Ferronordic AB (publ)

Then we move to slide number two here, and we continue to see strong performance in the US. And that led us, was much contributing to a 77% revenue growth. We had an operating result that increased to 2 million kroner. If we exclude a one-off effect of an impairment of inventory in Germany, it was 32 million kroner. Net debt of 1.792 billion SEK and that is after the acquisition of the US operation and also partly driven by expansion of our rental fleet in the United States. Total equity of close to 1.5 billion and we also presented on October 2nd new financial objectives on our capital markets. So we move a little further and speak more about the US. The operations there are continuing to perform well. We have revenue of $686 million, operating profit of $53 million, which then gives us an operating margin of 7.7%. We had lower machine sales, actually. The market is slightly down from high levels in 2023. But the revenue was higher also than in last quarter, and that is we had a good mix. We sold a large machine. We do have a higher inventory and a higher rental fleet, which is in line with our strategy to take market shares in the excavator segment mainly. So, US looks good. In Germany, the market is declining big time by 40% in the third quarter. Our own deliveries were down by 60%, which we had a high comparable quarter in 23. But the market is down, the economy is not going well at all, and we see price pressure We've had previous customer cancellations of orders. And obviously, as you might know, we are having a too high stock, which we are making efforts to reduce. And we then took a decision to make a 31 million impairment of inventory in Germany. to allow ourselves to be in line with the market as it is at the moment. What is very positive in Germany, however, is that we see good development on some of the underlying factors, really. Service and parts business continue to increase by 6%. Within the quarter, we saw order intake on new trucks improving. and we saw the electric rental business, which was developing positively. We also saw the results now of our cost reduction program, and we are in line now with the annual target of savings over run rates of 60 million kronor per year. In Kazakhstan, we had a better quarter as well with the sales of new machines and units, which increased to 21. back to the numbers a bit more there so summary on the next slide here um revenues said 77 up to 1.141 billion um us of 686 million german revenue was down 35 percent not as much as deliveries of trucks thanks to a good performance in the after markets to 372 million, and Kazakhstan revenue is up 19% to 82 million. And that then gives us an operating profit of 2 million kroner. And we saw obviously a good contribution from the US, but also the German Underlying development is positive, although the impairment obviously created a decrease in the operating profit in Germany. And in Central Asia, we increased from zero to a positive three billion in terms of operating profits. um we had a big foreign exchange losses in in the quarter and therefore the net income decreased to uh minus 88 million and as i mentioned that depth then increased to 1.7 uh 92 million um and and again this is mainly of course the acquisition of the american operations but also attempts to to increase our market share in the rental fleet in Germany through excavators and to take market share in a very prospective market for excavators where we see opportunities to grow. So, if we take some more operational highlights in the US, historically the market is around between, in our, in North America, totally 52 to 56,000 units for the for the Volvo products that we are representing. Our area covers approximately 8% of the North American market. In nine months, the market for GPE segment, larger construction equipment in total North America declined by 10%. It was a slightly more decline in our area by 21%. But if we compare then Q3 23 to Q3 24, despite the decline in the market, we increased our sales of new machines and conversions of machines from the rental fleet by 2%, and obviously then we're taking market shares. We also saw good sales of Sandvik drills in the quarter. So all in all, in Q3, we sold 61 new units, 10 used units, and 36 units were then converted from the rental fleet to sales. Service and parts business relatively stable in Q3, and that gives us a mix of 49% of revenue related to sales and new and used equipment conversions. 11% to rental and 40% to service and parts. In Germany, as I said, the market is down 40% in the quarter. In our area, it's down actually more, about 47%, and we had a big fall in our deliveries of new units. But again, we saw order intake on the trucks for future deliveries. Then obviously, it started to pick up in the quarter, which is positive. And we see some signs that activities are going in the right direction in our industry. Used truck sales in units also down. That is a deliberate choice that we're taking in this downturn now to decrease our stock. and also our conventional rental fleet. So that's in line with what we want, actually. And then price competition from a supply-demand imbalance and the margin pressure then triggered a decision to pay a part of it by 31 million kroner. But again, very positive. Let's see continued demand for service and parts. And our off-the-market services may grow strongly, actually. So we could actually sell more servicing parts if we had more educated and trained mechanics out there. So off-the-market demand is still high. If we then talk about our efficiency program in Germany, which we launched in Q43, we launched the program to make Our organization in Germany is more patient and resilient, and obviously one key objective is to increase our absorption level, which means how much of our fixed costs are covered by gross profit from the aftermarket business, which is a very, very important target for us as the market is usually more stable and actually even in the downturn, usually continues to grow if we perform well.

And we are now at the level where we can say we do expect to see the coronavirus on an annual basis, starting in Q1. And we believe that we actually can continue to invest in our aftermarket business and in e-mobility.

In Malaysia, with a strong economy and supporting government investments at least, there is aid on infrastructure investments coming up. But the market for construction equipment still remains challenging. Structural tenders, competition from mainly Chinese equipment, and lack of customer funding is creating hurdles for the market to grow. Still in Q3, we believe that the market has grown by roughly 9-10%. We saw an increase in units to 21%, but that was partly at the expense of gross margins. and used equipment of eight units. And so service and parts business actually declined in the quarter because we saw client business activity decrease.

But also, we're making, in Kasa, good progress on inventory position.

Actually, in Kasa, we've had Germany as a result of it. effects of the abnormal situations during COVID when there was lack of supply and then after COVID when there was no system cancellations, etc. And we're almost back to normal when it comes to inventory positions in Germany and also in Kazakhstan. We're not there yet, but we're on a good way. And I think in Q3, we've made good progress on icing our inventory positions. So we talk a little about the US network. You see where we are here on page nine in the Midwest with a headquarter in Louisville, Kentucky. And then we have 13 outlets in nine states, basically. This is a very interesting part of the United States, a lot of A lot of the planned infrastructure investments are going to happen in this area. And also a lot of private investments in terms of data centers from the tech companies are being built or planned to be built. So we're positive about it. And as you might know, we're not only distributed to all the CE in the area, but also other strong brands. as we mentioned, link belt cranes and Bergman, smaller articulated trucks. And obviously, the United States is the world's second largest, we should say, market for construction equipment. And again, substantive infrastructure investment programs planned or having started, actually. As for Germany, our network currently looks like this. We have 20 outlets in Germany. And in Kazakhstan, we have seven outlets spread out, like you can see on this map. And by that, I hand over to Erik, our CFO, for a little more on numbers and economic development.

Thank you very much, Lars. I hope you can hear me well. As per usual, I start with a little bit of a macroeconomic context. In the United States, we have seen strong economic performance. We had a 2.8% GDP growth in Q3 and 2% projected for the full year. as I think Loris mentioned, we've seen some hesitance from customers in the run-up to the elections, and we do believe that there's some scope for such wait-and-see strategy, so to say, to some side, and therefore for some projects that have been on hold to be released and now following the elections. In place, still about 2%, but it's way down, and that's one of the reasons why the Fed has started lowering rates. Market rates shot up after the election, so potentially pricing in a slower trajectory, at least for that. But it's coming down. for our customers, and it's good for us. We are predominantly low in our funding, so lower will translate into lower funding costs for us. Germany, very different picture, negative growth in the quarter, flat expected, or zero as a whole, and it actually up a bit in October from which is unwelcome, but I think also in Eurozone, the lower rates, we will probably open up for more rate cuts. Kazakhstan, relative to this, we expect 3.5% or not we, the monetary authority, expect 3.5% growth in 2024. Inflation rate is coming down there, but from a high base, 8.3%. The bank is still very high at 14.25%. And that's also reflected in conditions for our customers. Funding conditions are tight in Kazakhstan. We do feel that this is for a lot of our customers, lack of access to funding. If we move on to our results for the group as a whole, split by our different segments, you can see this slide here. So we're in a very strong revenue growth, but that's much driven by the acquisition of the US, of course. If we look at this, we're 60% US. That's where we're also in the second quarter, 60% of revenue. Less Germany and a bit more. If I remember correctly, 4.5% year-to-date in the second quarter, so the first six months. Good that Kazakhstan has picked up. We've sold more there indeed. But I would say it's more of a reflection of Germany being low. Germany should be higher. And Kazakhstan is more closer to where we'd want to see it, then we believe there's still more potential there. So that behind, I think, where we are, we want to see a significant high also on the new equipment sales and truck sales. I'm happy that the aftermarket is continuing strong, but again, we need the new truck sales also to pick up. If we look rather at revenue-making, Yeah, 52% with trucks, 39% aftermarket, and 9% other. In that other, you would have rental income mainly. That's what we have there. Here as well, happy to see a high number for parts and services, those 39%. But also, again, a reflection of a revenue that should be higher. And that would... in a proportion make aftermarket look lower, but it should be rather high revenue. Gross profit much driven by the U.S. up strong both by U.S. volumes, so to say, that comes in, but also from strong gross margin performance. So a positive effect on both of those. FD&A up on the addition, but down as a percentage of revenue for the group. And again, we have an effect from lower than potential revenue in Germany. Higher revenue would push that measure down. And that's, of course, what we're aiming for, for the group to grow our revenue base. Operating margins. just above break-even with that 2 million that we have, would be higher without that, of course, impairment that we had in Germany of 31 million. So operating profit 2 million would have been 32 without it, which compressed minus 28 last year. Net income, mind you, is very exposed to foreign exchange moves. In the third quarter, the Swedish krona did strengthen against our currencies, and by ours I mean euros in Germany and US dollars in the United States, of course. We don't make forecasts, as you know, but judging by where those currencies are today in relation to the Swedish krona, one might expect that trend to reverse in the fourth quarter. But we shall see how the currencies move going forward. If we move on to next slide, it's largely the same one. I'm just picking this out of our report. So to guide you towards that, if you want to see the results for the group by segment. I flag here also those unallocated group costs, as we call them. lower than usual and in the footnote there you will see that we had released the reserves and accruals of 7.1 million in the quarter so that's reducing that cost side and last year we had a similar it was 6.5 then but that's worth noting If we move on to the balance sheet and starting from the top with our property planning equipment, our fixed assets up significantly year on year and that's really an addition of US of course and notably the rental fee there. The vehicles that we put in rent for our customers and then continue renting or convert and as was mentioned the excavator strategy and effort we have there being a large part of it. If you would look quarter on quarter rather, so compared to the second quarter, then you see that there is little difference. We had a build-up of that Renfeld fleet in Q1 and through Q2 to the end of Q2. in central asia which is kazakhstan networking capital increased despite those sales which of course trimmed our inventory we are making making good progress on normalizing inventory in kazakhstan but payables came down quicker we had tables coming due from our suppliers and settled those and that resulted in a higher working capital germany um a slightly lower and sort of balanced effect there between payables and inventory. So mostly a receivables effect in the US and increase in there, like in Kazakhstan, but for different reasons, also an effect of lower payables, really. So that's the driver there. And then net debt increase by 121 million to 1.8 billion Swedish. And this is to a large part due to non-cash reclassifications of accounts payable to debt. I will come back to that just on our summary slide for net debt. And our equity assets is slightly lower, stands at 31%. Just the movement in EBIT. Year on year, to summarize that, so to say we started Q3 last year without the US, minus 28 for the group. Through this quarter, plus 53 from the U.S. lifts the results for the group significantly. Germany, minus 24 versus last year, but again, then mind you, plus seven versus last year without the inventory impairment that we took. Slightly better in Kazakhstan, slightly lower in HQ, and we'll land at the two that we see in the third quarter of this year. If we look at net debt, it can be cut and pieced together in different ways, but this is what it looks like. And what I'd like to draw your attention to here would be the 441, the non-cash debt increase. So explaining that briefly, we have pay labels from our suppliers, mainly Volvo Truck and DC. For a certain number of days, we don't disclose that, but there are different lengths depending on product and segment, i.e. market. Once those payables come to maturity, if we don't sell the vehicle and repay the payables before the end of the payables term, the number of days, then they move over to VFS without cash. So we don't get... cash from VFS and then use that cash to pay the supplier, Volvo Trucks or VCE, for example. It's just transfer, so that's a non-cash transaction. And that can look different to what some people would expect in the cash flow of the financial statements. With that, I would move to the balance sheet. And really just a summary, a graphical representation of our balance sheet, maybe pointing then to the inventory where we had the adjustments this time. as Lars pointed out, a mark-to-market in Germany, where we have worked, we've written about it from Q4 report, to reduce our inventory in a market that had supply pressure, which has translated into price competition, price pressure, and we have analyzed closely and come to the conclusion that we had to make this right as we did in the third quarter. And then I move to our new financial targets, which are quite fresh. As you know, we had a capital markets day on the 2nd of October, and there was a board decision on these financial objectives the day before that. We have set ourselves ambitious targets, doubling our revenue over five years, reaching an operating margin above six, and keeping net debt to a bit below three. Well, we've made the first baby steps on revenue. The operating margin while up has a long way to go. So this is last 12 months, mind you. So we're not looking at the quarter here. Minus negative 0.1 and then a net debt EBITDA at 4.8. That is excluding IFRS 16 effects. With that, I think I'm ready to hand back to you, Lars, before we take questions. Maybe a few words on Outlook.

Clearly, we're optimistic about our expansion into the US and the opportunities we see there. There is a strong demand and supported by a dynamic economy and a significant need to upgrade the country's infrastructure. There are extensive federal and state programs for doing so, and these are needed and are being addressed. And obviously, we expect that these programs will support demand for construction equipment throughout the cycle and also other large construction projects, battery plants, data centers, et cetera. in the US Midwest will continue to drive good demand in our markets. In Germany, the economy remains weak, but as we talked about, our organization is resilient. We experience and we believe in continued strong demand in the aftermarket business, and we are optimistic about the long-term potential in the German market and opportunities in the mobile and sustainable transport solutions. We see a big downturn now in the market, which we expect to normalize in the future, and we see some signs of that. Caltech started a small part, as Eric said, of our business, but we see a long-term potential in the country. So, by that I'm handing over for questions and answers please.

If you wish to ask a question, please dial pound key 5 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 Adrian Jelani from ABG Sundal Collier. Please go ahead.

Hello and good morning. I'd like to start off with a few questions on the German business. And you comment in the report that there was an increase in new orders for future truck deliveries in Germany. Can you give some indication on the lead times of these? I mean, if orders increase now, when can we expect these to start materializing as deliveries?

Well, I mean, the usual delivery times for a truck, in usual times, we haven't seen usual times, Adrian, in four years. Once upon a time during COVID, which is what has created our overstock, was that we had 14, 15 months of delivery time for a while. And that was then very abruptly cut very short. Now it's more normalized and back to normal, which means that the delivery times are roughly three, four months usually. It depends on customers when they want them. They can be spread over a long period of time if it's many trucks or because they can't accept all of them at the same time and they don't want them at the same time. It's very, very difficult to give an exact answer to that. delivery times have normalized, if I put it that way, which is good to see.

Okay, understood. And then you did mention you're now at the 60 million per annum run rate on the savings target, but given that there's no clear improvement in the market yet, are there any plans of continuing to cut costs from these levels?

Continuously looking into where we can cut costs without, of course, hurting our possibilities to earn, which is also in sustainable transport solutions. We then, as we talked about, we see actually an uptick now in our ordering. So we have to be careful with not hurting ourselves too much. But of course, we're always looking to see where we can take up more. But they are now, and that has been a big job, actually, to maybe take a bit longer than we hoped for to come to the target of 60 million savings per year. But clearly, we can only hope that we find more opportunities to do that without them hurting, because we, as we mentioned, we need to invest continuously in our aftermarket business. We need to hire more mechanics. because there is demand and we can earn more if we have more mechanics, as we write in the report as well. So it's a mixed picture, to be honest.

Okay. And then moving over to the US, regarding your prior comments about there being some hesitancy among customers to invest ahead of the election, I think I understand it's only been a week or so since the election, but have you experienced any sort of shift in behavior or any increased activity since then?

Adrian, I think it's more a sentiment shift, and you know, of course, it's giving guidance. But I think it's natural that people are a bit hesitant in these, how do you say, pre-election times. And then almost regardless of what the outcome is, when the certainty is there, they're more free to act. They know with biggest certainty what they can expect. Okay.

And then also the... I mean, in general, usually the kind of seasonality, if you want, in the end of the year, there are usually more conversions from the rental fleet than during the year. So customers are usually renting machines in the beginning of the season and in the end of the year. That is a normal cycle, so to speak, which runs every year with or without connections.

Okay, that's helpful. And then just regarding the specific VC products that you sell in the U.S., are they for the most part domestically produced or imported into the U.S.? Because I'm thinking of potential tariffs on imported machines and whether that would have a negative impact on Volvo's competitiveness compared to the local brands in the U.S.

Now, the majority are imported.

Not all of them, but the majority are. Hello, can you hear me?

Yeah, you cut out as you were starting to answer the question.

The majority of the Volvo products that we sell are imported, not all of them, but the majority, at least for the time being, they are. So that's the answer I can give, basically.

Understood. And a final question, more of an accounting question regarding the mechanic of the payables moving into net debt. Just to double check that I'm understanding that correctly. It's a reclassification of an operational item into a financial one. So it makes the operational cash flow artificially boosted, you can say. In reality, the non-cash adjustments in the financial part should be seen as operational. Is that a fair assumption?

Yeah, I think that's a correct reflection, yes. I mean, with indirect cash flow creation the way it's done, this cash, this movement, as you say, or reclassification of payables, the reduction in payables and the increase in financial items, yes, would have that effect.

Okay, perfect. In that case, that's all for me, so thank you.

Thank you.

The next question comes from Anders Ekerblom from Nordea. Please go ahead.

Hi, Lars and Erik. Good morning. Thank you for taking my questions. So I have a few ones primarily on Germany, I guess. starting off on kind of the order intake that you comment on increasing somewhat. I mean, to what extent can we kind of attribute this to a better market more so than kind of a catch-up of some of the postponed or delayed orders in Q2? Is there some effect from that that you kind of bundled together, so to speak?

Well, I mean, how should I answer that? I think it's a combination of a few different things. First of all, as you can see then, we have lost more sales in this year than the market, and we need population in our area to serve, because it's in the aftermarket where you make the margins, really, in our business, in the truck business. So, but of course, customers seem to have woken up and usually we are quite early into the cycle in our industry. So at least we see a bigger activity and replacements that might not have been made or at least being planned to be made, which is a positive sign. So I don't know if I can give you more And obviously, I mean, as you can see them, we see that pricing is an important part of it. And that is the reason why we had to make an impairment of our old inventory. Clearly, the pricing in the market has changed. And that has also had an effect on that we have been able to take more orders, for sure.

Okay. Thank you for that. I think that's a good segue into something else I was thinking about, which is kind of, I mean, speaking of the pricing pressure in the market, I thought you mentioned something about Chinese players and now in the call, could you just elaborate on this kind of what ends of the market that this pricing pressure is coming from? Is it European based to some extent or is it mostly kind of the low price Asian competitors that are pushing down prices?

Well, in Germany, we don't have any Chinese competitors at all. In Germany, the competitors are basically the big seven, as they're called, which are the European manufacturers. When we refer to Chinese competition, it's mainly in Kazakhstan, where they are very active and very successful, I should say, also. So, in Kazakhstan, we have a situation where we are then competing in the premium segment together with the other famous western brands with our way of going to market with considerably higher pricing but also higher productivity, higher residual values and efficiency and good service setup to make sure that these machines are are working when they should. But in Kazakhstan there is still a lot of Chinese competition which is successful. In Germany there is not. So whatever happens in the market is determined by the seven players, European players, and obviously that is driving the markets. And at the moment, clearly we see a price pressure downwards and we have seen for quite some time, I should say. We have not been able to respond in quantities to that, as you can see in our deliveries, and in the impairment that we're taking now, which is an effect of that. We are playing now, if I put it that way.

Okay. So should I kind of interpret that in terms of, I mean, the write-down that you had now and kind of the non-recurring or recurring nature of that? Should we see that as maybe being, you've mostly adjusted to this now in terms of your inventory, or could we expect something more there also going forward?

We expect and we hope that this is a one-time effect obviously. We're now in a position where we have the future in our hands and we feel that that is what we have done really. We're taking down the cost, we see good progress in the aftermarket and we have an inventory which is in line with the market. And we see order intake picking up. So from that perspective, we're actually quite positive. Although we're not at all happy with the result. We clean out a little, if I put it that way.

Yeah. All right. Good to hear. Thank you. Lastly, kind of on North America. And kind of if you could elaborate a bit on, I mean, the rental fleet obviously is increasing and kind of your progression of taking market share in kind of the excavator segment. It would be interesting to hear what you're able to say there.

Well, I mean, in terms of market share, we've already taken a lot of market share this year. We're very happy about that because obviously, again, We want machines out there to service them and we also want machines to make money when we sell them and when we rent them and when we convert them. Traditionally in the area, the market share for reloaders and articulated holders have been good but not for for excavators and we see an opportunity to to grow in that segment uh um but um it's a very um the the way that the center is and then most of the times buying it out after a period of time, and that we call conversion. So that is, if we want to take market share in the excavator segment, we need to increase the rental fleet to be able to do so. And that is what we've done during the year, and obviously then we have and we expect to continue to take market shares, not only in excavators, but in other areas as well. But that is how the market works. And, you know, that's how you do it, basically.

Yeah. All right. Perfect. Thank you for the nuanced answers. I appreciate that. All right. That's all for me then. So have a nice day to both of you.

Thank you.

As a reminder, if you wish to ask a question, please dial £5 on your telephone keypad.

While we wait for more questions online, I have two questions. From the conference call, I have two questions online. One is whether we can expect to see better cash flow going forward and a strengthening of the balance sheet. And I think here we are cautious to give forecasts, but I think we have increased the rental fleet in the US and why that is an important part of our strategy in the US so that there will be a rental fleet. I think also the plan is now to put these machines into work and then convert them in the future and that will generate cash flows and To some extent, strengthen the balance sheet in Germany and Kazakhstan. As we've said, we are working to reduce the inventory positions in both those countries and are making progress there. So that would also contribute to some extent. In terms of the balance sheet overall, I can but refer to our strategic objectives there, where we want to keep overall net debt below three over the long term and over the cycle, and that's what we're aiming towards. There is a follow-up question on that, whether we may sale and lease back some of our properties in our portfolio. That refers specifically to Germany, but I guess it could be applicable to the US as well. And here, I would probably also give a fairly generic answer that We are looking for the most efficient way to use our balance sheet. So if we would find terms that would make sense in that way, then we would definitely consider it. The properties are fairly specific, though that's worth being in mind. It's not sort of residential in downtown Frankfurt or Louisville for that matter. So it may need that one looks at portfolio solutions and those kind of structures. But the stock answer would be that we are always looking and pondering how we can use our balance sheet as efficiently as possible. So those are questions that I got online. Anything else, operator, yet from the conference call?

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

Okay, thank you very much, and thank you everybody who has listened in and asked questions. I'm looking forward to presenting the fourth quarter so have a good day everybody thank you