engcon AB (publ)

Starting with our vision to change the world of digging. We will do that step by step. It will not happen overnight. We have, together with our competitors, taken big steps that we'll come back to. And what do we mean we changed the world of digging? In the Nordic, the penetration is approximately 90%. 90% of all the excavators have a tilt rotator on the machines in our range in the Nordics. In the rest of the world, the penetration is only 2%. So that means that we have a lot left to do up to 90% where it's more or less fully penetrated. And that means that we have a huge potential to grow in Europe, North America, and the countries we have picked in Asia and Oceania. All these countries are stable, democratic countries. Why would this change come then? What is it that pushing this change then? It's an increased demand on sustainability, focused especially within the European Union. We also have a lack of labor in more or less the whole Western world. We also have increased cost of fuel and energy. And the machine prices have also been going up. And also the material prices have increased. All these things will make the industry look for increased productivity. And how will we lead the change then? We can offer 25% increased productivity in average, reduce the need of labor, not only outside the machine where the man would shovel and so on, but also since we can reduce the need of other machines with 2.2 in average, there will also be less people operating other machines in that way. There will also be less fuel or energy per project that will give less CO2. That will be better for the environment. And they also talk about that it's a sustainability focus. We also have increased safety for the workers, not only outside, but also for the operator inside the cabin. And we have, during the last 10 years, been taking some important steps toward our vision to change the world of digging. We have had good growth in our growth markets, Europe, America, and Asia, and Asia, Oceania. And if you're taking a look at the donut chart right there, we can see that 2012, the Nordics, the yellow part, it's more or less, the donut is more or less totally yellow. We have a small segment there that is Europe, it's the black part, and the gray area is Asia, Oceania. Americas was not even in that, it was less than 0.5%. And if you don't move on to 2022, you can see that the yellow part is much smaller, but still dominant, more than 50% of the share of the revenue. Europe has grown a lot, we are over 30%. And now we also can see Americas there on 8%. And Asia Oceania have also grown. And then if you're only moving nine months forward, how it looks then. You can see that the Nordic is less than 50%. Europe is still a big piece right there. But the Americas have been growing more or less twice the size from just nine months ago. And also Oceania has been growing. And all this has been happening during when the markets have been growing. So, we can see the change we already have done, where we've been moving from being more or less only in the Nordics to be in Europe and now also in America and Asia and Oceania. And we will take a further look on that. As I showed on the donut chart, we have moved from the dependency on the Nordic market. And I will now show also the growth we have had during the last 10 years. that have been and we have been able to grow even through crisis. We had the Euro crisis 2011 and the pandemic 2020 and now we have some type of macroeconomic or geopolitical uncertainties that are worrying us. But I know that we'll ride this one out and be even stronger after that. That's been the way we have done it before and we'll do it again. But we also have a growth pace on these 10 last years on 16% in average. It will actually be easier for us to have a higher pace the upcoming years when the Nordics parts getting smaller and smaller. And the Nordics will also come back to the same level when the economy turns around again. And we're moving over to some highlights in the quarter. As I mentioned, the Nordic market is cyclic, and that's why it's been so important for us to grow outside the Nordics, to reduce that risk of being cyclic. We can also see a stabilization on the water intake in the Nordic and Europe, both in year-on-year comparison, but also comparing to the last quarters in both regions. And that's a good sign for us. And also really positive that we still can deliver out close to 100% more for the third quarter in a row in North America. This big increase of deliveries have caused us some growing pains, of course. Been a lot of focus to install all these new units and support all the new customers in North America. And in that way, we lost a little bit of sales focus. And that's why it's really positive to see that we have a 28% in order intake in this quarter, and we're getting back on track regarding our sales there. We see that it will be a lot of infrastructure and maintenance projects coming years in U.S. So that's why it was important for us to be at the utility expo in Kentucky, where it was a lot of maintenance and infrastructure machines and so on there. And then another topic that's been up a couple of times already is our ERP project. something that we have invested a lot of time and money in. And almost everyone in the organization has been involved in it somehow. And this will be really, really good for us when it's implemented. But to be honest, it has been a distraction and been taking a lot of time from really good people that we can use to grow our business instead in the future. And our goal live date is set to be in Q4 regarding the ERP project. And we're moving over to KPIs for the third quarter. Here we can see the net sales decrease 11% on year-to-year basis. That's actually slightly better than what we expected from looking on the forecast and early quarters order intake. And we can also see a small growth on order intake, 2%. The order intake has stabilized on the lower level. both compared to last quarters and last years. The gross margin is 40% and it's negatively impacted by low volumes, campaigns, and less stable product mix. This is something that we will need to work more on during the coming quarters to improve our gross margin level. The EBIT is 14% in the quarter. The EBIT margin is of course affected by the gross margin. but also from our investments in our sales force in our new markets then. We're having a higher sales cost compared to last year, but also the ERP cost then, of course. Our growth starts on an impressive level, 64%. Now we'll move over, talk a little bit more financial. Me and Jens will guide you through, but I will start and I will talk more about break down the net sales and order intake over the regions for the quarter to start with. And I start with the Nordics. It's a decline of 33% net sales. Due to the high penetration and market share, this is the most cyclic market that we have. We see a continued weak demand in the house building, and the general macro environment makes the end customer still hesitant to invest. But we see signs of increased demands, but from lower levels then. On the positive side, the order intake increased with 90% in the Nordics from last year, mainly as a result of better order intake in Norway, where we now have our own subsidiary instead of the distributor that we had last year. In Norway, we also have the possibility to increase our market share. since we are so dominant in the Norwegian market as we are in the other Nordic countries. And we also still have some penetration left in Denmark that have made them able to keep the sales up during the year then. And we have reached the bottom in the Nordic, and it's only one way to go, and it's up. The question is when we'll start to see the increase in the Nordic. We're moving over to Europe. Here we can see a net sales decrease with 10%. The drop is mainly from the OM sales that we had last year. Otherwise, it's a little bit similar like in the Nordic. House building is still weak, not as weak as in the Nordics, but the end customers are hesitant due to the macro development in general. If you're looking into the order intake, The development is flat, which actually is positive after three consecutive quarters behind previous years. The signals from the market is a little bit mixed with good order intake from some countries and lower in other countries. However, as we communicated earlier, we see some signals of improvements in Europe, with a bigger order in France to a rental company in Q4, and a new distributor agreement in Daesh region. Germany, Austria, and Switzerland. And I will come back to these and talk more about them later in the presentation. Moving over to Americas, show a growth both on terms of revenue and order intake. Net sales show strong growth with 93% versus last year in the quarter. And the order intake increased to 28% as I mentioned earlier. very important to get our focus back on sales and that we got it back as fast as we did then. And we also see positive signals from the OEMs, including Volvo, that just reported a strong increase in Q3 in order intake in North America. So the market is still warm. We still see a slowdown in house building and landscaping, even though it's not even close to what we see in Europe, but it's going down a little bit. And that has been an important segment for us. The good thing is that the infrastructure projects have started, and a lot more projects for infrastructure and maintenance will start in the beginning of 2024. For instance, an infrastructure project that fits us perfectly is the fiber cable digging, or fiber cable that we put down. And there'll be a lot of digging for that. In Asia and Oceania, we can see 30% net sales increase, and a 38% decrease of order intake. Here we can see that it's Oceania that's doing better, and Asia having a little bit weaker here. You also see that financing is a challenge for our customers, especially in Korea. If we try to summarize the quarter a little bit then, all in all we can say that the Nordics depend on the macro environment, and it will come back. Our development in the near and long term mostly will be relying on the growth markets, Europe and America. And that's positive that it's up to us then. In Europe and America, we have so much penetration left. So even if the machine sales goes down, we still can grow on those markets. We're moving over to year to date on the same thing that says an order intake. And here we can highlight that we have a record revenue for this period, even if the Nordics have a drop of 16% on the net sales. This shows that we can manage to grow even if the Nordic drops. We have had big drops in Sweden and Finland in net sales. Norway and Denmark haven't dropped in net sales because of the reasons I mentioned earlier, with the possibility to take market share in Norway, and Denmark still had some penetration left. In Europe, we show growth in net sales in more or less all countries, and strong growth in Benelux, UK, and Ireland. Our growth in Europe on net sales so far this year is 24%. In America, we're showing strong growth in North America, and that's because we're not active in South America in that way. But here, the growth is really strong, 102% year-to-date. In Asia, it's Australia that shows the good growth, and Korea is decreasing. The growth is still 37 percent, though, in Asia, even though we're having struggles in Asia. If we're moving over to the water intake, we can see that it's stabilized. on a lower level. We believe that we have reached the bottom, both in Europe and in the Nordics. And to show that we have stabilized, if we then compare last year and the last quarter, we can see the order intake is stabilized. So if we take a look on Q3 2022, where we're having 324 million in order intake, and also then looking on Q1 And Q2 and Q3, 2023. In Q1, we have 408. Q2, 341. And now we have 347 in Q3. So you see it's stabilized a little bit on the lower level, with a small positive sign in the last quarter then. That will hopefully continue then. But what's important with this picture is that we shouldn't anticipate the big pre-ordering effect in Q4, like the last two years. Q4 2021, we have an order intake of 774 million CX. And the Q4 last year, 2022, 553. And they were more exceptional because of the high price increase and long lead times we had back then. And for 2024, we haven't increased the price that much. It's short lead times and a lot of macro uncertainties as well. So our dealers will wait as long as possible to place the orders. before they move on regarding that. Now, Jens will guide you through our financial numbers a little bit more closely. So I hand it over to you, Jens.

Thank you, Krista. Let's start with the average in the quarters. It's down by 47%, and it's up to $5 million compared to $104 last year. And the margin is 14% compared to 25%. And as we mentioned earlier, it's negatively affected from less favorable product mix, lower volumes, and sales expenditure. Then we're going to dig a little more deeper in the profit and loss. And we can see the net sales at 391 million compared to 416. And then gross margin is 40% compared to 45%. On the rolling 12 months, we had a gross margin of 43%. If you look further down, it's notable that we are continuing to invest in the global sales organization and with a logistic hub in the US. And more notable is that we also have affected by Expenses for the ERP system on 7 million compared to 6 last year. This ends up at 55 compared to 105 pre-IPO. On rolling 12 a month, we are ending up at 478 million with a margin of 22%. And we're going to look at the cash flow. The operating cash flow came in at 108 compared to 63 last year, the second best quarter ever. We have lower capital tied up, and capital employed as percentage of net sales is 20% compared to 31% last year. On the rolling from north, we are 33%. The main reason is that we have reduced the level of inventories and accounts receivable. Then I'm going to turn to the next. We look closer on the return on capital employed. On the roll into a month, it ends up at 64 percent, which is due to an efficient management of capital and good profitability gives us a really strong rose. This combined with a strong cash flow, a solid equity to asset ratio, give us possibility to keep on investing and follow our business plan. With that said, I will hand over to Christel, who will take us through the financial targets and summarize the quarter.

Thank you very much, Jens. I will take you through the targets here then. That's year-to-date numbers, by the way. And if we're looking into the growth target, in a challenging year, we show growth on 8%. Our goal is to be higher than the market, and that's to compare to our competitors, so we don't know exactly where they are on it. But over a business cycle, our target is 19% on average. Profitability. We are on a strong EBIT margin, 22%, and our target is to be over 20% over a business cycle. Capital efficiency, ROSE is extremely strong, 64%, compared to the target 40% over a business cycle. Capital structure, equity to asset ratio is 58%, compared to our target, 35%. looking on the targets we can see that we are above for sure on three of them and then we need to wait for the answers on on the growth target to see where the market is and we can see our competitors and numbers then we'll go to the last slide where we're going to try to summarize and take a little bit forward views on it also And as we talked about it, net sales are slightly above our expectations compared to the early quarters on order intake and forecasts. We are at the low level now regarding order intake and believe that we are at the bottom. Thanks to recovery and good growth in some countries in Europe, like Netherlands, and also the small increase in the quarter for the Nordics give us the comfort to believe that we have reached the bottom. Very positive water intake growth in America with 28% after being flat for a couple of quarters. The market is still warm and infrastructure and maintenance projects will increase and keep the market warm. We see a strong cash flow that provides strength to execute on our strategies and our strategies is to keep investing in innovation and our sales force on growth markets. And then if adding up then with some news about Q4, we are increasing our efforts in the North American market by establishing a new logistic hub in North Carolina. That would be our platform for future growth in North America. have grown out our current warehouse and have to keep stock in several different places so that's why it's important for us to get a new bigger warehouse but with also with our new logistic app we also have the possibility to start with some light assembling and easy machinery in future than when we're getting even bigger volumes there in north america and we also have some really positive news then and we are happy after signing an agreement with a distributor in the DACH region. And as I mentioned earlier, DACH is Germany, Austria, and Switzerland. Our new distributor is the same people, people who are founders behind Olkurt Germany. They have the sales channels, they have the sales people. They also have the knowledge about how to open up the German market. They will sell our Tift Rotator together with Quick Couplers that we don't provide to the market. Enco Germany will continue to promote and sell system income. We believe that this cooperation will increase the penetration in DACH and that we also will gain market share in the region. We also have one more really positive news. Actually, we consider it to be a big breakthrough in France. We received a major order from a French machine rental company in early Q4. They will equip more or less all their excavators with tilt rotators. Normally rental fleets are the last one to adapt to this type of change since they are earning the money by renting out the machine by the hour and then that way they don't look for increasing productivity because that would mean that will rent them out fewer hours. We consider this to be an important milestone and hopefully we can look forward to more deals like this in France and Europe. As I mentioned also earlier then, we should expect a smaller pre-buy effect in Q4 compared to previous years. Previous years, our customers had big incentives to pre-order like big price increase and long lead times. Now they don't have that. Then we only made a smaller price increase and the lead times are short. There was a lot of uncertainties in the world, so they will not stock up the dealers. If you're trying to summarize this, with this positive happening of news in Europe, with a new strong distributor in DACH and a big order to rent the fleet in France, we have a very positive view on the European market on long term and also in shorter term. And the market in North America is still warm, and a lot of infrastructure projects are in the pipe to keep it warm for the future also. And Europe and America are the most important markets for our growth. And the Nordics will come back and give us an extra boost also when the economy are turning back. That was everything from me and Jens. Thank you very much for listening in. We will now open up for questions that can be asked in the telephone conference.

If you wish to ask a question, please dial star 5. 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 Vilela from Nordia. Please go ahead.

The next... So, yeah, I have a couple of questions. So maybe just starting in terms of what you're seeing in the demands in Nordics, is there any way to quantify the stocking impact that you've seen in Q2 and Q3? And do you think that the stocking is over by now?

Now, we're having a few dealers that are still having stock, especially down in the the Nordics, and in Europe we don't have dealers with stock anymore. But a few dealers having, but they're running out of it. A big reason for that have been also that the machine manufacturers have been delayed with a lot of machines. So hopefully they will start getting running out of their stock that they're having. It's not the same problem as it was before. It's definitely getting less and less problem with the stock.

Perfect. Thank you. And then maybe just on your comments on Q4, you don't expect the pre-buy. But how should we think about it, you know, on a sequential basis? You also say that you think the kind of order levering Q3 was a bottom, if I interpret your message correctly. So the point here is that there will not be a pre-buying, but order intake will be just reflecting the kind of underlying demand and hopefully the demand is getting a bit more stable. Is that the correct interpretation?

Yes. yeah not that it will not be no pre-buying but we say it will be a smaller pre-buying there will always be some that will pre-buy a little bit but not in the same way as it was like 2021 or last year but it will be some type of pre-buying that's more or less always some type of pre-buying but not in the big numbers as it was the two years before and we see it's more stabilized and We see also as I mentioned, we see some countries in Europe where we've been having good growth in the water intake and so we have a little bit mixed signals there. We also have high hopes or expectations on our cooperation with our new distributor in DACH and so on. But as I said, more stabilized and I guess that's more the same as for Q4 and Q1 in that way that we don't expect it to sprint away and being much, much higher, but stable growth, hopefully.

Perfect. Thank you. And then maybe just referring to the deals that you signed with the DAX distributor and the French rental company, is there any way you could quantify that for us? How much will that add in terms of sales?

With the DACH distributor, they haven't placed any orders yet, but we just signed the agreement. But they are having, of course, they are positive, and we believe that they will help us a lot in the DACH region. And I mean, they are working with Oilquick, so they know our tilt-rotator already from that. there will not be a big learning curve for them or anything like that. So it's been a discussion we've been having for a long time that we have been able to finalize now. So with them, I can't give you anything right now, but we believe that they will help us a lot. Regarding the rental fleet, It is a bigger order, but it's not like a huge, huge order. But for us, it's like a milestone, as I said, where we're coming into the rental fleet and they equipped all their machines with a tilt rotator. So they were actually like buying more tilt rotators than they were buying quick couplers because they were putting on older machines that they've been having bought quick couplers from us earlier on. So in that way, it's positive, but it's not... the biggest rental company in the company, in France.

All right, I understand. And then I have just one more question really on your cost base. I noticed that the number of employees still increased in Q3 in both the Q&Q and your near terms, but obviously your sales were quite significantly down. So what's your plan when it comes to adjusting the cost base? And maybe if you could provide us a bit more detail how you think about the kind of production employees and sales and administration employees.

As I have mentioned also then on some investor meetings and before that, we see that we also have in the ERP that also are taking a lot of admin people and so on. sales, we definitely want to keep where we are. And we need to, of course, look into the production and try to find the right size for it there. But it's also some people are hard to replace, like we're having some CNC and so on that we don't want to lose and so on. So it's a simple way of looking at it. But hopefully we see increasing order intake and in that way we get more and more stuff to do.

Thank you Krister.

You're welcome.

There are no more questions at this time so I hand the conference back to the speakers for any written questions and closing comments.

Okay, thank you everybody then for listening in and Looking forward to meet you again after the Q4 report. And have a great Friday and a great weekend from me and Jens. Goodbye.