engcon AB (publ)

With me today, I have our CFO, Jens Blom. Together, we will take you through the highlights of the quarter, and then we'll move on to the Q&A session after that. So, start with a little bit background regarding ENKONG. In 1985, Stig Engström, our founder, saw the first prototype of a tiltrotator, and he realized directly this will change the world of digging. In 1990, he started, founded Encon, and we started selling tilt rotators by ourselves then. Encon have grown a lot since 1990. The year 2022, our net sales was 1.9 billion SEK, and we were active on 16 markets globally. We had 440 employees, and we had kept the entrepreneur core as well as our vision. And our vision is to change the world of digging. And what do we mean with that? So far, it's 98% still that doesn't use a tiltrotator. So they're having the bucket directly mounted to the boom, and only 2% having a tiltrotator on it. And if you're looking into the Nordic, we are approximately 90% there having a tiltrotator on their excavator. So we have changed part of the world already in that way. Now we're looking to trying to change the rest of the world and getting those 98% to change to a tilt-rotator. And why should they change to a tilt-rotator? How are we going to make them change is because we're having superior value proposition for them. We increase the productivity, we increase the efficiency with approximately 25% in average. Some is more, all the way up to 50%, some is less. But we also make the machine much more flexible with the tilt-rotator on it. And we also, together with our full-head-only quick coupler system, the machine becomes a tool carrier and can replace a lot of other machines, not only performing other tasks within digging. They can do other things and replace the skids there or having pallet forks and doing these type of things. And we're also having a good sustainability part in it, both that we use less fuel and less wear and tear and so on on it for the environment, but also having a safety part in it is both good for the person inside the cabin, but also people around the cabin. And the products we offer to make this change then is tilt rotators, quick couplers and tools, both hydraulic and mechanical tools. but also then control system that are more software-based, and also safety system to reduce the human errors problems with this. And as I said, we already have done it once in the Nordic, changed the way of digging, and now we're aiming to change the way of digging in globally then. And this way that we did in Nordic is how we will create the long-term value for our customers and shareholders then. And as you can see on this graph, we have a proven track record of value creation over time. Future growth will not always follow a clear path, but we have the products, we have the people, and we have the means to succeed over time. If we're looking on the history of ENCOM, we have grown approximately 16% in average over the last 10 years. if looking since 2014 to 2022 we have grown four times during that eight years period and we can do it again and we also have done it with good profit so this is again how we will create a long-term value for our customers and shareholders as you saw on the last slide we have a lot of benefits and advantage and we have done it before in the nordics and we can do it again globally we also like to announced that we are now celebrating one year as a listed company. It has been an amazing journey, and we have learned a lot during that time. Now we'll take you through the report for the second quarter of 2023, and we'll start with the highlights. Despite lower net sales, we have a good profitability and a strong cash flow. The macroeconomic uncertainties have decreased the end customer's willingness to invest in new excavators, which can be seen in the lower order intake then. Dealers have also been stocking up from on earlier quarters then. And this has further negative impact on the order intake and also some of the net sales then, especially in the Nordics then. On the positive side, we are very happy about what we have achieved together with Caterpillar. Our next generation control system are compatible with CAT's next generation of excavators. We consider this as an important milestone that the world leading excavator manufacturer have now chosen to follow our strategy with an open solution. By this open solution integration, the end customer will benefit from all the advantage in the excavator and all the advantage with an end consistent so they can get the best both from the machine and the best from the tilt rotator. And the good thing, this is something we've been working with all the OEMs about this solution. And now CAT have joined this, and Volvo have joined this, and other OEMs is joining it also. So that's a really big step for us and important long term for us. We also have signed a lease contract for Logistic Hub in US. An important step to meet the future demand on this growing key market. I'll also give you a short update regarding the Road to Tilt lawsuit. The first level dismissed Road to Tilt's lawsuit against Encom. Road to Tilt have appealed to the higher level, and we're waiting to see if they will pick it up on that level or not. More information probably coming in Q3 regarding that. We also see a gradual improvement of order intake in some countries on the European market that we'll come back to a little bit more about later on. Looking into the Q2 figures then, we can see that we're having the organic net sales is down 10%, that we'll also talk a little bit more about later on. Organic order intake is down 38%. That's been expected that we will have a tough time in the Nordics. But Europe is a little bit more disappointing that we see this dip there. We'll talk more about that also when we dig in more to each market then. We have a gross margin level on 41%. It depends a lot on the lower volume and still fixed production costs. And we also have a less favorable product mix where we've been selling a little bit more to the OEMs. And the OEMs have a little bit lower gross margin for us, but we don't have the cost further down. So in that way, still good contribution to the EBIT margin. And speaking about the EBIT margin, then we're having it on 20% for the quarter. That's stronger than last year and in line with our financial targets. And our rose is on an impressive level, 73%. Let's move over then to business and financial development. And we start doing up with the net sales and order intake then. Again, we need to remind ourselves that the last years have been anything but normal. But with that said, start looking at the Q2 2023 then, and we start in with the net sales. It's 508 million SEK. It's a decrease of 10%, as I mentioned earlier. We also have delivered most of the strong order book that we have entered the 2023 with. With the shorter order book, the net sales in the coming quarters will be dependent on our ability to sell. Short order book is the normal situation, Frank, and have been that for until the pandemic more or less started. So we're used to it, but our future ability to guide regarding net sales is more limited now. The order intake is 341 million SEAC in the quarter, a decrease of 38%. The macroeconomic uncertainties have decreased the end customer's willingness to invest, and the buying process getting longer and longer in that way, and they're waiting a little bit more. Also, the supply chain issues during 21 and 22 have contributed to that our dealers have stocked up, and this affects the order intake negative since the current demand for tilt rotators is taken from dealer stock. As I mentioned, we also seen throughout the second quarter signs of improvements from some countries in the European market. So now we'll drill down more to each region then, and we'll start with the Nordic. In the second quarter, we saw a decline in both order intake and net sales. And here we can see that the Nordic construction sector is at standstill, and a few new projects have started. Dealers are holding stock and sell from that. And that's the main reason for... We are expected on the order intake to follow more the machine sales, but that we're dropping a little bit more than the machine says is mainly because that the dealers are holding stock and not refilling yet. European region, we see a flat development of net sales and a decline in order intake. The decline in order intake has been a disappointment for us. The market have reacted much stronger to the macroeconomic situation than what we expected. The pattern reminds me a little bit of the Nordic where dealers have been having stocks that they've been selling off. But I think the main key is that we see the extended buying process due to the macroeconomic situation where they need to evaluate the risk of trying something new and investing into that. But we see that they've been coming, some clear positive signs that we'll talk a little bit more about also later on in some countries in Europe. America, we have a strong net sales development, but flat order intake. So really strong net sales, 100% up, and that's really good for us. We think and believe that the flat order intake is a little bit because that we are much stronger towards the smaller excavators in US especially. With smaller excavators, we mean up to 9, 10 metric tons, and those 9 metric tons machines are a lot for landscaping and house building. And that have been hit much harder by the higher interest rate and the macroeconomic situation in the US, as Volvo also mentioned in their report. And we've also been more dependent marketing-wise since our influencers, the majority of them are landscapers or within house building. So this is something we also need to work more on marketing-wise showing more towards other segments and working harder towards those segments to get in there, deeper into them. Asia and Oceania, growth in net sales but decreasing order intake. The high interest rates and low birth rates in Korea, where the birth rates are around 0.8 to 4, and the focus there on that within one generation, they will have half the population. made housing projects and housing markets in korea more or less collapsing and that has slowed down a lot of our asian markets or growth there oceania started really really good but have slowed down right now uh the good thing with oceania is that we're not that dependent on the railroad as we was before we've been managed to work into the civil side And we have a little bit similar case that we need to do in the Americas and getting into more segments regarding that. If we're looking still on each market, but year to date on each region, then we still see that the macroeconomic situation have created uncertainties that have made people less willing to invest and taking risk and trying something new now. But we think the period gives a fair view of the net sales, where we have record level of net sales on 1.2 billion SEK. And we show a higher level on organic growth on 17% for the period then. And here, all the markets except the Nordic show an impressive increase versus last year. Then if we're looking down a little bit on net sales split by region for year to date, If we're looking at how the Nordics were on 60% last year and now on 46, we can see the European market have grown from 27 to 33. And America's impressive from 7 to 14%. And Asia, Oceania from 6 to 7. And here we need to remember that this has been on a growing market. We have been growing with 17% during this period. and made this change. So our growing markets is positive on the net sales, less dependent on the Nordic markets. That's really good and important for the future. So we see positive on that. We need to take a little bit looking ahead. We think that the order intake have reached the bottom, and then we'll come back to that a little bit more. As we see the end customer have adjusted to the new normal, the willingness to invest will gradually increase, and the dealers will need to refill their stocks, and that will increase the order intake. This will not happen overnight. The order intake will gradually increase. To conclude why we think we have reached the bottom regarding the order intake, we see that the machine, OMs, they assume or, Estimate to sell the same number of machines that means that will come out a lot more machines still in in the Nordics and the stock with the dealers are starting to getting empty and that means that they will need to reorder from from us to sell to the new machines that will come here into the Nordics and We also have seen these sign positive signs from European market already, but we've been having a declining order intake for a couple of quarters in a row. So it's of course from a lower level that we see these positive signs then. I will now hand over to Jens that will guide us through our financial numbers then.

Thank you, Christian. We start with EBIT and the EBIT margin. The EBIT improved by 5% from 99 million to 104 million. We have a strong EBIT level despite a slight lower gross margin. It's the third best in the company's history. So it's really a good performance. Then we're going to turn to a little bit on the look on that profit and loss. We have a net sales, as Christian mentioned, 534 million compared to 508 this quarter. We have a gross margin on 40.6 compared to 42.5. And if you look at the roll in 12 months, we are on a gross margin on 43.9%. If we're looking a little bit further down, we have the R&D expenses on 12 million compared to eight. And we have also R&D reported in the balance sheet as an investment. on 15 compared to 16 last year. And the expenses is mainly due to our third-generation tiltotator. And the result is also affected by expenses for our group business system by nine compared to six last year. And if we look down on the bottom row, we have an EBIT margin pre-IPO on almost 21% compared to 20.8 last year. And on the rolling 12 months, we are on a margin on 24.5. Then we're going to turn to look at a little bit on networking capital and the cash flow. It's notable that we have a lower networking capital as part of the net sales, 23% compared to 32. We have, and that's mainly due to reduced of the accounts receivable. The high activity at the end of Q1 provide a strong cash flow. In the second quarter, we have an operating cash flow of 277 million compared to 92. During the quarter, we had a dividend on 74 million. And we have reduced the overdraft facilities with approximately 170 million. And then I'm going to turn to look a little bit on return on capital employed. The number is 37%. Our high profitability combined with and efficient handling of the capital in our production facilities give this really good number. And this is a solid foundation to meet the upcoming quarters. And with that said, I will hand it over to Krister who will summarize the second quarter. And he will also give us some outlook. And he then will take us through the financial targets.

Thank you, Jens. We look on our financial targets year to date, and we have four financial targets done. We have the growth, where the goal is to exceed the growth in existing market through organic growth. Since we don't have the competitors within the TIL state of market, they are not listed, so we cannot compare to them. Then we compare to the market report from WC. that says the growth will be 19% over a business cycle. Our growth year to date is 17%. And if you're looking on the target profitability, the target is to have the EBIT margin in excess of 20% measured over a business cycle. And there we are on 25% on year to date on the EBIT margin. Capital efficiency. Here the target is that the rose to exceed 40% measured over a business cycle. Here we are at the impressive level of 73%. Capital structure is the target to be the equity to asset rate to be above 35%. And here we are on 55%. So exceeding the targets on three out of four then, but we're still on pretty good on the growth. Pat right there, then we're moving over and I will summarize. And we have a really good result and a strong cash flow in the quarter. And the strong cash flow is mainly coming down from accounts receivables that we've been collecting in and had the finance department and sales companies been doing a really good job by getting that in. But we also have reduced our stock a little bit. But here we have more to do, so hopefully we'll keep a strong cash flow for the coming quarters. We show record high net sales and profitability in the period. I would like to say thank you to all the employees for fantastic work to achieve this during this period. We also continue to have a high activity level with exhibitions in Q2. And the exhibitions in Q2 have been, among a few of them, is Netherlands, the TKD. And that was a really good show for us. We had a lot of units out there in different booths, and we had a lot of people into our booth. And we can see a lot of more activities after that show, but also with a higher order intake in Netherlands and Benelux then. And UK, we had a hill head also in Q2, also a similar good show with a lot of interest in our booth. And we also see much higher activity afterwards with a better order intake after that. And we will also continue with the exhibitions because this is important for us to meet the end customer in that way and show the benefits with our product. And in Q3, we'll have more shows, but I will mention one that we'll have in U.S., Utility Expo in Kentucky. And the Utility Expo is then good for us because that's within a different segment where you work a lot more with pipes, water pipes, gas pipes, different type of maintenance work, and so on. And since we need to come into different segments in the U.S., that's really good for us to have but show where we can meet these type of customers. But it's also important for the future infrastructure work in the U.S. will be a lot of regarding water pipes, gas pipes, and that will also be important infrastructure work coming up in Europe regarding that water pipes. So it's really important for us to have that communication and dialogue with end customers. And we will also further increase our dialogue with end customers and other stakeholders. to highlight the benefits of our products that also apply in economic downturn. Then we'll also finish up here, like I talked about in the last, or like I communicated in our last report. 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 customers' profitability is clear. with increased productivity, cost saving of fuel and wear and tear, the flexibility to replace other machines that actually can generate the positive cash flow for our end customer, and all the sustainability advantage for the environment and safety we have. All these benefits, we need to communicate them, and we need to communicate these to all the stakeholders and adjust our message depending on to whom we communicate them. For instance, like when we're talking to end customers is the profitability and the flexibility, and that we can help them reduce the need of labor and do other type of cost savings, as I mentioned regarding wear and tear and gas. When we're talking to the OEMs and OEDs, we have been talking about the electrification and automation, but also that the machine can become a tool carrier. And with that, we fit with the tiltrotator and with the electrification and automation, we fit together with our next generation tiltrotator then. And with the OEDs, they know that they can earn more money on selling the full income system to add to the tiltrotator, to the excavator then. And to these two stakeholders, we've been pretty good on communicating about the benefits and so on. What we can improve and what we need to improve too, speed up the process and getting out all these advantages and benefits we have is that we need to talk more to like construction companies like Skanska, NCC and so on. But there is more important about the sustainability, environmental part and safety because they don't want to have an accident on their sites. And if we can speed up the process, we've talked about that they will normally step in when we come into the tipping point. But if we can or push them to step in earlier and try to get their subcontractors to have a tilt-rotator on their sites. That will help us also push and get more sales then. Another stakeholder that we need to address more is the legislation and regulation and these type of organizations like the unions in the US and so on. Here we can talk about the sustainability part But safety will be a really important part for their workers and for the people and so on. And also, regarding to the unions, we can prolong their members' careers within the industry because we make their work easier. They don't need to run in and out of the machine that many times during the day. They don't need to be out there with a shovel and so on. So these are the important things that we increase these type of work and talk more and communicate more. with all these four stakeholders. And we can improve and do a better job also with end customer and OEMs and OEDs that we already have talked to. But with all these benefits and need of change within the construction industry, and with still 98% market penetration left, the tilt-rotated market will be on a growth journey for many years. And we have a proven record of creating value for our customer and shareholders. we will change the world of digging. That was everything from us. We will now open up for questions that can be asked in the telephone conference. Operator, please go ahead with the first question.

If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Agnieszka Wajlela from Nordia. Please go ahead.

Hi, good morning. I have a couple of questions. Maybe starting with the dynamics between orders and sales, I would like to understand it a bit better. So basically you had orders of 340 million in the quarter and sales of more than 500 million. Does it mean that you still use the backlog from the previous quarter's orders and also how much of the backlog is left and should we expect the sales in the coming quarters to just reflect the order intake during the same quarter or how should we think about it?

That's a little bit of what we tried to explain there. We see that we have used up a lot of our order book, as mentioned. But of course, we still have an order book, but much, much smaller compared to what we had when we started the year. So it will be much more important how we sell in each quarter. That will be more reflecting the net sales in the future to come.

And just on the delivery times, if you could remind us from order to deliver right now, how long is it?

Now you're coming into vacation time then, but normally right now we are back to where we want to be. If it's a standard product, it is two to four weeks maximum for us then to be able to deliver that. Of course, then if you are ordering something to the

countries far away where it's longer delivery time it can be different but we're having stock also both in Americas and Asia Oceania perfect thank you and then just on your comments about orders possibly hitting the bottom in q2 could you elaborate on what gives you the confidence in this thanks

those signs that we see on on markets in in europe uh there are pretty strong signs for the uh not just a few weeks there there are pretty many weeks we see that we are higher than last year uh on those markets and we can see that we are in in the nordics we we see if you're looking on volvo and we check their reports they're saying that the estimate is still that we will They will sell the same number of machines for 2023. And we're looking how many units we've been getting out and how they're looking for them. We know that the stock needs are almost empty for the most of the dealers that we have then in the Nordics. And that means that they need for the future machine sales need to order from us that are tilt-rotated manufacturers. We know that we're having a high market share, so a large portion of that should come from Austin.

And then just to follow up on these signs that you see in Europe, if we look at your order intake for the fall of the quarter, it was still down by 31%. So these signs, if you could be a bit more specific, in what countries do you see that and how they kind of manifest themselves?

uh the reason for them that the quarter being so much lower is that we were a little bit friendly since we made a fast change of price in q2 there if you remember 2022 and they could order for uh two to three weeks into uh april and there we got a lot of orders coming in that so we had a stocking up or Uh, this type of effect in in the early in the quarter. So, if we. Taking from from May and further on, then we see the clear signs that we are having a higher order intake and I mentioned 2 of those. Uh, regions with the that had, um, uh, exhibitions and we could clearly see clear signs from that. Also, the bigger, bigger increase in order intake after that. We also have the big tour in France that we also can see good signs after that.

All right. And I have two more, if I may. Just somewhat slower and disappointing to you, order intake in the early days market, Asian, the margin law in Americas. Do you think that given the kind of macroeconomic concerns that the adoption rate in these markets will be slower than previously expected?

uh that that's probably the billion dollar question then but um we we see that at least they they need to we need to find a platform where they know what are the interest rate uh how much is that then they can make a calculation from that now when we still have inflation and we still have the central banks talking about increasing interest rates people get hesitant and want to wait to see what is it, how can I make my calculations, what I need to have when I offer my price to the customers. They need to have all the facts with them before they make a change on it. I think when it will stabilize a little bit, our customer will find a way of making They have adjusted now for the higher gas price or fuel price, and they will make an adjustment for this higher interest rate and so on. And it will be the same thing hopefully then with the house building because we're having a lot of need of that in the Western world and so on. So that's why I say it will be a gradually because everybody will not come to this conclusion at the same time that they feel safe and can make this calculation. But it will be gradually stepped during this. And I still believe that we are a good product in the downturn also, because we can make everything much more efficient. You can reduce the need of labor, reduce the need of machines. And that's, to me, key things that you actually can make sure that you will be able to offer a good price and still make money on that and have job for you and your employees then.

You need to get better on that message. Yeah, perfect. And then the last one from me, just on prices. You have hiked prices quite considerably in the past years, really. So now with orders momentum weakening somewhat, do you see any pricing pressure from either your customers or your competitors?

We see... On the mechanical tools, there are, of course, where we need to look in a little bit deeper to it because we can see that the steel prices haven't been rising in the end here, more or less going down. So that's where I think we need to look into it a little bit more on the pricing part.

and on the tilt rotators specifically?

I think we don't see really the price pressure there. There are fewer competitors, of course, but it's also getting more and more electronics into it. And so I think it's absolutely less price pressure there. I think we still have the pricing power. It's more on the mechanical tools where you're having local competitors in a totally different way and so on. But on the tiltrotator, it's more, we are four or five global players that are running it. And as I said before, then I think everybody needs to be on this price level more or less.

Perfect. Thank you.

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.

Okay, 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 trying to help you. Thank you for listening in today and we hope to see you all soon again. Thank you.