Ferronordic AB (publ)

Hello everybody, this is Lars Korneliuson here and welcome to this presentation of the second quarter results for Forenordic of 2024. So we see continued strength in the US in the quarter. Overall, we had 62% revenue growth and that is driven by the addition of the US operations operating results minus 4 million. Net profit decreased to minus 81 million and that was mainly as a result of exchange rate losses. Net debt increased slightly to 1.671 million after obviously the acquisition and consolidation of balance sheets in the US operations and total equity then decreased to 1.627. If we talk about the US, it's continuing to perform well. We had a revenue of likely above 700 million in Q2 with an operating margin of 7.3%, 51 million kronor.

We

saw the market in the US the first five months was going down slightly from a very high base in 23, 6% lower. We however delivered more machines to customers and obviously then we gained quite some market shares actually and as we saw the construction season started during the quarter also we saw utilization of the rental feed improving and also demand for aftermarket increasing. However, in Germany we had a challenging in quarter. Overall, the market grew by 11% per our own deliveries of new trucks in units declined. Aftermarket business however is stable despite high level of actually absence among our mechanics and quite a lot of work in progress moving into Q3. One important thing in Germany we talked about is our cost reduction program and we see now that we are expecting the result of that saving of approximately 60 million from the end of Q2. We believe we are there. In Kazakhstan also challenging in Q2, economy is still growing but the market for construction equipment declined. So due to the slow sales in Germany and Kazakhstan inventory are still too high and we will work to stabilize those stock levels throughout 2024. So very brief on financials as I said 62% to close to 1.1 billion SEK with the US 700 million. German revenue down minus 44% to 332 million SEK and Central Asia and Kazakhstan down to 56 million. Profit contribution from the US operation 51. German decreased to 27 million and in Kazakhstan to minus one. If we take go to the next slide. A bit more on the operations. The market for construction equipment in North America is historically around 52 to 56 million thousand units. Our area then covers approximately 8% of the North American market. In the quarter actually we estimate that the market for larger construction equipment or general purpose equipment segment has decreased by 27% in the area by a decrease in crawler excavators and articulated haulers. However our own sales actually only then decreased by 7% compared to Q2-23 and obviously we continue to gain the market share that we started doing in Q1 and we see solid actually demand continuous despite the drop in in Q2. There is a lot of activities going on and we sold 70 new units, 25 units and also 10 units that were converted to sales from rental and also parts business remain strong in Q2-24. So basically then 39% of the revenue came from after market business and 11% related to other sales mainly rentals so 50% down from equipment sales. Continuously good performance and looking good in the United States. If we go to Germany the total market then for heavy trucks increased by 11% in Q2 and increased by 3% in the first half year despite the economy indicators pointing downwards for quite some time now. In our own area it was increased by 22% and then that's again approximately 18% of the total German market. Our own new truck sales decreased by 65% to 101 units. This was compared to a strong Q2 in 23 and this is a result of us maybe not responding to the price competition that we saw in previous quarters as the supply started from a low supply base to maybe an over supply base. We saw price competition from certain competitors in the market and we refrain from acting to that and we obviously lost market shares. What is very very positive though is that a great share of our new truck sales were rigid trucks and they generally have a much better potential for service and part sales going forward. So the main competition was in truck tractors which are running on the highways. Used vehicle sales performed better and declined 10% to 80 units. And we are continuing obviously to decrease our used trucks inventory and a rental fleet to reduce capital commitment and focus on how these operations can support new sales and the after market business in the weaker markets. And aftermarket sales were broadly flat year on year. Aftermarket sales share of revenue up 19% to 43%. So also we launched the efficiency program to make our business in Germany more efficient and 100%. So that means that how much of the fixed costs we can cover by the gross profit from growing aftermarket business. And we're looking into all vertical horizontal administrative units. We reduced the number of regions, removed a number of little management roles. And we unfortunately the program has taken more time and cost more than we initially anticipated but we are confident now that starting from end Q2 we see an annual saving going forward of 60 million kronor. And obviously we continue to work on streamlining the organization and at the same time continue to invest in our aftermarket business and in e-mobility. And when it comes to Kazakhstan, Central Asia as I said fairly strong economy. Going forward we see supportive government investments but the equipment market stays challenging. We estimate that the total market might have grown by 9% but it's complex tender structures, Chinese competition and the lack of funding in the market that creates hurdles for premium segments and premium brands. So our sales in Q2 decreased to 11 units and use equipment to 12 units and we saw a slight decline in aftermarket sales. We do have a high two-hour inventory in Kazakhstan as I mentioned and we work to normalize that and we expect to have that normalized by the end of 2024. So next slide we see our US network. We're active in we have 13 outlets and we're active in a number of states in the Midwest and as I mentioned so far so good and it's looking good going forward as well. German network looked like this. We closed one sub dealer, the only one we had actually in May. So now we have 21 outlets in Germany and the Kazakh network we have seven outlets and they're placed like this in the geography. So by that I hand over to Erik for some more on economy and the financials please Erik.

Thank you very much Lars. I start off as I usually do with a bit of the macro context. A number of indicators one can follow below the GDP level but GDP is also really a macro indicator of the activity of the economy and that trickles down to the construction industry. So starting in what is now our biggest segment or biggest market the United States we had .8% GDP growth in the second quarter and more than 2% .1% is expected in 2024. That's still a good strong growth. Meanwhile core PCE inflation is trailing lower so it was 2.6 in June. You may have heard that the CPI yesterday was reported at 2.9 which was the lowest reading in quite some time. So very high likelihood now being priced in by futures for a cut next month by the Fed. From the current level which is a bit above 5% so potentially some interest rate cutting there providing a bit more liquidity into the economy. Germany very different picture sluggish Q2 negative point one. Lars said that the market was up so it was but really we look at industrial production. We look at purchase managers index and IFO which is the business sentiment and they're all still pointing negatively in Germany. So sentiment is still not there but there is an expectation for a turn in GDP as you can see positive reading and with inflation lower the ECB is taking steps to lower the rate so we are hoping for a bit of the revival coming to the German economy but at the moment it's been fairly sluggish going. Kazakhstan strong growth still in 2023 reported and still expected in 2024 even if less so from 5.1 to 3.1. Inflation rate there very high by our standards but much lower from where it was so it continues to trail down and therefore also the central bank rate. That is not unimportant. I mean Lars mentioned hurdles in the market for construction equipment and funding conditions in the market funding for local customers is one of the problems in Kazakhstan. Moving on to the numbers Lars has discussed how the business was doing this is how it's reflected in the numbers starting with a more of a top view of the situation. We can see that revenue yes is up 62 percent as much driven by the US acquisition. The business now for the group 65 percent of revenue is US so that's about two-thirds a bit more than a quarter. 30 percent is Germany and Kazakhstan is about five percent of the total. If we look at the revenue mix a bit more than half is equipment and trucks. New equipment sales really and used and aftermarket being high in this quarter clearly driven partly by lower revenue in Germany and Kazakhstan than we would expect to see there. Just below 40 percent and then nine percent in other you will have mainly the rental income from the rental fleets in the US and also in Germany. If we look at the single indicators that they're mostly driven by the acquisition of the US so that's why you would see the big increases in the gross profit SG&A and the other metrics. I would rather maybe look in the table to our left of the text there and on the right side of that we see again strong US performance lower EBIT margin but still very healthy at 7.3 percent and a 51 million Swedish operating profit from that revenue of 707 million Swedish. Germany a big decline in revenue as we have discussed and it's very much driven by the truck sales and that feeds through to a significantly lower gross profit 35 million lower than the same period in 2023 and with a cost base that then in the quarter still remained too high. Again this cost program that we have been driving since really mid-November last year we estimate we got to where we wanted at the end of this quarter. The second quarter that is but still through big parts of the quarter our cost base remained too high and on that lower sale and gross profit that balance just doesn't make so we need to get the revenue up again and then see the fruits of these cost cuts that we've been working hard on to reach in Germany and then Kazakhstan a negative minus one on the operating profit line so less impact from Kazakhstan but of course we want Kazakhstan to be a positive contribution to the group as a whole as it was in the same period of last year as you can see of seven million there and we believe that there is indeed more potential in Kazakhstan. So when we take group cost into account we end up at negative four in the period versus the positive number that we posted in the previous quarter. So below operating profit worth noting that we're seeing the the other side of foreign exchange in the first quarter you may recall that we had a significant positive effect of a weaker Swedish Krona or rather a stronger Euro and dollar versus the Swedish Krona. In this quarter we had the opposite effect then and therefore foreign exchange losses also dragging the net result the net income down. This slide is really taking from the report just to show how we report the different segments year on year. Worth maybe commenting as well you will see there an increase in the group overhead costs but it's really it was the release of a provision as we wrote in our report last year so I highlight that for you that that lowered the group costs in that period last year. Moving on to the balance sheet again a lot of it driven by the the edition of the US if we look year on year some effects effects also they're having impact on what the balance sheet looks like. Looking at some of the separate segments at working capital, Lars mentioned that that we're still too high in Kazakhstan we are. Networking capital is down there both on lower receivables and lower inventories but again we want to trim that inventory position further to be more efficient in our return on capital as a whole. Germany different but share some similarities still too high working capital there as well there we have a small increase but the inventory is lower there and it's more a reflection of the lower revenue when we look at it as a percentage of revenue and in the US you have a more normal inventory situation arguably at 15% there the net debt increased part of that is driven by transfers from payables to debt in the US as part of inventory are moved from inventory to to the rental fleet in the US. So that's what I probably would mention on the balance sheet happy to take your questions on that. Further on looking at the EBIT dynamics year on year last year we were at minus 10 and we see here the very positive contribution so this is again mind you that the difference versus last year we didn't have a US in the second quarter of last year so this is pure Q2 2024 therefore plus 51. In Germany we have a negative result and dynamic versus last year as we do in Kazakhstan again a positive seven last year versus the negative one of this year and then we have a negative effect on the headquarter as well so despite this very strong contribution and performance in the US we're not there yet in Germany clearly and that needs to become a contributor also as we plan to make it for the group as a whole and also of course bring Kazakhstan to positive contribution levels. A quick look at the net equity and our NAV to show you where the net assets are we see that we have trade and receivables at your far left there and then a meaningful inventory position and then you have the US rental fleet which I remind you it is rented but it's also used for so-called sales conversions in the US meaning customers buy out vehicles from the rental fleet and then we have property plant and equipment which also contain the German rental fleet in that piece actually and then you have of course property plant and equipment in more traditional sense our buildings fixtures and fittings and infrastructure and then you have the liability side so still a healthy NAV there for the group as a whole and with that I hand back to you Loris to say something about the outlook.

Yeah thank you so looking forward we are obviously we're optimistic about our expansion into the United States and the further opportunities we see there it's the second biggest market in the world for construction equipment and we continue to see a dynamic economy and a significant need to upgrade the country's infrastructure with extensive federal and state programs for those investments and they should provide an unstable foundation for construction equipment demand even in case of a broader fluctuations in the general economy and in particular maybe in our area we see further large construction projects including data center battery plants and logistics centers that have started or are about to start quite some gigantic projects actually planned and starting up what we see in Germany is that it remains weak the economy and the market sentiment is negative and as we've talked about we are taking actions to make our organization and cost structure more resilient we believe however in continued strong demand in the market and we are continuing to promote e-mobility and sustainable transport solutions and we believe very much in the opportunities they provide us with and also Kazakhstan it's a small part of our business but we continue to see long-term potential in the country so I think that was about what we wanted to present to you so I open up for questions please

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 Anders Ekerblom from Nordea please go ahead

hi Eric and Loris good good morning I have a few questions just firstly on kind of what you mentioned about cancellations and and kind of orders and in the German market could you give any flavor on where in the quarter this has occurred if it's kind of an accelerating pace towards the end of the quarter or kind of at the start and something of a catch-up so kind of just the timing of this

well I mean Anders hi by the way Loris here I mean our business it doesn't happen in the quarter it happens over time and you have deliveries and you have things changing over time and so this is really something that hasn't occurred maybe in the quarter but in previous quarters if anything I would say that we saw a correction in the quarter maybe more positive if I put it that way I mean we saw already last year we mentioned that the market the supply chain is normalizing and you come from a situation of under supply to a situation of normalization or possibly even oversupply and then certain competitors behave in different ways and we decided not to join that I think we create more credibility among our customers to long term take your responsibility and creates better relations with your customers not to join that which can lead to cancellations from certain customers and it did and we saw result on that in in the quarter from some things that possibly happened before the quarter so um everything else equal in a in a wave like goes like like it does in our industry it should potentially not have that big effect going forward but in the quarter it was hitting us badly really

yeah no that's uh that's fair um kind of on the competitive landscape then in Germany and how competitors have been behaving could you kind of specify a bit what they have been doing to kind of support sales and and and more in detail what kind of the market market losses have been due to and how you intend to kind of win this back going forward

well I think we've

done

the right thing I mean we've been focusing on on on on getting the deals where we see a long-term potential in the aftermarket meaning in the rigid trucks um which are the trucks you know it's the tipper trucks it's the forestry trucks it's the um you know waste trucks that are running around our workshops and have a good long-term potential in in the aftermarket whereas maybe uh in the tractor market where where the aftermarket potential is less and the price competition is higher and but the volumes are quite significant uh that's where we've seen the biggest battle if I put it that way so so we've been focusing on getting a better mix in our population and creating a more sustainable future for us without uh risking relations with our customers in the tractor markets uh for a short term market again if I put it that way

yeah no that sounds fair um but kind of on on them the consequence of the more muted sales in Germany in Kazakhstan you comment on stock levels being too high I mean uh we saw an inventory right down here I think was after q4 um what's kind of the risk of that going forward

I think maybe I jump in there yeah I mean in the q4 we took a look and and it was a specific product group there that we did take a impairment or write them on and you know and this is a sort of an ongoing process every quarter we go out to our sales force we go out to the used team the the team that works with our our used vehicles or machines and also to the rental fleet and and we look so I think you know inevitably as the the longer equipment is an inventory that that risks increase but we try each quarter to take again a critical look of what where we are versus the book values we we carry out so I think that that's again a process that will will happen every quarter and we'll just have to see where we are there and we have that in you now as well

yeah okay Thank you so much I'll step back in line I'm finished with my questions for now thanks

Thanks

Anders

The next question comes from Adrian Jelani from ABG Sundal Collier please go ahead

Yes hello I'd like to start off in the US business and regarding your sort of optimistic view on the expansion opportunities in that region but then contrasting that with the fact that in the near future you still have some fairly high leverage following the red acquisition so are you focusing in the near term on reducing that before further US expansion or are you open to doing both on acquisitions you know in the near term even with the higher leverage

maybe I start Lars and you can I think Adrian I mean first thing to say just I mean in general our thing to give guidance on I think it's part of our our core strategy to look for expansion opportunities but that said I think we said before that we took on RAD it's a big piece we're very excited about it we're think it's working very well to integrate it into the rest of the group and it's performing very well but we also said that we want to sort of digest this now and we still have a lot of to perform well and contribute to the group same thing for Kazakhstan but again Kazakhstan is a smaller piece now is there room for any Bolton acquisitions I would say our core case is again to work on the integration now and to focus on getting Germany and contributing to the group then we would need to look Adrian at the specifics of a potential acquisition I think it also depends there you know what's the cash flow contribution of sorts and acquisition would it fund or more itself well then one could look at if it would be more of a turnaround maybe it's a bit further a field in the future to look at rather than in the immediate near term that's probably how I would put it

okay that's very clear thank you and then on the sort of federal infrastructure programs in the US do you see any political risk to these given the elections coming up or would you say that the current programs are fairly safe regardless of the outcome of the US election

well if I mean if we should believe what both parties have done and what they are saying that they they are intending to continue these investments and they are needed so so at least on at least from that we don't see a big risk frankly speaking no

and nothing from your customers directly either sort of hesitate any hesitance on on investing ahead of the election that is okay

well I mean that there is probably Adrian as in any country there are some hesitation maybe on investing just in ahead of an election but there is not that's a very common thing that happens in any market anytime but not long term we don't see anybody talking that there should be a problem with that really no

okay thank you and then in Germany just you mentioned that the savings program reached full run rate at the end of q2 are you able to sort of quantify how much that impacted during the quarter so that we can get a picture of how much the costs can come down sequentially in q3 compared to q2

I think that would be difficult for me to do Adrian I mean I think you know the easiest way I mean to look at it would be that we have achieved if you would take you know 60 that we referred to and and sort of I really think I mean the best approximation would be to to draw a sort of a sloping line from November last year or potentially from from end of December rather and and that's sort of how we work through it of course it hasn't been like that but I think it would be the most reasonable approximation for you okay

I understand and the final question also a bit of a detailed question on the on the savings program you said that it's costing more than you initially thought and I just looked at the q1 report you booked a 23 million restructuring provision in the q1 report but I can't really find a sort of the equivalent number in the q2 report are you able to sort of quantify how much extra restructuring costs were taken in q2

we're not we are not giving a number there I think it's it's costs that come again with the time that has taken more rather Adrian than than further provisions that we need to make so we if you remember we we initially targeted to be done in q2 so somewhere in the middle and then it dragged out until the end of it so that's probably more what I would would look at in in in the sort of rear view mirror it's taken longer and that implies more cost carrying carrying the burden of cost we had longer if that makes sense so yeah yeah I understand

okay perfect thank you in that case that's all for me

thank you Adrian

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

Yeah we we have received some questions by email one is contracting services which seems like it did not work out in Kazakhstan is that correct and what lessons can you draw are the odds better in the US for RUD if so how come and and so far that's a correct statement we haven't been able to to start working on contracting services in Kazakhstan for for for many reasons and one of the reasons is that we haven't really been able to convince customers to pay for what to make those investments into productivity that the services entail they are not free of charge and they cost more but they also give much better return for the customer but as as the economy is such at the moment and with high interest rates and and quite short-sighted unfortunately as we talked about it's it's a difficult to sell so far in Kazakhstan so we haven't been able to do that I mean obviously in countries where situations are different both in in the US and and potentially also for for expanding electrification in Germany it's a different story so we're we're we have that in in our future plans but at the moment we were we're focusing on on making sure to to develop what we have and looking forward to developing other services in in our countries as well another question is could you provide an estimate of the remaining capacity in your German service workshop service workshops before you reach an optimal utilization level and that is is a very good question and something we're working on every day and it's a it's a very complex question because it's so many factors going into that question it's obviously it's a matter of first of all demand how many trucks are out there and how how much can we sell to them and how good are we at selling everything we can then you have a supply question do we have the right mechanics do we have enough mechanics do we have qualified mechanics enough do we have equipment enough do we have well prepared workshops that can do we have shifts enough how do we work so it's it's I can't say that but but clearly we we are still not there in in full efficiency rather than utilization I would say in our network so we still have a a way to go we have done a lot we have in the last couple of years we have increased productivity and efficiency and also had a better utilization but to give a number there I think is very difficult but there are still opportunities in the existing network for sure to grow and and then there is a question quite a detailed question on one of our partners or partners competitors or colleagues in in the US a Volvo dealer but rather a question on how the the structure of the dealer network looks like in in the US and and it is quite fragmented at the moment and the last couple of years there's been a consolidation in the markets and one of the reasons why why we are there is because we're part of that consolidation and that's why it makes the US interesting is that that's it is a consolidation that we believe will continue and that's why we see future opportunities in in continued expansion really so there are plenty of opportunities that's what I can say regarding that question whether any

more Eric we had one question about the increase of rental fleet in the United States over the year what the drivers is behind that you want to take that one or

yeah I mean that that's it's a it's a very good question and that's because we see opportunities in in in growing the rental fleet and particularly we do that in the excavator segment because the market in in the US is such that for certain products that's how you sell you actually customers are first renting the machines and then they buy them out from the rental fleet and that's how the market looks like and particularly so in the excavator segment and we want to grow our our share both in terms of sales in in excavator segment but also obviously selling more aftermarket subsequently and that's why we have deliberately increased our rental fleet in in the excavator segment to take more market share and so far we have been as you can see from the numbers we have been successful in doing that so that's the reason

And there is another question from the same sender even though the aftermarket share has increased in Germany of revenue the gross margin decrease compared to Q1 what is the reason behind this maybe I start or so you can you can add on to it I think yeah typically you would see a relationship the bigger share of the total revenue would be aftermarket aftermarket has more margins you would drive up the average margin and and that happens but I think in those in this case the decline in in the overall revenue driven by equipment sales or truck sales rather used and new was too big and you also had a margin effect in that part which lords has discussed some of the price pressure that that filtered through and even some of the cancellations we had so correct assumption about higher aftermarket share higher gross margin but in this case the the overall mix was such that we didn't see that effect it didn't help so that that's on that question I would say and I think that's in terms of email questions that I have lars I don't see anything more so no more questions from the audience if there is please please ask us now otherwise we will pass back to the operator

there are no more questions at this time so I hand the conference back to the speakers for any closing comments

all right thank you very much and thank you for for listening in to this presentation and have a very good day thank you bye bye