engcon AB (publ)

Hello everyone and warm welcome to Enkom's presentation of the second quarter of 2024. My name is Christer Blomgren and I'm the CEO here at Enkom.

With me today I have our CFO Jens Blom.

Together we'll take you through the highlights of the quarter and then we will move on to the Q&A session. So let me start talking a bit about our vision. Our vision is to change the world of digging, and with that, we are referring to our mission and vision to revolutionize the construction industry, specifically within excavation and digging. We are the leading manufacturer of tilt rotators, and by introducing innovative technology and engineering solutions, we aim to transform the traditional digging methods and make them more precise, productive, and sustainable. Our tilt rotators allow excavators to have 360 degree rotation and 45 degrees tilting, enabling operators to perform complex tasks with greater ease and accuracy. Our goal is to optimize digging operations, streamline workflows, and reduce environmental impact by minimizing material waste, fuel consumption, and machine wear. We believe that by improving digging techniques and equipment, we can contribute to a more efficient and sustainable construction industry.

Looking into a little bit on the highlights.

And we continue to grinding our way back on revenue and profitability. We have a high gross margin level on 45% in this quarter. It's mainly impacted by favorable market and product mix. Positive is also that we see an increase order intake in all regions. So we aren't depending on one region or market. Europe continues to have a strong performance and are for the fourth quarter in a row our biggest region on order intake. In our go-to-market strategy, the meeting with end customers is absolutely the most important thing for us. During the quarter, the exhibition season has started with the Intermatt in Paris, the Swedish Machine Fair in Stockholm, and CSPI in Tokyo, among others. These shows give us the opportunity to meet our end customers and the industry colleagues. We also get the opportunity to get a good view how the tilt-to-tater market is developing. And since Baume in Munich in the fall of 2022, we have seen a clear trend that the tilt-to-tater is on its way to becoming an established and recognized product in the digging world.

That tip rate is more or less in every OEM's booth on these shows nowadays.

If we look into the numbers then for the second quarter, we see the net sales decreased 12% organic compared to the high levels last year. During the Q2 2023, we still had a boost from the strong order. The net sales continue to recover for the second quarter, and we see that some markets actually outperform 2023. On the order intake, we see an increase on 26% versus last year, and I'm really glad to see how all regions increased versus last year. On the gross margin, as I mentioned earlier, we're having a high 45%, and it's mainly the favorable product and market mix that give us that high margin. It's really strong, especially since we're still on lower volumes. The EBIT margin amounts to 18%. Increasing net sales together with a strong gross margin has taken us back to a solid level, even though we in the quarter see increased selling expenses connected to trade shows. And even if it's increased net sales, it's still on a pretty low volume, as I mentioned earlier. If you're looking on the return on the capital employed, It amounts to 28% and it's a calculator as always on 12 months basis. And Jens will guide you more regarding that later on in his comments then. So let's move on and take a closer look on the net sales and order intake. The order intake continue to increase gradually and we see a strong improvement from last year. I'm very glad to see that All regions are increasing. Excavator sales have dropped in our major regions. Despite that, we can see an increase in order intake. In 2023, the dealers had a lot of tiltrotator in stock, and they sold from their own stock instead of ordering it from us. Now the stock of tiltrotator is low, and the demand is increasing. The current situation is now that dealers have a high amount of excavators in stock. and don't want to carry tilt-rotators in stock also. This means that we need to have a short lead time to deliver when they sell excavators now then. Going over to net sales, the net sales decrease organic with 12%. We are behind 2023 when we were supported by a strong order book as we mentioned. And I'm glad to see that the net sales continue to increase for the second quarter in a row after the dip in Q4 2023. If we take a look at the order book, in the quarter we can see a small reduction on the order book, but it has been gradually growing since third quarter 2023 then.

Let's move on and dig deeper into the regions. And we're starting with the Nordic.

And the demand is gradually increasing. And we're seeing recovery with order intake increasing organically by 30%. Stock levels at dealers are low compared with last year. And a gradual increase in willingness to invest is having a positive impact for us. However, we need clear positive signals are necessary for them on a macro level. to achieve a broader and more powerful upturn in the region. And what speaks for a faster recovery then? One thing is that the excavators sooner or later need to be replaced. Last year's replacement has been delayed due to a slow construction sector. It continues during this year. Then users need to update the fleet to avoid high maintenance costs and the risk of downtime on the excavator. Further, the excavator stock has been growing at the dealers and depending on how they decide to do with campaigns, will they run campaigns to get rid of the stock or not? If they run campaigns, that can give us a boost in the sales in short term since roughly 90% of the excavators are equipped with tilt-rotators in the region. If we look into some numbers for the quarter, then the order intake shows a strong increase of 30% organic growth even if it's a little bit mixed signal in each market. Finland and Denmark is taking the lead in Q2. Net sales is 11% behind last year, but continues to grow over the quarters. At the same time as we're having this increase in order intake, the ex-series sales has been dropping in the Nordics. We're moving over to Europe, and Europe continues to demonstrate an impressive performance. maintaining the highest order intake among all regions for four consecutive quarters in a row. It's important with these positive performance across all major European markets. For example, France continues to develop, showing strong growth also after the Intimat exhibition. Intimat is the third largest construction exhibition globally then. Our products have been gaining significant interest in the region, as we could see at Intimat. Tilt-rotators and hydraulic tools were shown in the majority of the exhibitors' booths. Mirroring the trend that I observed at Bauma two years ago, suddenly it was tilt-rotators in more or less every booth, similar to what I saw eight years ago at Bauma with hydraulic quick couplers, and they have really been taking off in Germany after that. We're also having a shift into higher adoption of the tilt-rotator concept among smaller size machines in Europe. This is an important step since the cost for tilt-rotators is much higher compared to the machine on the smaller machines. And it's also indicating a growing knowledge about the benefits and value offered by tilt-rotators across the construction industry. Let's dive into some numbers also then. The order intake increased strongly with 28% organic. And we also see a small net sales growth of 4%. We're seeing a convincing order intake increase on the major markets, France, UK, Netherlands. And we also had a good start with our partners in the Daesh region. As with the Nordics, order intake increased despite the drop in the machine sales.

We are moving over to Asia Oceania.

That is currently our smallest region. where Australia is serving as the main driving force. If you're looking on performance, Korea had a strong first quarter, but experienced a decline in the second quarter. This pattern follows the pattern of the machine sales in Korea, but it's important for us to not simply follow that trend, especially considering that significant untapped market potential we have in Korea. Our business operations in Japan have mainly been around OEMs, making it challenging to figure out specific trends since they are buying more or less in batches. We are recently taking a more proactive approach in Japan, following a change in our agreement with Kobelco, transitioning to a non-exclusive arrangement with them. And then to boost our presence in Japan, we have signed agreements with a local Volvo distributor and a dealer slash influencer These partnerships will greatly assist us in marketing, particularly on social media platforms. The Japanese markets are significantly different from other markets, so it's good to get local presence as we get with these agreements. Overall, we view Japan as an increasingly attractive market. The combination of aging population and a growing labor shortage shows the need for more efficient digging solutions. During my visit to CSPI in Tokyo in this quarter, I observed a rising interest in tilt rotators and hydraulic tools in general. Every OM had a tilt rotator in their booth. That's a big shift compared to just a year ago. However, there's still a long way to go, as the majority of end customers have yet to adopt the quick couplers, and regulations for OMs remain unclear regarding tilt rotators. Nonetheless, our ambition is to become big in Japan, as Alphaville sang in their song. If you take a look at some numbers, we have a strong order intake increase of 47%. However, with lower net sales versus last year with 27%.

We're going over to Americas. In the American region, we are seeing a stabilization at a lower level in terms of order intake and net sales.

We have faced challenges during the high interest rates on our products and difficulty in securing finance to subsidize these rates, as well as a lack of awareness about the tilt-to-treaty concept in the market. It is key for us to educate both the dealers and end users about our offerings. And we must stay true to our go-to-market strategy and understand that there are no quick fixes. In the current quarter, we have seen a 38% organic decline in net sales in the American region. However, there are signs that the order intake is stabilizing on a lower levels. We have a small increase this quarter with 5% on the order intake. It might be too early to clarify this as a positive trend. We need to closely monitor signals in the upcoming quarters. It is important for us to improve our sales efforts. educate end users about the efficiency gains from our products. Considering the challenge in finding labor in construction sector, our product is a great alternative for that. If you're looking on the positive side on the American region, Canada showing good numbers, it's actually the strongest quarter ever. even though it's from lower numbers, but it's still a really positive sign from Canada. Then I will hand it over to Jens to guide us through the financial development. So take over, Jens.

Thank you, Christian. Let's start with an overview of the EBIT and EBIT margin. EBIT has decreased by 21% from 104 million to 82 million. And the margin is 18.2 compared to 20.5 last year. And as you can see, we are now moving towards our financial goal of an EBIT of 20%. Now let's dig a little bit deeper in the profit and loss. We have a net sales on 450 million compared to 508. And on the rolling 12-month basis, we are having 1.5. The gross margin is 44.9 compared to 42.6. And on the 12-month basis, we are at 42.1. If we move further down, it's notable that the selling expenses have increased to 73 million compared to 64. which is mainly explained by our participation in two larger exhibitions during the quarter. If we continue further, we can see that the result has been affected by this change in our business system by 10 million compared to nine last year. And if we wrap this up on the bottom line, we have an EBIT on 82 compared to 104. And on the rolling 12 months, we have 216 million. Then we're going to look a little bit on cash flow and on networking capital. The operating cash flow is 32 million compared to the record strong last year on 277 million. The lower cash flow is mainly explained of a lower profit. And networking capital as part of net sales is 29% compared to 23%. And our liquidity reserve is 300 million compared to the record strong 421 last year. Then we're going to look closer on our efficiency. The rose ends up at 27.8% which is lower than last year and that's due to lower profit and more capital tied up. Since we have invested more in both the ERP system and fixed assets, it affects both the result and the capital binding. And the consequence is that we have a lower growth. However, these types of investments will give us a good position to meet the upcoming quarters and further growth. And with that said, I will hand over to Kriste, who will take us through the financial targets and give us a summary.

Thank you, Jens. Our targets are measured over a business cycle. If we look on the growth, we have a decrease from last year, but now we are on a positive trend. If looking into the profitability then, I'm proud of that we are closing in on our targets, even though we still are at lower volumes. We are now on a solid 18% EBIT margin, and our target is 20% over a business cycle. Taking a look at the capital efficiency as Jens went through earlier on. We are lower on our target as Jens mentioned earlier. If you take a look at the capital structure then, we are well above our target with 52%. And we also have paid out one or two dividends in Q2.

So we are well prepared for future growth. Coming into the summary and update.

Our financial performance is gradually recovering with increased order intake observed across all regions, reducing dependence on specific markets or regions. We have a really strong gross margin of 45%, and as mentioned earlier, is influenced by favorable market condition and product mix. Europe remains the top region in order intake for four consecutive quarters. with a successful exhibition in Intimat, contributing to the positive trend. And most of the, or all the major markets in Europe, like France, UK, Netherlands, and the dark region showing convincing order intake growth. This growth in Europe is despite the drop of the machine sales in the region. Asia, sorry, Asia, Oceania driven by Australia, holds potential for growth despite fluctuations in performance in markets like Korea. And we've also been taking proactive measures in Japan, including partnership with the local distributors and the influencer. And we aim to increase our market presence, giving the rising interest in tilt rotators and hydraulic tools in Japan. In the American region, sales stabilization at lower level is noted. with challenges of high interest rates and lack of market awareness about tilt-to-status benefits. The positive side in America is that Canada posted a strong quarterly performance, indicating positive trends then from low numbers. Overall, the focus is on increasing market presence, addressing the challenges we have, and use our growth opportunity across all regions then. And then in the ongoing patent dispute, we have appealed the decision to grant the patent in question to the European Patent Office, APO. And we requested that the patent be declared invalid. After we have consulting with our legal advisors, we have withdrawn our appeal to the APO. This doesn't really mean anything in the lawsuit in Sweden. They already had the patent when the district court released the verdict that we did not infringe the patent. Regarding if it will affect our future technical developments, we judge that this is not the case. We don't see any issues with it right now. We also have some other positive things here. We strengthen our group management by creating a new role of Chief Operating Officer, COO. The change is being made to create better conditions for future expansions. The position will be filled by Encom's former head of sales, Anders Schmitt, who is returning to the company. And I'm really happy to have Anders back. As we have earlier announced, Jens Blom is now taking on new responsibilities within Encom. He will, from August, be a specialist within accounting and tax. And Marcus Asplund will take over as CFO from August. And I would like to thank you, Jens. all the things you have done during our journey as the CFO. We have been working together for many years and we have been complementing each other in a great way. I'm so happy that you're staying within ENCOM so we can keep on changing the world of digging together. Thank you, Jens.

Thank you, Kristoffer, for the fine words.

And then we're wrapping it up with looking ahead. We see a gradual recovery compared to last year for the upcoming quarters. Even if we have increased order intake in all regions this quarter, we don't expect a fast recovery during 2024. We believe it will be a stronger recovery in the Nordics in 2025, since end users in the Nordic region must consider updating their ex-VETA fleets as fewer changes have been made during the two last years. Older machines are associated with increased maintenance costs and high risk of downtime. This scenario with updating the fleet could drive a rise in machine sales in 2025, especially in the Nordics. We are preparing ourselves and our suppliers for an increased volume because short lead times for tilt rotators will be crucial, given that dealers currently prefer not to hold inventory. We are also well positioned for future growth. Our vision is to change the world of digging. Despite uncertain times and weak economy, our strong financial position has enabled investments in the sales organization, a new business system, new product generation, and we also invested in management. Together with our business model based on capital efficient and a scalable production, this will enable us to meet market demand when the economy recovers. As you have said earlier, Our goal is to come out strong after a downturn, and I believe we are doing that now.

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 pound key five on your telephone keypad. to enter the queue if you wish to withdraw your question please dial pound key 6 on your telephone keypad the next question comes from Agnieszka Vajlela from Nordia please go ahead perfect thank you and good morning Krister you talk about slight growth in your outlook for the coming quarters

What do you refer to? Do you mean the kind of order intake year-on-year and also maybe does it mean that we should expect just stable sequential orders for you in Q3 and then maybe some typical pre-ordering in Q4?

Yeah, something like that that we are seeing a smaller increase compared to last year but Q4 of course in the might be a little bit higher pre-ordering effect there compared to last year where it was really low pre-ordering effect and our net sales was also really low in q4 but we don't we don't expect a big big growth as we're trying to explain and but for 2025 we are more optimistic yeah

But when you talk about slight growth on the group level, that's still kind of the Nordics that's being a bit more muted, the outlook there.

Excuse me, I couldn't really hear you.

Sorry, so looking to the regions, what kind of growth do you expect? Is it the Nordics that is the reason behind the growth rates slowing down a bit?

I mean, we see a big decline in Americas, of course, also, that we didn't really foresee maybe earlier on. And we also feel that the Nordics is not really taking off. And as we mentioned, we think they need even more positive macro signals for getting that faster recovery that we are looking at. But we also know that normally then If we don't get those signals, we don't think that the Nordics, where you're having normally a winter season where they maybe can't dig, so they will probably not invest into tilt-rotators or actually excavators then in Q4. They will get those machines in Q1, Q2. So that's why we're expecting the bigger growth coming in early 2025, more instead of all the... late 2024.

Perfect. Thank you. And then maybe on Americas, you had some challenges there. Can you talk about the progress that you are making in the region? And also, as you mentioned, that you try to increase the sales effort. In what way? What are you doing there?

Yeah. The challenge that we had and felt that we've been working with a lot have been on the service and support side. And I think we have been doing a good job now. The feeling is that we're fulfilling the needs from the customers and with extra help from Europe where we send over, we are covering that in a good way. What we need to do better is staying true to our go-to-market strategy, where it's a lot about educating the people about the benefits of the tilt-to-tailers and so on, especially now when it's a higher interest rate and it costs you money to invest in the tilt-to-tailers, then you need to believe in all the benefits that you get with the tilt-to-tailers, that you're actually going to make those money back and even more. Earlier, when the interest rate was much lower, it was easier for them to gamble a little bit more on it. Now they need more type of proof on the benefits. So that's what we need to be better at. And we've been working with sales training materials and so on. And we've been running sales training for our staff, not only in America, but in Europe and Asia and also in the Nordics and so on. to have the benefits the tilt stage are having, but also the benefits Encon having compared to our competitors.

Great, thank you. And then maybe just on the profitability, you reached close to 45% gross margin in the quarter despite volumes presumably still being rather low. So can you talk about the drivers behind the profitability improvement?

It's a positive on the product side. The right products, of course, when we're having a lower volume, our spare parts are increasing in percentage of the revenue. And that's, of course, helping us. And this is the season where you're doing a lot of repairing and so on, since the dating season is fully over. up and running now in Q2. So that's of course one big part. And then also a positive market mix where Europe is strong and we're having a good margin in Europe. So that's also a positive sign. So it's a little bit mix of a lot of smaller things with products and market mix.

And then just last follow up from me before I get back to the Q. What proportion of your sales is the aftermarket like repairs and spare parts?

Jens do you know exactly otherwise I will do the famous guessing.

I don't have exact figures in my head right now.

But normally if you don't have exact numbers normally we are somewhere around little bit about 15% and then when the volume goes down, it's increasing up to around 20% of our revenue.

Okay, perfect. Thank you. I will get back to the queue.

Thank you. Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad.

The next question comes from Agnieszka Wajlela from Nordia.

Please go ahead. Okay, and then it's me again. So just maybe on the disputes that you have, what was the reason really to withdraw the appeal, the patent office?

I can't really comment on the reason behind it. It was an advice from our legal advisor and it's an ongoing process that we're having then in Sweden. So unfortunately, I can't comment on the reason why we withdraw. All right.

Thank you. And then maybe the last one from me. On Europe, you mentioned that you do see higher interest for tilt rotators. Maybe you can talk a bit about the momentum in different markets. penetration rates and what you are doing yourself to capture that kind of growth.

What we see in Europe is a positive thing if we're taking France as an example. We see growth both in regions where we've been weaker where the interest for tilt-rotators are increasing. But we also see, as I mentioned, a higher adoption rate from the smaller size machines. So the growth is coming both from new regions within France, in that case, but also with smaller machines. And that means, indicates, as I mentioned there, that if you're willing to invest to the smaller size machines, then you really start understanding the benefits of the tilt-rotator because that's a hard thing to make the calculation on those since the tilt-rotator is pretty expensive compared to the machine then. In UK, we see a lot of positive things and trend on that they're having a hard time finding labor after the Brexit. So that means that they've been starting looking to more technical solutions and also that the operator is getting more to say about it and wants to have tilt rotators more in that way. So that's been a lot of the shift there in UK. We also see positive signs on the macro level with the new government in UK that are talking about the house building and starting up projects regarding that. So I think there are a lot of good signs all over in that way. But they are also, they're not just one thing, they're more than one thing. And that's also really positive. So it's not something that can be broken fast in that way, since you have more trends than just one.

And then maybe a follow up. Do you feel that you will need to invest more in your sales organization? Or do you think that your current organization, the kind of manpower that you have, will be more efficient and will be able to cover more sales.

I don't think it will be any drastic investment we need to do. We decided to try to keep our sales organization pretty as it was even during this downturn. So in that way I don't think we need to invest in a major investment. It might be Those bigger countries, if we see that we are getting increase in the southern part of France, for instance, that we might need to add something. But no, not any big thing as I see in front of me like that. And of course, if we decide to go into some new countries or something like that, then of course, we need to invest into new people there.

Perfect. Thank you, Krister. And yes, have a good day.

You too. Take care.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments. Please go ahead.

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 help you out with that. And thank you for listening in today. And we hope to see all of you soon again. Thank you very much from Enkontin.