engcon AB (publ)

Hello everyone and warm welcome to Enkom's presentation of the third quarter 2024. My name is Christer Blomgren and I'm the CEO here at Enkom. With me today I have our new CFO Marcus Asplund. Together we will take you through the Q3 report with the highlights and the key financials of the quarter and then we will move on to the Q&A session after that. I will start with some background before we move over to the highlights We're still having a lot of uncertainties in the world and in the construction industry. It's relative high interest rates, even if they have started to cut both in Europe and US. We also have the election in US coming up soon. Excavated sales are down more or less everywhere in the world. We see that the dealers having stock of excavators. So if the sales start to pick up, we can have a good growth since we more or less doesn't have any stock anymore at the dealers. We also see that is some good signs on the macro level, the lower interest rate and also a budget proposal of infrastructure projects and also signals of increased started building projects. It really has to take some time before the confidence is coming back to the construction industry. During that time, we need to keep educating everybody in the industry about the benefits our products have for the productivity, profitability, and also the sustainability advantage we give to the customers. If we're moving on to the highlights of the quarter, then I'm really proud of our team's strong performance in the quarter with an EBIT margin of 22%. The EBIT margin is a result of the high gross margin and lower selling cost. Once again, we demonstrate that we can deliver profitability that are above our financial targets despite relative low sales. The gross margin was an impressive 46% compared to 4% for the quarter last year and was primarily a result of strong market and product mix. We can also conclude that our order intake is driven by Europe. And Europe is the engine of our growth this quarter and have been so the whole year. And continued strong demand in the region led to an organic order growth of 39% and a net sales growth of 42%. We also have an experienced and knowledgeable organization and a greater awareness of the tilt-to-tilt concept that combined with the partnership that we have been starting in the past few years have been proven valuable for growth in the European region. The feeling right now is that we have a good momentum in Europe. We also have been awarded some prizes that we are really proud of. Enkom was awarded the Carnegie Sustainability Award 2024 in the category of best newcomer. Sustainability is spread through our entire organization as a driving force for innovation and serves as a cornerstone for future growth. And we're proud that we have been recognized in this sense for our work, especially with our third generation tilt rotator. and that our important efforts are benefiting customers, shareholders, and society at large. We're also very proud of that Stig Engström, the founder of Enkom, is appointed the Entrepreneur of the Year in Strömsund, the heart of Enkom. He has again been recognized in his and our hometown. Enkom and the municipality is well connected, and Stig and Enkom are doing a lot of positive things for the people living in Strömsund. We're moving over to the numbers for the third quarter. And net sales continue to rise. It amounts to CX 412 million compared to 391 last year and increased organically by 8%. Order intake amounted to CX 367 million compared to 347. Also an organic increase on 8% compared to last year. This even though the Nordic and Americas had a weaker quarter. If you take a look at the gross margin, it amounts to a strong 46%. And it's explained by a favorable combination of deliveries to high margin markets and a beneficial product mix. The Nordic region is normally weaker from a gross margin perspective. A low share is positive for our gross margin. now with a high percentage of spare parts also the nordics having a high gross margin 46 percent is high especially on a lower volume level we can see a couple of things that can lower the gross margin in the near future and marcus will come back to this as it takes us through the financials more in details later on the ebit margin amounts to a strong 22 percent the high operating margin is a result of the strong gross gross margin, coupled with our scalable business model. And also, if you're looking on the return on the capital employed, it amounts to 31%. It is slower than the record levels earlier, but the increase from earlier quarters now then. So we're taking a look to the net sales and order intake. We can see that we are on a stable recovery. We have increased in net sales versus last year in the quarter. Also, the order intake continued to increase versus last year. The third quarter is historically a bit lower than Q2, and we can see that here also. We see that Europe continues to act as the growth engine. At the same time, the Nordic region and Americas are having it a little bit tougher. So if you're going a little bit deeper into the geographical regions, and let's start with Nordics, it's continuously slow and show flat development versus last year. Demand remains low, and even if customers are needing to replace their fleets, high interest rates have led to cautious purchasing behavior right now. What we see is a weak third quarter, even if it's normally a slower quarter than Q2. The machine sales is continuously low in the region, but the dealers have a larger stock of excavators. So if it takes off, it can go pretty fast up for us then. To get the stronger recovery in the region, we need more positive macro signals that can give confidence to the construction industry. We are confident that the increase will come. However, it's hard to conclude exactly when. We also see signals like lower interest rate, increased started building projects for 2025, and also budget proposal for infrastructure projects. We also know, as I mentioned earlier, the need of renewal of the fleet. We believe that the recovery will start when the digging season starts in the end of Q1 in the Nordic states. We're moving on to Europe. The European region are the growth engine in the third quarter. And I've also been that during the year and are now our largest region if you're looking on rolling 12. The importance of the region is growing and it makes up to 48% of the order intake in the quarter. And if you compare it to the 2023 when it was 34% of the net sales. In the quarter, both net sales and order intake increased strongly as I mentioned earlier compared to last year. And Europe is our biggest excavator market in terms of newly manufactured excavators. It's only Asia, including China, that's larger. And it feels really good to see these positive trends on this important region. And it's also great to feel that we are well suited in this region. We then establish sales organization on the most relevant markets. The sales organization are gradually spreading the awareness of the tilt-rotator concept throughout the region. We are also entering in new segments. For example, we have step-by-step increased sales to smaller excavators. And we also have made a simpler tilt-rotator for the smallest excavators up to two metric tons. Normally, it's harder to sell in the tilt-rotator concept to the smaller machines because it's a longer return of the investment. But with a simpler tilt-rotator, we can offer it to a lower price. And the step from a tilting coupler or a tilting bucket is smaller for the customer to take. We also see the strong contribution from the partnerships that we have entered in that region to serve mainly the German market. And with the broad development across many markets, we can now see that the hard work and focus on building the market starts to pay off in Europe. The interest in Europe is also one of the biggest reasons to why the interest from the OEMs are still picking up then. Moving on to Americas. And unfortunately, we continue to see a weak development in the American region. The challenges in the Americas persist with a decline in order intake of 29%. Its high interest rates and a weaker economy combined with a soon-to-come election have set everything on hold. The conditions now are a little bit similar to where we were in Europe a year ago, when we saw high levels of excavators in stock at the dealers and a slower market. As we have previously mentioned, we are continuing our efforts to strengthen our organization in the US. We are now on track in service organization with a local service manager in place. Logistics aren't an issue anymore. Now the challenge is within the sales organization and the currently weak demand. This is similar to what we have seen in Europe in earlier years. It is a little bit two steps forward and one step back. And right now we need that step back to rebuild. The positive thing in the region is Canada. That continues to go strong, but the numbers are still too low to have a greater impact on the region. We're moving on to Asia and Oceania. In Asia-Oceania, order intake declined 6%. Since Asia-Oceania is our smallest region in terms of volume, major orders from OEMs lead to considerable fluctuation in the order intake and net sales between the quarters. And Asia Oceania is the only region with these type of orders. It can be like that 1OM is ordering something last year in Q3 and this year it's coming in Q4 or opposite. And that makes these fluctuations and it's harder to analyze Asia Oceania than the other regions. With that, I will hand it over to Marcus to guide you through the key financials.

Thank you, Krister. I'm very happy to have joined the ENKON team and excited to share my first presentation on ENKON's financial development for the quarter. We see a continued strengthening of the results compared to the previous year. Between the quarters, EBIT increases strongly by 36 million Swedish kronor, which corresponds to an increase of 65%. We also see how Continuously improved the EBIT margin since the low point of in Q4 2023. In the quarter, we are now on a level above our financial target of 20% over a business cycle. Let's go through the income statement in more detail, starting with the net sales. Like Krista was into, the net sales is driven by the growth in Europe. This is mainly a volume effect. The strong gross margin is partly explained by a favorable market mix as the volume in the quarter has largely been channeled through markets where we have higher gross profit than average. This is normally the effect when volume is less centered to the Nordic region. We also see a more favorable product mix with a higher share of tilt rotators of total revenue at the expense of some other products with lower margins. In the quarter, we have started to see a negative effect from the strengthened Swedish krona. On the other hand, on the selling expenses, we have a bit of a tailwind from the strongest SEC as most of our sales companies uses other currencies. Generally, on the expenses side, I am pleased to see that our scalable business model runs through the whole income statement. The administrative expenses remain unchanged year on year. as the implementation costs for the ERP will continue to be elevated also in Q4 due to implementation on hypercare period in Poland. This means that by the end of this year, the production units will have been implemented. On the R&D side, we have high activations in the balance sheet due to further development of the third generation tilt rotators. The total R&D expenditures corresponds to 3.2% in the quarter and 4.2% of the net sales year to date. All in all, the higher net sales, the strong gross margin and stable OPEX gives a good EBIT result of 91 million kronor. Corresponds to a gratifying EBIT margin of 22% in the quarter. Moving over to the cash flow. The cash flow from operating activities increases from 108 to 144 million. We can conclude that the net working capital remains on the same level as in Q3 2023, and the strengthened cash flow is driven by the higher operating profit. The unutilized total liquidity per the last of September was 417 million SEK. As a side note here, the dividend payout was carried out on the 3rd of October. Return on capital employed continued to recover compared to last quarter and is expected to continue to move upwards towards our target for the coming quarter. Focusing then on our financial targets before I leave the word back to Krister. It is good to see that we're back to growth on net sales, even though it's purely driven by Europe and partly offset by a weaker Nordic region. As mentioned before, a strong EBIT margin exceeding target and the return on capital employed is recovering and expected to grow. And we continue to have a solid equity to asset ratio above target. And by that, I hand over to Kriste to summarize it all.

Thank you, Marcus. If you're taking a look on and summarize it, and as Marcus talked about, the gross margin improved considerably and amounted to the 46%, as we talked about earlier, for the quarter. And that was primarily a result of the strong market and the product mix. And we also have the really strong EBIT in the quarter. And that was also a result of the high gross margin and the lower selling cost. The third quarter really demonstrated that our business model is scalable and we can have high margins even on lower volumes. We also see that the order intake is driven by Europe. Europe is the engine of our growth and continued strong demand in the region led to an organic order growth of 39% and a net sales increase of 42%. We have a more established and knowledgeable organization and a greater awareness of the tilt-to-tater concept, that combined with the partnerships that have been started in the past few years, have proven valuable for growth in the European region. And the good thing is that we are growing on an XQ market that is down, so the penetration levels are increasing. In the Nordic region, the oil intake remains at the same level as last year. Demand remains low, even if customers need to replace their fleets. They are cautious and waiting for positive signals and the digging season to start. The challenges in the Americas are still there. High interest rates and a weaker economy combined with upcoming election have led to cautiousness in the market. As we have previously mentioned, we are continuing our efforts to strengthen our organization in the US. We now have service and logistic organization that we consider to be stable. We need to keep working to improve the knowledge and strengthen our sales organization so they can educate the market during the slower times. We also see the sustainability as a future growth driver for us. And with Encon, you get sustainability with the increased productivity. That will be the key drivers for future growth. You don't have to choose. You get both together with Encon. And we don't settle with working only with the environmental part of sustainability. We also add a lot to the safety, both for the people around the machine and also the operator inside the machine. We believe that CSRD will have a great impact in Europe. And if we push it right, it will be a benefit for us since we both have the sustainability part and also the increase of productivity. we're trying to look a little bit ahead then in the fourth quarter we don't we do not foresee any major pre-buy effects since no major price increase has been communicated and also to this the interest rates remain on high levels and for a stronger recovery in the nordic region we need those more positive macro signals that can give confidence to the construction industry and as we mentioned earlier we are confident that the increase will come. However, it's hard to conclude exactly when. We also see the signals like lower interest rate, increased started building projects for 2025, and the budget proposal for infrastructure projects that will push the market to start growing again. And also they have the need of the renewal of the fleet. So we foresee increased demand in the Nordic region when the digging season starts in the end of Q1. But regardless, we are well positioned for more or less whatever the future will bring. We feel confident with our business model. It is scalable and we can have high margins even on lower volumes. And we know that we can ramp up if the demand picks up. And with the dedicated people within Encom, we will continue to change the world of diggings. That was all in the presentation and we will now open up for questions that can be asked in the telephone conference. So operator.

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 Zeno Engdalen Richuti from Handelsbanken. Please go ahead.

Thanks for taking our questions. Just starting off with the gross margin, of course you said that there was a positive effect from both the market and the products. But just to clarify on the product mix looking also when you compare to the last quarter, is it that there's a larger amount of the spare parts, so to say, that explains the uptick?

Mainly in the Nordic region is it where we see that product mix is that we're having higher spare parts.

Of course, because of also the total lower revenue in the Nordics, then it's become a higher part of the spare parts there. And as I said earlier, it's... gives normally we're having a weaker gross margin in the Nordics. If you're looking on the market mix in that way then, but with having a lower part with that and a high part of spare parts, that gives us a higher gross margin there and that benefits also. But there are, of course, a couple of other things that is positive also for us.

Okay, very clear. And just looking into Europe, which is the growth driver, as you were saying, where do you feel that you will put more of the focus going ahead? Is it that you're trying to get onto more partnerships or strengthening the ones that you already have?

As I mentioned, we're working a lot also with OEMs and trying to prepare the machines for tilt-to-status. and that will be a key thing, not in short term, it will be more long term, because that makes it much easier to put on the tilt rotator, so the barriers to get one get smaller, and it's also pretty high price, especially in the Americas, to make an install. So if we can get that down, it will be easier and get the return on investment even faster, and we can even have trial periods and stuff like that when we get into that so that's where we work in mainly with partnership right now otherwise we are in europe we're sitting pretty pleased with all our markets and with in germany we got with the partnership with the help that we needed but in the other markets we're strong so we don't really seeking partnership maybe right now short term very very clear

A last question from me. When we're looking at the R&D costs, it's of course lower when you're comparing to the previous quarters. How should you think about that one we're looking at?

So, yeah, lower as in what comes into the income statement, yes, but not lower when we talk about what we put into, I mean, overall R&D expenditure. And we are still very much activating a lot due to the, we're deep in the third generation tilt rotators development. So over time, as we said, we have, I mean, an indicator we like to be around for, present as an innovative company so we are where we want to be there and what is needed right now I would say.

And we can also say that we have now made a bigger part of DC3 and EC3 but we still have seven more sizes that we need to do we are more or less ready with a 319 and finishing that up but we have seven more sizes so as marcus said we will keep on investing in that and we also will need to keep on invest with the oms there for preparing the machines there so i think we will stay on more or less the same level, even if it maybe dropped a little bit this quarter to 3.2 compared to 4.2 or something like that. But I would consider that to be just a little bit slower just this quarter, maybe because of the Swedish summer or something like that.

Okay, thank you. I'll get back in line.

the next question comes from Agnieszka Wajlela from Nordia please go ahead yes perfect thank you for taking my question so maybe starting with the Nordics your positioning for the market recovery But when we look at the quarterly orders, they went down by 25% sequentially in Q3. So yeah, I think you mentioned, Christer, that the recovery will not come before the Q1 season. So can you give us any kind of guidance, what you expect from the orders for Q4? Or when will the orders pick up in the Nordics?

As you said, we believe that the orders

recovery will start to be seen more in end of Q1 where the digging season starts. We don't expect any bigger pre-ordering part in the Nordic since the price increases low and the interest rate is still high and the dealers don't want to keep stock. Right now they're still having a lot of excavators in stock so they want to they don't want to tie up any more capital in that way. So as we're saying in this we're expecting to start seeing the recovery in 2025 and end of Q1. So not that much in Q4 to pick up that much compared to last year.

All right perfect and then on Europe do you expect acceleration now in the coming quarters and also if you can help us to understand how much kind of sales from the your corporations with the distributors in that region helped orders in Q3. Will you be kind of meeting a bit tougher comps now in the coming quarters because of that?

Yeah we believe that we will

continue to have a good growth in in in europe we as i said the feeling is that we have a good momentum there uh the good thing is that it's not only one market that is doing good it's uh almost all of the markets is doing good so in that way um i think we we can continue be on a good growth level and and um Might be if one market is slower, the other ones will compensate for that. So it will stay on high margins or high growth. So it's a little bit hard to say how much we have depended on our partnership in Germany. It is not a huge volume. So I'm not worried that we should see that it's slowing down because of that. Because we're doing good in all regions right now, so that's the positive thing. Perfect, thank you.

Yeah, and then my last question, I think Christopher mentioned that you do see some headwinds maybe for the gross margin in the coming quarters, but I didn't pick up anything except for FX, so maybe some clarification there?

uh if the fx and since we also talked about when the nordics having a lower volume so if nordic starts to pick up that might hurt the gross margin level a little bit great thank you so much

The next question comes from Anna Whitstrom from Carnegie. Please go ahead.

Hi, Christa. Hi, Markus. My first question is if we can go back to the Americas. Obviously, as you say, it's quite a challenging market currently. But given the volumes that we stand on now, what could we expect near to mid-term?

Good question. We still see challenges there. And of course, we believe that, as I said, everything is a bit on hold because of the election. And that will hopefully make, when the election is done and people know who will be the president and so on, That means that it will pick up because there are still needs. They have started up infrastructure projects and stuff like that. So I believe it will come more and more from this level. We are of course not pleased where we are. We definitely need to have an increase in North America. I mean, it's no reason for us to, it should be dropping. Since it's a penetration case, we are only on less than 2% penetration. The positive things are Canada, where we see that we are increasing and growing. So there are definitely signals there where we can keep on growing on the market. But to say how much and when, no, I don't dare to make any guessing on that.

Is your assessment that your competitors in the American market experience the same kind of challenges or has the market shares shifted in any way?

You never know exactly but the feeling is that the market has slowed down a lot.

All of us had pretty good deliveries on 2023 but It definitely has slowed down in the sense of, as you mentioned earlier, with the high interest rates and that the OEMs have been subsidizing their interest rates on their machines, but not on attachments that are not their own, have made people look like it's a bigger investment to try a tiltrotator. The awareness of all the benefits of the tilt-rotator is not there. We are three, five years behind Europe in that. We need to keep on working with that. We need to push out that to the market. And unfortunately, dealers are not normally good enough to open up the market. So we need to do it the hard way by being on exhibitions, having demo days, meeting end customers and so on.

Okay, thank you. And as you mentioned, the pre-buying effect is not going to be that huge going into Q4 due to lower price increases. Should we expect like low single digits into 2025 on price effects or is it going to be flat basically?

One more time. I'm not sure I heard the question there.

It's a question on the price effects going into 2025. You alluded to that it's going to be quite minor. Is it going to be flat or is it going to be a price effect of a few percentages compared to 2024?

Yeah, it is more or less just following the inflation right now than in that way. So we're not doing anything more than that.

Okay, that's very clear. That's all for me. Thank you.

Thank you.

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

Thank you everyone for good questions. And if you have any further questions, please don't hesitate to reach out to any of us. We are more than happy to help you out with that. And thank you for listening in today. And we hope to see you all soon again.