VBG Group AB (publ) (VBGB) Earnings Call Transcript

[Audio Gap] Now I will hand the conference over to the speakers, CEO, Anders Erkén; and CFO, Fredrik Jigneus. Please go ahead.

Good afternoon, and welcome to the presentation of VBG Group Q3 2026. I will try to make a short summary of the status in the quarter. Fredrik will give you the details, and I will come back to make a wrap up what our future focus is. And of course, we'll take questions afterwards. It's been another volatile quarter with new tariffs and geopolitical tension, especially in the Middle East, which has had an impact. Still, revenue increased by 5.8% compared to the second quarter of 2025 and adjusted for currency and acquired volume sales increased by 5.4%. All divisions showed growth together with all the 3 geographic areas that we have in North America, Europe and rest of the world. And in summary, we can say this is the best third quarter revenue-wise. If we look a little bit more in detail, we saw growth in our off-road segments for mobile Thermal Solutions particularly in the Construction and Agriculture segment but also in the Mining segment in Europe, and it's positive to see good momentum also for MTS in the European segments. Greenfield power transmission, which had the best sales ever in a specific quarter showed growth in all industrial verticals and from truck and trailer equipment perspective, we saw a clear trend that European truck OEMs increase their volumes. Order intake increased by 4.5% in the quarter compared to quarter 3 2025, which indicates a good demand in the coming quarter. The group delivered an EBITA margin of 10.6%. It's worth commenting that the new tariffs and commodity price increases in mobile thermal solutions were mitigated fully during the quarter. And we -- as we stand at the moment, we see that this means that we have reached the bottom in quarter 2. We also reserved SEK 4.7 million in mobile Thermal Solutions, a severance in cost in the division in Mobile Thermal Solutions. And we will come back with more details in the future focus, how we mitigate this. Last but not least, highlight in the quarter is that the operating cash flow reached SEK 265 million during the quarter. So please, Fredrik.

Thank you, Anders. The third quarter was characterized by continued growth across the group. -- organic growth amounted to 5.4%, with all 3 divisions and all geographical regions contributing positively. Overall, sales increased by 5.8% to approximately SEK 1.45 billion. Order intake, as Andres said, developed positively, increased by 4.5% compared with the corresponding quarter last year, and organic growth was almost 4% in the order intake. EBITDA amounted to SEK 153 million, corresponding to an EBITDA margin of 10.6%. Profitability was affected by several factors during the quarter, and this included higher cost for tariffs, raw materials, energy and transport as well as an unfavorable customer and product mix. The result was also impacted by a personnel-related -- personnel-related restructuring costs of approximately $5 million within mobile thermal solutions. We have implemented and will implement more price adjustments to compensate for the higher cost. However, there is a timing lag before these measures are fully reflected in the earnings. In parallel, we continue to focus on cost control and operational improvement across the group. If we make a touch down in each division in third quarter, truck and trailer equipment, starting from the left -- truck and trailer equipment delivered another solid quarter. Sales increased by 2.8% to SEK 380 million, corresponding to an organic growth of 2.1%. Demand for coupling products remained stable, while the European trailer market continued to show a modest positive development from a low level. The Defense segment also continued to contribute positively to sales development. EBITDA amounted to SEK 63 million, corresponding to an EBITDA margin of 16.6%. The result included cost of approximately SEK 4 million related to larger trade fairs, both of which take place every second year. Looking at the first 9 months for Truck & Trailer Equipment division, the division delivered EBITDA margin of 19.5% and return on operating capital of approximately 54%. This continues to demonstrate the underlying strength and capital efficiency of the business. Going over to the middle and mobile Thermal Solutions, Mobile Thermal Solutions continued to report strong demand and solid organic growth. Sales increased by 8.3% to SEK 778 million with an organic growth of 7.9%. The development was driven primarily by strong demand within the off-road segment and improved performance in the European markets. EBITA amounted to SEK 65 million and corresponding to an EBITDA margin of 8.4%. Profitability continued to be affected by higher costs for tariffs, raw materials and transportation combined with less favorable customer product mix. In additional personnel-related restructuring cost of almost SEK 5 million were recognized during the quarter. Price increases have been implemented to compensate for these cost increases, but the full impact is achieved with a certain time lag. We therefore remain focused on pricing, cost control and operational efficiency. The construction of the new production facility in Toronto is progressing according to plan. The facility is expected to reach full production capacity from the second quarter of 2027 and is an important strengthening of the division's future capacity and efficiency. Moving over to Ringfeder Power Transmission, Ringfeder delivered its stronger sales quarter-to-date. Sales increased by 3.3% to SEK 289 million corresponding to an organic growth of 3.4%. Demand was stable across the industrial segments with particularly strong development within defense-related applications. amounted to SEK 31 million corresponding to an EBITDA margin of 10.9%. Despite the record high sales level, profitability was affected by temporary ramp-up costs associated with expanding capacity as well as a slightly unfavorable product mix. The high activity level has created temporary capacity challenges, which affected efficiency during the quarter. The work to increase capacity and improve operational performance continues. Construction of the new production facility in [indiscernible] is progressing. The facility is planned to become an operational -- become operational during the third quarter of 2027 and will support the division's future efficiency, capacity and long-term competitiveness. Moving over for rolling 12 months. Looking at the rolling 12 months perspective, sales continued to develop positively. Rolling 12-month sales reached approximately SEK 5.6 billion compared to SEK 5.4 for the full year 2025. All 3 divisions contributed to sales development. Rolling 12 months EBITDA amounted to SEK 648 million, consponding to an EBITDA margin of 11.5%. The year-on-year development in profitability primarily reflects higher cost for tariffs, raw materials, energy and transportation as well as unfavorable product mix and temporary ramp-up costs. The result also has been affected by the restructuring measures within Ringfeder and Mobile Thermal Solution divisions. North America represents 52% of the group sales during the quarter, Europe, 33%; and the rest of the world, 15%. All 3 geographical regions contributed to growth during the quarter, the broad geographical end market exposure reduces our dependency on individual markets and provides resilience in volatile environment. Our diversified business model with exposure to several industrial niches and significant aftermarket business also contributes to recurring demand and stability across business cycle. Cash flow improved significantly during the third quarter. Cash flow from operating activities amounted to SEK 265 million compared to SEK 136 million in the corresponding quarter. The first 9 months as from operating activities increased to SEK 364 million compared to SEK 248 million last year. The improvement was mainly related to lower tax payments and currency effect while working capital contributed to be affected by the high level of activity in the group. During the first 9 months, we have invested around SEK 370 million in our long-term growth agenda. The largest parts related to the new production facility in Toronto but we have now also started to invest in the new Ringfelder facility in Dogani. These investments temporarily increased capital employed and net debt, but they are important for improving capacity and efficiency and the competitiveness over the long run. At the end of the quarter, net debt amounted to SEK 1.3 billion and net debt in relation to rolling 12 months EBITDA including IFRS 16 was 1.6x. The equity ratio remains solid at almost 54%. Return on operating capital amounted to 25.2%. The reduction compared to the end of 2025 primarily reflects increased operating capital associated with our ongoing investments and combined with lower rolling earnings. Overall, we maintain a strong financial position and sufficient financial flexibility to continue investing in the development of our business. Thank you. Over to you, Anders.

Thank you, Fredrik. So as we look ahead, we remain prepared for continued market volatility and external environment characterized by geopolitical uncertainty, inflation pressures tariffs, fluctuating raw materials and transportation costs. Despite these challenges, our business remains reside. During the quarter, we delivered organic growth, as we mentioned, and achieve growth across all divisions and geographic markets. Order intake also increased by 4.5%, reflecting stable demand across some our key segments. And of course, a major priority going forward is restoring profitability in Mobile Thermal Solutions. While sales increased more than 8% during the quarter, profitability was impacted by higher material and logistic costs, tariffs and restructuring expenses. We are actively implementing price adjustments, operational improvements and cost control initiatives to offset these cost increases. As pricing actions take effect, we expect improvements. And as I mentioned, we believe that we saw the bottom when it comes to the EBITA margin in quarter 2. Although there is naturally some timing lag before we see the full benefit is reflected in the earnings. Another key focus area is the completion of our new production facility in Toronto. As Fredrik mentioned, the project is progressing according to plan and will significantly strengthen our manufacturing footprint capacity competitiveness in North America. The facility is expected to reach full production capacity during the second quarter of 2027. At the same time, we continue to invest in our future growth. strategic investment in both Mobile Thermal Solutions and Ringfeder Power Transmission are enhancing our operational capabilities and supporting long-term value creation. We also remain focused on driving organic growth by leveraging our strong market position, broad customer base and healthy order book. Finally, acquisitions remain an important part of our growth strategy, supported by a strong balance sheet and a strong cash flow generation. We continue to evaluate opportunities that can strengthen our market position, broaden our technology offering and create long-term shareholder value. In summary, while we remain cautious regarding the external environment, we are confident in our strategy, our operational initiatives and our ability to continue to build a stronger and more competitive [indiscernible]. By that, we are open for questions.

[Operator Instructions] The next question comes from Gustav Berneblad from Nordea.

It's from Nordea. So I thought maybe just to start off with the MTS here and maybe just start off a bit high level. I just wanted to get your your view, get a better sense of how you look upon the market for MTS now with the remainder of 2026, but I guess even more so heading into 2027.

First of all, if we divide the moboThermal solution, we can start with the off-road side, which is 60%, 65% of the revenue and the big market, of course, North America. We see a continued strong growth in the what we call the Power Sports segment, which is the side-by-side business. And it's an underlying growth, but the most important thing is that the take rate in the utility sector of HVAC systems are improving. So we see an underlying growth. We can also see, especially in the Construction segment that there is an underlying growth. I mean, if you look at [indiscernible] construction equipment, they see something like between 0% and 10% growth in North America next year. When it comes to the European part, we see the light in the end of the tunnel here. And it's especially in the Mining segment and the Material Handling segment that we see growth, underlying growth. If we go to the bus business, which is particularly a North American business, we see an underlying growth of the big school buses. There we see a compound average growth of somewhere between 4% and 6% in the coming years. We also see a good take rate when it comes to HVAC. The big question mark when it comes to school buses in the U.S. that is the rate of electric school buses in the future, where we we most probably will see a drop in the ratio of total school buses. When it comes to the transit buses, we have an underlying growth and we have spent really good resources in developing a competitive range, which we will see bear fruit during 2027. And we can see that the -- the quoting rate is increasing very much in this segment. So all in all, a positive view of [indiscernible] on a high level. What we can see also which is interesting, which probably is your next question, Gustav, that is related to Yes, for example, it's an 8% growth in the quarter, but what happens with the result and of course, this has been a key issue for us to increase the gross margins. And I mean it's clear that a lot of things has happened during the year. But we can see now that when we are in quarter 3 that we are really focusing on -- and we have reached the mitigation to offset cost increases, which we had on the raw material side pursuing aluminum copper and plastics with price adjustments in the market. And it's not enough. We need to continue with this, and I'm convinced that we will continue with price adjustments during 2027 as well. But as Fredrik mentioned, in this kind of business, it's a lag before the order book is consumed, and we can drive new prices. But for sure that we are committed to continue to adjust price levels to improve the bottom line at MTS.

That's very clear. I appreciate the color there. And then I guess, just wanted to move to the factory facility situation in Canada here. I mean you say full production in the new facility Q2 2027. Is that plan to have full production already during the beginning of Q2? And sort of if you can just elaborate on the execution time line here when you -- how you plan to close down current facilities, et cetera.

Yes, we have actually access to a new building now. We have started to move assembly. We have facility ready. We are working on the offices and so on. But now we have a plan to move in all the equipment by year-end. And of course, it takes some time during the quarter to ramp up things. But our aim is to squeeze the period as short as possible now. So we have a daily plan, and we are following that plan since October 12 with no hiccups so far. But as I mentioned before, it's easy to build a building. It's now the crucial things to move and more machines, but also to move people. But so far, so good. And of course, it will be a ramp-up period during quarter 1, but we expect to be at full speed during the beginning of quarter 2.

That's clear. And do you see any risk of having say no to orders or not being able to deliver to the backlog based on your current footprint and your current workforce? I mean, meaning outsourcing, could that be an option?

No. I think we have really been careful with building inventory. We have secured the critical parts. So we don't foresee any backlog at the moment. I think we will reduce inventory during this -- the latter part on quarter 4.

Perfect. And then just -- sorry, 1 final 1 before I get back in line here. On Ringfeder Power transmission and the sort of temporary ramp-up costs you're seeing there, how long should we expect this to be a headwind for you, is that until the third quarter of 2027, where you are done with that consolidation as well? Or

I think this is -- maybe I take 2 minutes to explain this. We have 6 production facilities across the world -- and Brazil, U.S., 2 facilities in Germany, 1 in Czech Republic and 1 in India. And -- of course, we have had an increase in order intake, but it's affecting the Czech plant mostly. That is the big pressure. And of course, we take action now and ramp up internal production with shifts with operators and so on. But in order to keep lead times and our customers, we are outsourcing quite a lot of hours to mitigate the peak that we have. And to -- so the the cost that we have now in relation to what we had before, that is the extra outsourcing cost with the transportation cost that is included into that. And to your separate question, when have we mitigated this -- and I believe that it will take until quarter 1 -- end of quarter 1 before we are in line with the situation because it's -- it's really the Czech facility. You can't move these products to other facilities. It's really dedicated production for the Czech factor.

The next question comes from Albin Barnevik from ABG Sundal Collier.

On the order, what segment would you say drove the order growth of 5% here in the quarter?

I would say that if you spread this out, for sure, it's linked to the power transmission that is on top of the line when it comes to this. Secondly, mobothermal solutions and then tracking tainequitment.

I see. And on MPS then, of course, the margins here were a bit disappointing, but we still saw an improvement sequentially -- and would that improvement be attributable to price hikes in the quarter? Or how should we read that and improve the gross margin as well as the MTS margin then.

If I understand your question correct, I mean it's...

Quarter-over-quarter.

Quarter -- I mean when we compare quarter to quarter 3 2025, we can see that there is cost tariff and material cost that has affected. But if we compare also the actions that we have taken in the quarter, now we can see that our -- I would say, for the first time, our price adjustment has mitigated on the cost that has occurred in quarter 3 2026. So I think we are on -- and if you compare it to quarter 2 2026, I think we are on the right track now mitigating the cost increases that we have for Mobile Thermal solutions.

All right. And on the negative customer and product, which you mentioned in the quarter for MTS as well then shouldn't the fact that off-road is growing faster than buses, for instance, be supportive to the margins here?

Yes. It should be so for sure, but there is a certain mix within off-road as well -- and -- but it's clear, it should be so that the margin is favorable for the off-road side.

And moving on, perhaps to link for the power transmission. As you noted, record high sales here in the quarter yet softer margins than previous quarters this year. Could you perhaps expand a bit on the product mix in the quarter as well, you gave some color on the capacity challenges, but on the [indiscernible], how should we read that?

I would say that the mix is dependent on 1 or 2 product groups. And for us, the friction spring business is really, really important. And if you look at the mix, where it's produced, it's produced and supplied globally from the Czech factory, where we have all the test equipment and manufacturing equipment specifically for this. And this is where we have the backlog. We haven't gotten out with on the volumes that we expected. And we have a backlog with our new orders in this segment. So -- the friction Spring business, it's project-oriented. And as I mentioned my many times, it could be different from quarter-to-quarter. And in this quarter, we had capacity constraints for the range and fewer project holders. That's the backlog to the good sales generally in volume, but with a lower product mix of fiction prints. Yes.