engcon AB (publ)

Hello everyone and warm welcome to ENCOM's presentation of the first quarter 2023. My name is Christer Blomgren and I'm the CEO here at ENCOM. With me today I have our CFO Jens Blom. Together we will take you through the highlights of the quarter and we will move on to the Q&A session after that. So let's start with a big overview then and We're still active on 60 markets, but have now started up our subsidiary in Norway. It will be good short term for us that we get the margin there that we've been giving to the distributor. And long term, we will also have a good opportunity to increase the value per unit and take market share. If we take a look on the net sales split per region, we can see that the rest of the world have been catching up. with the Nordic, as we said earlier in the last report, so we'll see that. And the Nordics are now on 49% this quarter compared to the full year where they were on 53%. Europe is on 34% and was on full year 32%. And America is on 10% and was on 9% on full year. Asia, 7% and was on 6% on full year. The good growth in all regions actually, even though the Nordics are losing compared to the rest of the world, they had a big growth as we will see later on also then in the presentation. If you're taking a closer look on the main highlights from the first quarter, net sales and profitability was on record high levels with strong contributions generated from all regions. Improved production capacity with a strong order book provided favorable conditions for high net sales. The price increases introduced during 2022 has now reached full effect and combined with stabilizing material cost, the quarter shows a strong gross margin. Looking ahead, microeconomic uncertainties regarding inflation, interest rates combined with short lead times are now making our customers more cautious in their purchasing behavior. Until now, we have focused on our end customer sustainability. Now we take the next step and commit to design-based targets initiative with focus on ourselves and our suppliers. Encon commits to lower emissions for scope one and two with 42% until 2030. Scope one includes direct emission from Encon's own operations and scope two include indirect emissions from purchased electricity and heating. For scope three, that includes indirect emissions generated in the value chain, Encon's ambition is to measure and reduce these emissions. If we're moving on to statistics and see how the quarter have been for us, how we've been performing, the net sale was by far the strongest in the company's history, even with the favorable currency effects excluded. The increase was 48% organic growth, and that's really a fantastic number for us. During the first quarter, economic uncertainties and shortened lead times has provided lower incentives for customers to place orders. This resulted in a decrease of 33% of the order intake. The gross margin amounts to 45.6%. We can now enjoy the benefits of the price increases introduced during 2022. The margin is further strengthened by stabilized material costs and favorable currency effects. But it's a really good gross margin level for us to be on 45.6. A record high EBIT margin on 28.7 was reached because of the strong net sales and the high gross margin and can be seen as an example of how our business model can perform during periods and generate high margins during those positive periods then. During the last quarters, we have made strategic investments in the sales organization on growth markets to provide conditions for future growth. We also have cost for ERP implementation this quarter, and it's on 9 million SEK that had reduced the EBIT in the quarter. But all in all, the record high net sales and profitability resulted in a rose level above our financial targets on 63%. This is also a record high level. This is much explained by our capital efficient business model with assembly and low investments in machinery. We will now go over to business and financial development, and I will continue a couple slides, then I will hand it over to Jens Blom. So if you start looking on our sales and order intake then, the net sales reached record high levels, and Q1 was our strongest quarter ever. The strong order book and improved supply chain generated high contributions from all regions. However, the organic order intake showed a decline of 33% compared to last year. In 2022, the order intake was characterized by pre-buy effects. Dealers had high incentives to place orders, to secure tilt potatoes, to be able to deliver complete excavators to the end customers. This partly resulted in the dealers building stock carried over to 2023 that needs to be sold before new orders are placed. In combination with a gloomier economic outlook and a slow development in the construction sector, many of the dealers show a cautious purchasing behavior before signs of stabilization can appear. Looking ahead, the lead times and order book are now back on normal levels. This, in combination with uncertain economic outlook, gives less guidance for the future or for the coming quarters. Having that said, it will be even more important for us to keep up the high activity level we have with exhibitions, demo days, and the close interactions we're having with our end customers. Looking at our market regions, we can conclude the following then. In the first quarter, the stars were aligned. The strong order book and high production capacity generated an impressive net sales increase in all regions. It is, however, clear that the order intake has not matched the high deliveries and that more uncertain times lies ahead of us, as we have mentioned earlier in the presentation. The Nordic region increased net sales from high levels on all markets. Looking ahead, the high penetration rate as well as our strong market share make us dependent on the cyclic excavator sales. The order intake is negatively impacted by fewer construction projects started as well as dealers having stock. On the positive side in the Nordic, we can conclude with the new subsidiary in Norway. We can now market the full income system, and it's pleasing to see how the market has started the year strong there. We also have possibility to further penetrate the market in Denmark. We also see OEM reports indicating that the machine sales will remain stable during 2023 in Europe, and we don't see that it should be any difference in the Nordic countries. The price increase results are full effect during 2023. During 2022, the deal is avoided increase by heavy pre-ordering in Q4 2021 and Q1 2022. As you can see there on the picture, you see the drop of order intake on 38%, but we're having growth on 20% in net sales. And to have 20% growth on a fully mature market is really, really good. If we're moving over then to the European region, it showed great revenue growth across the board. Regarding the ordering intake, the picture is not as clear as in the Nordic region. We can see that Q1 2022 was characterized by heavy order intake from some individual OMs. However, we see the same tendency as in the Nordic region with dealers being more cautious due to stock levels and slowdown in the construction sector. On the positive side, like the previous mention regarding the Nordic, the OEMs indicate machine sales will be stable for 2023. And we still have a lot to further penetrate in all Europe. If we're then looking into the European order intake, it is down 39%. But as I mentioned, it was also a little bit special with the bigger orders for the OEMs last year in quarter one. But the net sales are fantastic growth on 92%, so that's really positive that Europe is growing in that way. Then moving over to the American region, we're having an impressive net sales growth. The order intake is on high historic levels, but flat development in Q1 2023. During Conexpo, it was clear that the interest for our products is increasing, as well as the knowledge about the tilt status system with its benefits. Now I also have more boots on the ground in North America and with a higher geographical presence to further strengthen our position on that market. And there you can see, as we said, it's a flat on the order intake, but it was on a high level. But we're also having really impressive growth of net sales, 113%. And the American market are hotter than the european market if you're looking on business perspective in that way so if you're moving over to asia and oceania region we're having a strong net sales development order it take is increasing but the dependence on a few om companies in mainly then korea and japan is making it the comparison between quarters hard to compare since it's also lower levels in in asia oceania But we can see an increase in order intake in 16% and a good growth on about 50% on net sales there. Then I will hand it over to Jens that will guide you through the financials.

Thank you, Krister. We start with an overview of the EBIT and EBIT margin. We have a record high EBIT in Q1, increasing from 91 million to 198 million is an improvement by 118%. The EBIT margin is 28.7 compared to 20.4. The record high result has been driven partly by high net sales, price increase combined with lower disruption in the supply chain and a strong order book at the beginning of the year. The strong result Also show the strings in our business model with scalable production and with relative low fixed cost. Then we can turn to the profit and loss. The net sales goes from 447 to 691 million. The gross margin goes from 40.3 to 45.6. If we look further down, we can see that the selling expenses is 76 million compared to 54 million. And this is due to high activity on the market with exhibitions like Conexpo. And we also have an expansion in the sales organization, which put more boots on the ground. Further down, notable is the R&D. It's 8 million compared to 6 million last year. And if you take in consideration what we have invested in the balance sheet, we are on the total of 16 million for the quarter, which is approximately 2.3% of net sales. Most of this expenses is related to the third generation of the Tilted Sector. And if we turn to the bottom line, we once again can state a very strong result, 119 million SEK pre-IPO compared to 96 million. And on the rolling 12 months, we end up in 534 million SEK with a margin of 24.5. And then we can turn and look a little bit on the capital structure. As you can see, we're tying up more capital. We have 34.7% of the net sales compared to 32.1. The main reason for that is that we have higher inventory in our more distant growth markets, and the high activity at the end of Q1 gives a high level of accounts receivable. The operating cash flow is 5 million SEK compared to last year, which was also 5 million. And we can go to the return on capital employed. As mentioned, we are on a rose on 63%. It's the first time we reach above 60%. This is a confirmation of our strong business model with a capital efficient production and we have also strong profitability. The very strong start of 2023 creates good conditions to meet the upcoming quarters. With that said, I now hand over to Krister who will take us through the financial targets, and he will also summarize the first quarter.

Thank you, Jens. If we're then looking on our financial targets and our performance in quarter one, we have a really good performance where we're exceeding all the financial targets. And if we're looking on the growth target where our goal is to exceed the growth in existing market through organic growth with 19% on business cycle, We're having 48% net sales organic growth. That's a really, really good number for us to be able to grow that fast. And again, shows with our business model with assembling that we can scale up fast. Profitability, we have an EBIT margin in excess, have an EBIT margin excess of 20% measured over a business cycle. Here we're also having a record high EBIT margin on 28.7%. that also shows that our business model with centralized parts and able to just move on with salespeople and support and technical people in the sales companies, it's possible for us to have high EBIT margins during positive periods. Capital efficiency, our goal is to have a rose to exceed 40% measured over a business cycle. As Jens mentioned, we have a record high It rose on 63%. And if you're looking on the capital structure, our fourth financial target, our goal is to have the equity to asset rate to be above 35%, and we are on 48%. So really strong quarter from ENKON, where we're delivering on all financial targets. And then now to the summary and outlook. In the first quarter, the strong order book, high margins and shorter lead times generated record high net sales and profitability. As we mentioned, the proof of what can be achieved with our business model when everything works as it should. Looking ahead, the order book is now lower, yet good levels, but it will give less guidance for the coming quarters. The order intake will be partly dependent on development on the construction sector and the excavator sales. Right now, we can see the fewer construction projects are initiated, which lowers the demand for excavators. And we are now more depending on our efforts to sell. You could also see a strong electrification trend at Conexpo. And as you can see on the picture, John Deere showed their prototype electric excavator together with our Ancon tiltrotator. That was the main piece in their inside booth. They also showed their new machines as a main piece on the outside booth together with ENCOM. And also Doosan, or nowadays Devlon, showed their prototype for fully autonomic excavators together with an ENCOM tiltrotator. And this is exactly what we have talked about, our Generation 3 tiltrotator. It will be prepared for it. So it's really good that we can see that the OEM are thinking in the same way as us. So we are linked in that way to see how the future will look like. Sorry, I was a little bit early. Our capital business model enables quick adaptions to new market conditions if needed. And we also, working with sustainability, forms the basis of our business and long-term growth. We constantly work closely with our end customer and partners to develop innovative, productive, and sustainable solutions. By doing so, we can make a difference. With sign-based targets, we get clear roadmap that reduce our own and the supply chain greenhouse gas emission and contributes to the global climate transition. However, the benefits that Tilted System offers our customers are more relevant than ever. And then if we're moving on to the next picture there. And in the time of increasing uncertainty, it's good to remind ourselves of the strong benefits of ENKON's products. To me, it's clear that the case for our tilt-rotator system is stronger than ever. When inflation and interest rates are high, the positive impact on our end customer's profitability is clear. The tilt-rotator can increase the productivity and efficiency within an average 25%. We reduce our end customers' investment needs. A tilt-rotator-equipped machine together with hydraulic tools can replace 2.2 other machines since it makes the machine to a tool carrier that can serve many purposes. We also save fuel. A more efficient machine needs less fuel. A 30 metric ton machine saves 6,000 liter fuel per year with a tilt-rotator on it. Not to mention the impressive CO2 saving of 130,000 kilos CO2 for the lifetime of that excavator. This is on top of the significant increased safety levels by reducing the needs to leave the cab and reduce the need of people around the machine. Because most of the accidents are occurring when you're leaving the cab to go in and out to switch tools and so on. And you don't need to do it because you can do everything from the inside. And also to reduce the need of people around the machine, you save money, but you also reduce the risk of dropping something on somebody or anything like that. So having an Anconas partner, our end customer, offered great tools to improve profitability and safety with less impact on the environment. This is how we changed the world of digging. And we will finish up with a picture where we're bragging a little bit about ourselves. At the event IPO of the year, when the business magazine Affärsvärlden handed out its annual awards during the ceremony in Stockholm, Enkom was awarded two prizes, the Euro's grand prize and the prize for quality in the billionaire class. So thank you for listening to us and our presentation of our Q1 report. We will now open up for questions that can be asked in the telephone conference. So operator, please go ahead with the first question.

The next question comes from Agnieszka Wajlela from Nordia. Please go ahead.

Thank you. Hi, Chris Cerenians. And thank you for taking my questions. So my first question is, Chris Cerenians, your comment that you would expect somewhat lower order intake in the coming quarters. Could you just give us a bit more color on that? sequentially from the about 400 million level that you achieved in q1 and also there is any kind of difference between the regions thanks as we said the guidance is harder to do right now then since our order book is short and we more having the normal

way of ordering it when they're achieving the machine, they're ordering it, they want to be delivered within two to four weeks. So it will be short in time. And we see that if we're going into regions, then we can see that the Nordic region are having more stock with the dealers than the other regions. So it might be especially the Nordic regions that still will be hurting a little bit more in the Q2. The other regions we expect to be picking up again a little bit when you're getting more and more clarity regarding inflation, interest rates, and these type of things. And the positive thing that we have seen is that the reports, I think, from the OEMs and so on with stable number of machines coming out. So it's hard to give you a really good guidance regarding the order intake. the guidance is more maybe we will not be on on this 700 million level uh order intake as we had in that sales as we said it's not matching right now then yeah

All right, I understand. And then just to follow up on that, do you still have a bit, so to say, elevated order book or is it now coming lower? And also then as a result, do you expect that sales already in Q2 or maybe in Q3 will be more in line with the order intake or will it still be above?

Yeah, that's a good question. It's hard to predict, as I said, but we still have a good order book for, as we mentioned here earlier, and we hope and believe that the more stabilized the inflation and interest rate will be, it will be picking up, and also the Nordic region, the order intake will pick up when the stock with the dealers start disappearing. We hope also for a positive effect after Conexpo that we will have an increased order intake in the U.S. there. And then we're having a good stock in the U.S. We can deliver fast there also. So right now it's a really short time for us from order to deliver. And that makes the prediction of each quarter very, very hard for us.

I will try to rephrase. My point was like, if we assume that your orders in Q2 are stable quarter on quarter, so at about 400 million level, do you believe that your sales in Q2 will be higher than that? Could it be 500 or 550 because you have some order stock that you could still deliver to or is it shortened that much that it doesn't really matter so what you will deliver in Q2 would be just the orders you got basically in Q1 maybe something from Q4?

No I mean you can't say that we will deliver what we're having in order intake exactly in Q2 because since we also can take orders and we can deliver those orders directly in Q2 So the expectation, I would say, is to be able to deliver more than what we're having in the order book since we're having this. We have the components, we have the people, and we can deliver in a short time as we have done for 30 years. It's just been during these pandemic years with the supply chain problems, we've been having a long order book. But of course, they are more hesitant to place orders. They will not place any stock orders or anything like that, it will be more units definitely sold to end customers and so on. So that would be the difference we will see. But we can definitely deliver more than what we're having in the order book right now.

Okay, perfect. And then, before I jump back to the queue, one question on your margin performance in the quarter. Obviously, fantastic margin of 29%. Maybe, Jens, or Krzysztof, if you could comment on what were the main margin drivers. Was it the production volumes, pricing, or lower material cost? What was the most important for the margin development in the quarter?

I can start and you can continue. I think the biggest was on the cost of material that we made an increase where we got the full effect, especially to the Nordic region on the price increases. And the prices, as we mentioned, have stabilized on the material, on the components, even maybe start dropping on some and so on. And of course, helped of the high net sales. I don't know if you want to add anything extra into that, Jens. No, that's correct. Okay, perfect.

I will get back to the queue. Thank you.

Okay, thank you.

The next question comes from Kev Toll from Carnegie. Please go ahead.

Thank you. To follow up on Agnieszka's question on very high margins, you have increased prices quite a lot last year and a little bit in the beginning of this year, and now you have very, very high margins. Do you think you will be able to keep the prices on the market when raw material prices start to come down a little bit? Do you expect competitors to start lowering prices or do you expect your customers to be a bit upset with your very high margins now that it's very official how much money you are making?

Hard to comment on if they will be upset with it but as we see we generate a lot of value to the customers and If you're looking on the things that we ended up talking about, not when we were bragging, but with 25% more productivity and less fuel and less machines, it is still a really short payoff time for buying a tilt rotator. So I think on the products like the tilt rotator and hydraulic tools, we add a lot of extra value where it might be price pressure is more on the mechanical tools like buckets and so on where we will see if the steel prices start going down that we need to adapt to that but on the tilt rotator and on hydraulic tools and so on I think they see the benefits with it and they see the value added into it

Okay. And you don't think that your competitors try to take share by lowering prices and getting more business that way?

They might do it, but I don't think so. We're trying to be humble then, but we are the one that are the market leader and we are the one that are making profit. The other ones are having a little bit smaller margins than what we're having, so they probably welcome this.

Another question is on the legal process with the rototilt. In the beginning of this year, they increased the claims in the process. Can you talk a little bit where the process stands and where you're seeing it going forward?

Yeah, we've been having the first hearings and so on regarding it in court and so that was in end of March and the verdict or so will be the 15th of May from that but I don't think it will be an end to it then if we win they will probably move it forward if we lose we will move forward with it and we also in the same time are running it towards the european pattern and i think it's planned to be this autumn sometime where we will meet up regarding that regarding in in the european patent so i think unfortunately they will this will be something that will be keep going on for the rest of 2023 at least.

And you haven't had any reactions from your customers due to this or any other impact on your business other than this legal process?

No, not at all actually. Nobody is asking about it. They ask why they have sued us and we try to explain what it is regarding sensors and stuff like that. But there haven't been any customers that have been talking about that. And I don't think it's that known, at least not outside Sweden.

Okay, thank you. That's all for me.

You're welcome, Kenneth.

The next question comes from Agnieszka Wajlela from Nordia. Please go ahead.

Thank you. I have three follow-ups. My first question is on Conexpo. If you could comment on what the impression was there from customers and also do you expect a stronger orders momentum in America from the back of this event in the coming quarters? Orders in Q1 were a bit subdued in Americas. But if you could tell us, what do you expect going forward?

It was a really good show for us. We had a good booth with three machines in it, two for testing for customers and one showing demo what you could do with all the tools we're having and so on. We had a good crowd in our booth all the time. um we actually got comments from from other that they thought we had one of the best booths with a lot of activities and they wanted to place um us between just beside them to make sure that they get more attention also so a lot of positive comments uh there were a lot of tilt rotators on on con expo and we could also see that um The customers have learned a lot compared to the questions three years ago. They are on a much higher level where they understand the benefits of it. They still maybe need, some of them need to think about it a little bit, but they much, much smarter question. It's not, even though I love to be a magician, they understand now that how we do it, that they understand that it will last. They're not about that everybody will break it or anything like that so I think we've been reached a lot of levels higher up and we could also see now bigger interest coming from new regions that haven't been that strong for us in North America like Texas and the southern part of North America so a lot of positive uh impact i think and as i mentioned with uh with john there that we're having both on their inside booth they were on the centerpiece with the electric machine uh income tilt rotator and also on the outside booth they had they were also the centerpiece the new machine the first one they produced by themselves but was also an anchor on that one and we also were on the devil on machine that they showed and and have live demos with their fully autonomic excavator was an Encon tilt rotator on that. And there were also a lot of other tilt rotators there. Never heard of those type of brands. But again, as I said, regarding Bauma, I think it's positive that people more and more think about Encon tilt rotators. And that will increase the penetration. And then it's more fight about Winning that war to get everybody to join this revolution with changing the world of digging. So we should not fight against each other. We should fight against those that doesn't have it.

Yeah, sure. Perfect. And then just to follow up on that, do you think that your order intake now as a result of that event and more awareness of the product will sequentially improve in America's?

That's my beliefs at least. We had more than double up in leads compared to last Conexpo. It had to pay off, otherwise we will be disappointed.

Perfect, thank you. A question on cash flow, which was relatively weak in Q1 despite strong EBIT that you booked. And obviously there is the working capital dynamics here. Do you expect the working capital to be released in the coming quarters? And maybe also, Jens, if you could comment on quite high tax payments in Q1.

Yeah. Our belief is that we will strengthen the cash flow in the coming quarters. And so when we get paid by accounts receivables. So that's my belief. And on the tax there, we had a couple of years with high profitability. And then now in the Q1, we need to pay taxes for that. And that's something we have to do and proud of. But yeah, that's my comment on that.

And you can also see accounts payable that are pretty low. And that will be also an effect that we were trying to lower down the stock a little bit since we don't need to have that safety stock as we've been having now with the supply chains been in turbulence mode. And now it's more stable. So we can also lower down the safety stock we're having. So I think they're both accounts receivable for us and the stock will help us the coming quarters and in the cash flow level.

Yeah, but sorry, follow up on tax only. So the tax paid out in Q1, that was on some deferred tax that or should we expect a high tax level in your cash flows going forward?

In some way it will follow a good result of course. So some of it will buy but not as much as the first quarter because we had a high tax debt so we needed to pay in the first quarter so it would be more smooth I think.

And the underlying P&L tax is about 21% or is it a higher rate for your group?

We have been on 21% and I think it's a good approximation.

Okay, perfect. And then the last one for me, just if you could give us the update on the status on your kind of organic investments in the business, both in terms of recruiting talent and also in terms of capacity expansions in your factories. Just tell us what's happening, what do you plan And how much will it cost? Thanks.

Yeah, we are still building up our sales organization, even if we have made the biggest steps regarding that right now. But we have some investments that we will do and finalize here in Q2 or Q3. both people and also in US as we talked about bigger warehouse and so on that we need. And to increase the production capacity we had the meeting here last week regarding our building in Poland and now we will go out and get the quotes for that and Hopefully we'll start building that after the summer. And if it will be done by the end of the year, we don't know, but hopefully it will be done by the end of the year. And rough estimates are still on the level that we talked about for that earlier around 40 million SEK for the extension in Poland, including machines that we need. Perfect. Thank you. You're welcome.

As a reminder, if you wish to ask a question, please dial star 5 on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Thank you everyone for good questions, and if you have any further questions, please don't hesitate to reach out to any of us. We are more than happy to try to help you. Thank you for listening in today, and we hope to see you all soon again. Thank you very much from ENKON.