive order growth?

I think we will have a flat development in these markets for the next coming 2 years. Don't expect an increase, but not in decrease either. I think they will be flat.

Perfect. Thank you for the color. And then last question to Marcus rather, just a clarification. The restructuring costs for the quarter was included in your administrative expenses. Is that correct?

Yes, SEK 12 million out of SEK 13 million is in admin, yes.

So actually, if you look at your admin and selling, that's already running at about, say, 17% of sales. And the question really is like should we expect this kind of same similar selling admin costs on absolute level in the coming quarters? And also, just if you could tell us if you do expect any more restructuring costs to happen?