engcon AB (publ)

Hi, everyone, and warm welcome to Encom's presentation of the fourth quarter of 2023. My name is Krister Blomgren. I'm the CEO here at Encom. I will take us through our financials for the fourth quarter and the full year 2023, and also the outlooks looking forward. Normally, I have our CFO, Jens Blom, with me. Jens is unfortunately sick today, and I will therefore have to run the presentation on my own. After my presentation, we move on to the Q&A session. If you have joined the telephone conference, you will be able to ask questions. But then let's start with our vision. Our vision is to change the world of digging. Today, only 2% of all excavators are using a tiltrotator. In the Nordics, it is approximately 90%. We have reached that level already around 2008 in the Nordics. To look at this donut chart, if you're starting down with the donut from 2012, you can see that the Nordics dominated the net sales. 88% of our revenue came from the Nordics. The rest of the world was only 12%. If I then move on to 2022, you can see that the rest of the world's net sales is 46%, but the Nordics is still the dominating part with 54%. And we said already last year that it was a milestone that the order intake in the rest of the world that year was greater than the Nordics. And we have now reached another milestone this year when we have more than 50% net sales, actually 57% net sales outside the Nordic region and getting in less and less dependent on the Nordics. Can also see another positive thing, how fast you can grow if we're looking between 2022 and 2023, you can see that America has been growing from 8 to 15% of our revenue in just one year. This confirmed that we are on the way to change the world of digging. And we're moving over to some historic data. On this diagram, we can see our development the last 10 years in business cycle and how we have performed. Over this period, we've shown a growth of approximately 16%. There are some bumps in the road, but we managed to grow 16% over this business cycle. And this was when the Nordic market, which is mature, where the dominating on our net sales. We believe that it will be easier to grow fast on new markets where we can do the penetration journey. Can also see that our EBIT level have been on a good level with some fluctuation, but from 2017, we have an average EBIT around 20%. We have seen challenges in 2023, but we deliver a good profit, even if Q4 was weak. We believe that many challenges will remain 2024, but we'll probably see a more normal pattern for our business for order intake and deliveries in the same quarter. History shows that we get a good growth after a dip and the Nordics have dropped a lot and we grow back up again together with the further growth in the rest of the world. This will boost our future growth journey. And then if we're taking some business highlights from the quarter. After closing Q4, we see a continued stabilization of the order intake, also if we exclude the small pre-buy effect in the quarter. We have signed a strategic distribution agreement with Zero Degrees that will help us to grow in the dock region, and they also placed their first order in the fourth quarter. We also received an order for tilt rotators from a French machine rental firm. That's an important milestone since this sector normally are among the last ones to adapt to tilt rotators since their business model is to rent out the machine by the hour and we shorten the time the customer needs to rent the machine. So they really need to understand the benefits or they need to feel the pressure from the customer to take this step. So that's why we consider it to be a big milestone for us. We also have started up our new logistic hub in North Carolina in the US. It's now up and running with personnel on site. This will also be very important for our future growth in North America, where we can stock all the items that we need to stock. And we also can have some light assembling, and we can also do some easier machinery on CNC machines to make our stock more flexible in that way. But we are concerned about the development in North America. It is challenging there. They have grown fast and increased our geographical territory. and also been adding a lot of new employees. This together with our move down to our new logistic hub made us lose our sales focus. But we still strongly believe in the North American market and we are following our development closely. We have successfully implemented a new ERP system in our production company in Sweden and will continue the global rollout over the year. This is a must for our future growth since it's secure, reliable support, and it's more future-proof compared to our old system. However, the high ERP focus has challenged organization and the profitability and used a lot of resources for us, both internal and external. We are a penetration case, and we need to have a focus on sales and our international markets. Because of that, We have added sales focus and more international presence to the income group management. And we believe now that we have the right people to lead us for the future growth. We'll go into a little bit more numbers and figures. And we're starting with the net sales where we're having a big drop on 43%. And it's mainly two things that affects it. It's the big backlog last year and the supply chain problems that finally started to disappear. So it could deliver out a lot of units in 2022. This year we have implemented the new ERP system and it has slowed down our capacity and the demand is also much lower compared to last year. And it's looking then on the order intake, it's also much lower, minus 26% compared to last year. That's also because the demand is lower, but it was also a big pre-ordering effect last year that makes a big difference. Positive is that we see a trend that the order intake is stabilized for three quarters in a row now. We had no significant pre-ordering this year, so Q4 is a little bit better than earlier quarters this year. If you're looking into the gross margin, that is 40%. It's mainly affected by lower revenue. and also the need for extra resources because of the ERP. If you take a look at the EBIT, that is 6% for the quarter. It's a high cost in relation to low revenue in the period. For example, we have 10 million SEK related to ERP consultants. That alone is approximately 3% on the margin, and of course that we had the low revenue then. we are we are following and looking at the development of the a bit carefully but we need the people for the erpm implementation and will continue and it will continue over the year and we also want to be ready with our sales force and also train sales force when the market gets warmer and we can take market shares in that way our rows is at a good level on 49 percent If we take a little bit deeper look into the order intake, as I mentioned earlier, we can see that it's stabilized, and it's three quarters in a row that we are on a stabilized level on the order intake. And we also see or predict that we will have a more normal year 2024 compared to 2021, 2022, and 2023. But normal is that we have a short lead times, and we also delivered the majority of the orders in the same quarter. The net sales, 308 million SEK, is slightly lower than expected when we compare it with the order intake we have seen in the last quarters. It's partly because of the implementation that has slowed down the deliveries. Another positive sign is that we have a positive book to build ratio in the quarter as the order intake exceeds the net sales. We're looking deeper into the order intake and we go to the regions, but still for the quarters and for the quarter four. We have a tough number to compare with on both order intake and deliveries. Last year, we had a big pre-buy effect on order intake. And regarding net sales, we had a big order backlog, as mentioned earlier. And then the supply chain issues that were sold and we couldn't deliver it out a lot in Q4 last year. This year, we have the capacity problems in production because of the ERP problem, and we have no order backlog. Order intake is stabilized compared to earlier quarters, as I mentioned earlier. Looking deeper into each region then, with the Nordics, it's a big drop in both net sales and order intake. The construction sector is in a standstill with a few signs of recovering in the near time. Our review is that we are dropping with the market. We are not losing market share. If you take a look at Europe then, there we can see that the order intake is higher than last year. And that's thanks to the big order in France to the rental company and also the bigger order from our new distributor in DACH. Regarding America then, as I said earlier, the development in North America is challenging. We're having growing pains from challenges with deliveries and installation. And as I mentioned, with the geographical increased areas we are in and a lot of new employees. This together with our move down to our new logistic hub have made us lose our sales focus. And I've been over there and we also sent over more suites to help out with support and installs. And we also made a lot of other actions to increase our sales focus and get us right back on the track again. But we still strongly believe in the North American market, and we are following our own development closely then. In Asia and Oceania, we have a stronger performance from all markets this quarter. This is, as I said earlier, is a market where we can get bigger orders from OEM some quarters, which make it hard to see trends. We'd like to see that we see a positive trend, especially in Korea, where we started picking up from really low numbers. 2023, we're bad in Korea, but it's been much, much better lately where we're getting orders every week and so on. So the positive signals this quarter are Asia, Oceania, and the European order intake. We keep on looking on the regions then and the order intake and net sales, but now for the full year then, 2023 has reminded us of the importance of not being too dependent on individual markets. The net sales is down 6%, but however, Nordic is decreasing with 23%. This is another confirmation of how our increased global presence makes us less sensitive to circumstances on individual markets. This is again showing that we're getting less and less dependent on the Nordic markets. So we can hold up our net sales and order intake in that way. We entered the year with a very strong order book from high demand and component shortage in 2022. This led to record high deliveries in the first quarter of 2023. At the same time, economic uncertainties had a strong negative impact on the Nordic construction sector, not only the Nordic, but also in the European, and had a general negative effect on the demand with a higher interest rate and so on. We also had stock levels in the Nordics and Europe that had a significant negative effect on the order intake. 2024 is expected to be more normal in this aspect. Might only be Finland that still have some stock left with the dealers. A positive thing is to see that the Norwegian market with our new sales company show a net sales increase and had a flat order intake on year-on-year basis. The other regions show important contributions especially on the net sales that compensate for the strong drop in the Nordics. Now we're going to go to the financial development and here it's normally when Jens Blom takes over but I will try to do my best to fill his shoes and guide you through these slides also. We're starting with EBIT. We see a big drop in the EBIT margin down to 6% this quarter. The drop mainly depending on low revenue and high OPEX in relation to the revenue. Despite that, we managed to keep a good EBIT margin on approximately 20% for the year. The majority of this EBIT came, of course, from our fantastic Q1. Going over to the profit and loss. And here, if you start with net sales, we can see that for the quarter this year, we're having 308 million SEK compared to 541 million SEK last year. And for the full year, our net sales is 1,898,000,000 SEK compared to 1,938,000,000 SEK. So we're having a drop in the full year on 6%. We're taking a look into the gross margin level. 40.3% for the quarter and lower mainly because of low revenue and the ERP implementation. The ERP implementation demands more resources for us for implementing the new processes that we need to do to be able to continue to grow and be able to produce more units in the future. For the year, we are still on a good level on 42.3%. We also deliver a good result for the year with almost 20% EBIT, even if the fourth quarter is low with 6%. In the quarter, we have a high sales expense, sorry, on 20% compared with revenue. We had invested in more people over the year in all regions, also in Norway, since we now have our own staff in Norway. This is an investment, as I mentioned earlier, for the future. And also exactly as our investment in the new ERP system, that's also an investment for the future to secure that we are prepared for future growth and expansion into new markets. We also have continued investing in our third generation tilt rotator. Our total R&D cost, including activated in the balance sheet, is 72 million SEK. That makes it 3.8% of our total revenue. I will go over to talk about our cash flow, where we're having a strong operating cash flow, both for the quarter on 96 million SEK and for the year 486 million SEK. This is mainly because of lower capital tie-up, and that's especially inventories and accounts receivable. We'll go over to our rows. And we have a good return on the capital employed. We are on 49.3%. And as you can see, if you're looking on the graph there, it's the second best that we have for the last five years. So it's still a good level on that. We'll go over to the financial targets. And we start with that we're proud. that we in the challenging year still can reach most of our targets. Net sales is negative, minus six, but we also measured that over a business cycle and we also compared to the market. And as we have showed on our historic data, we can have bumps in the road and still be able to grow fast over a business cycle. We deliver at the EBIT margin with 20% and have an average on being on that level since 2017, as we also showed in the historical data. Rose is still at a good level and above target at 49%. Capital structure, we are on a high level, 64%, so way above our target. And that together with that, we have seen that the market has stabilized, opens up for the last financial target. That's the dividend. And then also here are we delivering on target with 50% dividend or 0.94 SEK per share. This will be paid out in two different payouts as we did last year. So I think it's a good year even though we are not reaching the net sales targets this year. If we're moving on to the summary and outlook and start with a little bit highlights related to Q4. Adding the fourth quarter to the other quarters this year, we see the further signs of stabilization of the order intake. It would give us a lot of comfort with that. We also received important big orders in the European region from our new distributors here in Greece, in DACH, and with the machine rental firm in France. The net sales in the fourth quarter was slightly lower than expected. That's partly been affected by the lower delivery as a result of the ERP implementation. We also have a positive book to build ratio for the quarter. We're trying to summarize the full year 2023. It's been a challenging year with exceptional strong start from a high order book. And we had a weakening net sales throughout the years as a result of macroeconomic and geopolitical uncertainties that together with the ERP implementation put pressure on the organization and the profitability. Despite that, We have passed the historical milestone with more than 50% of sales generated outside the Nordic region. We made a smooth establishment of the sales company in Norway and put the full income system on the market with increased revenue per unit. We had exceptional deliveries in the single quarters, which confirms the strength of the income business model. And we generated a strong cash flow that gives comfort for the future. And to get there with the stabilized order intake gives that the board the confidence to increase the dividend for this year. If you're looking a little bit ahead, we are getting more confident that the order intake is stabilized, but we don't see a clear indication of a pickup in the near time. The question is when we go from stabilization to growth. Our guess is earliest second half of 2024. We may see a smaller increase in Q2 if the normal historical digging season pattern materialize with that. We will have the ERP rollout continue during 2024, so we still need more resources and consultants for that. We're also going to finish up with positive news regarding that we are very happy to be able to recruit our new CFO, Marcus Asplund from Scania. Markus Asplund brings nearly two decades of experience from Scania, where he held diverse roles. Prior to joining ENKON, he served as the CFO and COO for trade and financial services in Asia and Oceania since 2022. Markus has extensive and solid experience from leading roles within Scania, with international experience. In addition to his current role in Asia and Oceania, He has previously been CFO for Scania China and CFO for Scania Middle East. And a little bit fun fact is that Marcus and I work together at Deloitte in Östersjön and we both are from Södertälje. Marcus will move up to Jämtland and start his position within ENC on August 2024. He's excited to be part of our yellow family and looks forward to change the world of digging. Thank you. That was all from our presentation. And we will now open up for questions that can be asked in the telephone conference. So operator, please go ahead with the first question.

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

Perfect, thank you. Krister, you said that your sales in the coming quarters will reflect more the orders that you take in the quarter, so more kind of in and out orders. However, in Q4 you actually built some 100 million SEK in backlog. So my question is, when will this backlog be delivered? Will it be already in Q1? And based on that, should we expect higher sequential sales in Q1?

I think it will be split in both the Q1 and Q2 because some of it was also like a pre-ordering effect, like they're ordering for further on the year. but there was a smaller amount. So yes, it's a backlog we're having or book to bill, positive book to bill ratio that we're having there. So yes, some of it will come in Q1 and some of it will come in Q2.

And then any color on sequential sales development, would you venture that?

The sales development, we believe that it will be We see positive signals, and we believe there will be small increases hopefully every quarter for 2024. Where we made estimates or guessing was that we hopefully could start seeing some bigger growth in the second half of the year earliest. But I think Q1 and Q2 will not be any dramatic increases.

All right, perfect. And maybe if you could quantify the order you got from the French rental company and also the DAC order, how much was it? Just the ballpark number.

No, I don't remember. We have made a press release on the DAC. I think we was that 12, 13 million SEK. Something like that. And the French order was a little bit bigger than that.

Perfect, thank you. And just to give us, if you can give us the status on the implementation of the ERP system, what's left and would you expect further production disruptions due to that?

So far it's implemented in the production company in Sweden and in one sales company and we have had disruptions in the production companies absolutely but it's we get we're getting signals on it started looking better and better every every week more or less and we think with the capacity we have now we are prepared for an increase of getting more order intake and be able to deliver it out fast we will have short lead times It's if it's still some parts that are missing or anything like that. But right now the feeling is getting better and better regarding system. Still, the biggest problem is that we need to have a little bit more people because we have changed some processes before people are getting used to that. We will have the need for more people.

For more kind of cost headwind rather than sales headwind from now on.

Yeah.

Okay and then if we can discuss costs. I noticed that the number of your employees came down in Q4. Was it mainly in production?

Yeah it's mainly production. We've been having a lot of people on short term employed and we have been ending a lot of people during during the year in that way. And also some people have moved into other industries like the defense industry and so on have been popular for people to go to. So we have a more natural way of getting, letting people go. And right now for be able to do all the things that we need to do with the ERP system and so on, and also keep implementing it in Poland. We need the people that we have right now.

And then in general, how should we think about your other operating costs like SG&As and R&D in 2024? Do you plan to have them flat or expand them or do you expect any cuts in this kind of costs?

We're still behind on a lot of tools and stuff. The focus have been on the EC3 and DC3. So we still wanted to get more tools out during 2024. So that's something we will keep on working on. I don't think there will be that high cost as it's been with the EC3 and DC3. Now we are more or less ready for the serial production and starting with the one size on the EC3 and the DC3 is then more or less fully developed in that way. So it will be some cost then for the different sizes for the EC3 but also bigger focus on tools for the coming years. So I would guess to go down a little bit.

Going down a little bit, okay. And pricing, how does it hold?

We made a smaller price increase this year so we don't see any need for change during the year so far. Of course we've seen the fluctuations in the currencies and so on that of course affecting us. But we haven't made any bigger changes or planning any changes on that right now. Then it would be a normal price increase, I guess, depending on the inflation and so on for upcoming years.

All right. And then my last question, really. Do you think it's a fair assumption that your EBIT margin in Q4 was a kind of bottom? Obviously, we don't know about the markets, but it looks like sales might be stabilizing, redrawing a bit, pricing is not a problem, and maybe some costs are coming down. So do you think it's a fair assumption to think that margin should improve sequentially from here?

Yes. I mean, we are not sure. pleased with 6%. Our goal is definitely to be higher up. And I think we did a lot to ourselves by moving in North America our stock from one logistic hub to another logistic hub. And we also implemented the ERP system in the Swedish production company that is the biggest So we managed to destroy a lot for ourselves. So it's not only the market that are disturbing. It's also that we did this to ourselves. So in that way, we have the chance to increase our e-habit margin in a good way for coming quarters.

Perfect. Thank you.

As a reminder, if you wish to ask a question, please dial pound key five 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 a good question. And if you have any further questions, please don't hesitate to reach out to any of us. We are more than happy to help you. Thank you again for listening in today, and we hope to see you all soon again. Thank you very much.