Ferronordic AB (publ)

Welcome to the Faro Nordic QT 2025 report presentation. For the first part of the presentation, participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing pound key 5 on their telephone keypad. Now, I will hand the conference over to speakers CEO Henrik Karlberg and CFO Eric Donnemar. Please go ahead.

Good morning, everybody. Thank you for your interest in Fair Nordic and welcome to our presentation on the results of the second quarter 2025. Looking at some highlights for the group during the quarter, we had stable sales and stable cash flows. Revenue amounting to $1.88 billion, slightly lower than last year. Cash flows from operating activities amounted to $262 million compared to $270 million last year. Gross profit declined by 4% to 177 million kronor compared to 185 last year. Gross margin was largely unchanged at 16.3% with higher gross margin in Germany and lower gross margin in the US. SG&A across the group decreased by 6%. All in all, we had an operating profit of minus 5 million kronor compared to minus 4 million last year. Net finance cost decreased by 26% during the quarter to 29 million SEK and net debt increased to 1,679,000,000. During the quarter, we took further steps toward profitability. I started as new CEO in mid-May, and during these months, I have traveled extensively throughout the organization to meet colleagues, partners, and customers in my new role. It's been very exciting. Revenue was stable despite continued uncertainty in the US and persistent stagnation in Germany. Operating profit was negative at 5 million SEC due to lower contribution from the US segment. This, however, was not primarily because of softening market, but mainly due to our own measures to improve and grow the business going forward. In the US, demand was holding up and the market in our US territory was up 10%. In Germany, the operating result improved year on year but remained negative. Here, the main priority remains to continue increasing the number of technicians to fully meet the demand from our customers. During the quarter, we continue to optimize inventories and they are now generally in balance and we continue to reduce our debt. This led to lower financing costs, which possibly impacted the net result. Looking at the group financials in summary, revenue, as I said before, amounted to 1,088,000,000, down 2%. Revenue in the US was down 4% in Swedish krona at 695,000,000, but it was up 4% in US dollars. Germany, your revenue increased by 10% to 366,000,000 and that was 12% up in euros. In Kazakhstan, revenue declined by 54% to 26 million kronor and was down 45% in local currency. Operating profit at minus 5 million, mainly because of lower contribution from the US segment where the operating profit decreased from 51 million kronor to 26 million kronor. In Germany, operating profit increased from minus 27 million to minus 13. Kazakhstan operating profit was largely unchanged at minus 1 million. Unallocated group costs decreased from 27 million SEK to 17 million SEK. Net income increased to minus 51 million compared to minus 81 in the second quarter of last year. primarily on lower finance costs despite continued foreign exchange losses. Net debt decreased to 1,679,000,000, mainly on loan repayments and currency effect. Equity at the end of the quarter was equal to 31% of total assets, and the book equity was 1,302,000,000 at the end of the quarter. Looking at the operations in the US, we see consistent demand despite uncertainty, primarily regarding trade policy and tax. Activity remains high, predominantly in the infrastructure segment. Customers are optimistic and they have strong backlogs for the future. The market in our US territory then increased by 10% during the quarter. One uncertainty has been related to the continuation of tax incentives for investments. The passing of the so-called Big Beautiful Bill in July should remove those uncertainties, which should support demand going forward. We currently do not foresee that tariffs will affect our operations in the US worse than anybody else in the market. Our market share during the quarter, however, decreased somewhat as we added fewer new machines to the rental fleet. One positive thing we have seen during the quarter is that rental revenue increased consistently during the quarter as rental utilization improved. Service and parts sales were stable. During the quarter, we took actions to optimize our rental fleet and to increase our rental utilization by selling certain low utilization machines at loss. This added 19 million sec to revenue, but reduced gross profit by 2 million. We also made an impairment of certain parts and components amounting to 5 million sec affecting the gross profit with the same amount. Without these effects, gross margin was largely in line with the previous year. I would also add that we had some costs that were somewhat high during the quarter relating to maintenance, rental equipment and service vehicles, and we're taking actions to address this. And as a result, operating profit in the US was down significantly compared to last year in this quarter. And naturally, this is not a result that we are happy about. But the good news is that we see we are now in a good position going forward. Looking at Germany, demand for new and used trucks remain soft. Many customers continue to delay new investments. Truck registrations in Germany as a whole decreased by 27%. And in our Germany territory, truck registrations decreased by 38%. Our territory represented about 18% of the total German market. Our sales of new trucks, however, increased by 53% in units, 255, and by 32%, 280 million SEK in revenue. The good news is that customers continue to actively utilize their fleets. So even if they postpone purchases of new trucks, they use the old ones. And this results in continued demand for service and parts. Service and parts sales increased by six percent to 152 million which is positive but it's not enough we have increased capacity in our workshops but we will continue to increase the number of technicians to going forward to fully meet the demand that exists from our customers gross margin improved and gross profit increased by 33 percent and despite this our expenses decline Inventory was 53% lower than last year at 218 million compared to 461 million at the end of the second quarter of 2024. This also resulted in lower debt in Germany and lower financing costs. Looking at Kazakhstan, the economy continued to grow. However, the activity in the mining sector, which is important to us because many of our larger customers are active there, remained low. The market for larger machines thus declined by 27% year on year. Our equipment sales were down 79% as we sold less new and used machines. However, service and parts sales increased significantly by 65% year on year. The gross margin improved despite making impairment of spare parts of 1 million kronor. We also had lower expenses during the quarter despite 1 million kronor of restructuring costs. Inventory reduced to 68 million kronor at the end of Q2 compared to 209 million at the end of Q2 last year. I hand over to you, Erik.

Thank you very much, Henrik. As per usual, I start with a bit of an economic backdrop, the macroeconomic context we worked in, starting with our biggest market in the United States, GDP growth 2% in the quarter, but 3% quarter on quarter, so positive development there. Between 1.3 and 1.5 expected for the year as a whole. Looking at inflation, 2.8 seemed to be signs of some room for the Fed to potentially lower rates. which would be positive at the moment. The Fed funds rate effective is unchanged at 4.33. Germany up 0.4% year on year. but slightly lower quarter on quarter, the economy remains sluggish. And that is to some extent, as Henrik said, reflected in the market, 0% expected for the year and an inflation rate at 2% just below where the ECB has its rate at the moment. Kazakhstan strong growth at five percent that's that's a year to date so six months actually but mining sector being quite slow for more structural reasons there and that affects the demand of for Ferro Nordic and our biggest customers who are active in that segment of the economy. Inflation rate 11.8 and the central bank rate of 16.5. Financing and access to liquidity is a limiting factor in Kazakhstan, so positive when monetary conditions can ease up a bit in that market. Moving over to our income statement. And performance, looking at some of the details, Henrik covered the big picture there. We saw, again, total revenue down to about 1.1 billion. That's 2% negative. But that's with the USD that on an average basis versus last year, lost 9% versus the Swedish krona and the euro about 2%. So adjusted for that, we would have a positive development on revenue year on year. Looking at the distribution of our business, almost two thirds, 64% in the United States, almost one third just above at 34% is Germany and Kazakhstan making up only 2.4% in this quarter. In terms of revenue mix, which is a factor also on gross margin, as we know, with different margin pictures in the different revenue streams, 49%, so about half, coming from equipment and trucks. in the quarter um 41 aftermarket and and nine percent other and that other is mainly mind you uh rental so um again uh positive to see that uh grow in in the us and also positive to see uh strong after markets um in both our big markets, the US being stable and growth in Germany. Looking at gross profit, slight decline there, 4%, again, partly currency driven. If we look on margin basis, we're more or less flat year on year, down slightly, and that's a lower margin in the US compensated by a higher margin in Germany. Our overheads or SG&A selling and general and administrative costs down 6% year on year. That's about 12 million Swedish in the single quarter. That in turn reflects lower costs in Germany. partly driven by our cost reduction program there, lower costs in Kazakhstan and lower group costs, whereas we did have higher administrative costs in the US and selling costs. But that's again something we're looking at to address going forward. As a percent of revenue, SG&A declined in the quarter versus where we were last year. Operating margin more or less flat year on year. And we have operating profit slightly down to negative five versus negative five last year. And that's mainly on a lower contribution from the US. So looking below the operating profit, we had a net income negative 51, which was upwards as last year, lower financing costs. We have brought down debt and net financing costs were down 26%. But we did experience negative currency differences in this quarter as well as last year. Minus 15 versus minus 35 last year. Turning to the balance sheet, we had a slight increase in PPE, so our property plant and equipment, and that's despite a weaker foreign exchange situation in the sense that Swedish strengthened about 13% against the dollar and 3% against the euro if we compare year on year. Growth in property, plant and equipment driven mainly by addition of rental fleet in the United States and electric rental fleet in Germany. Not conventional, that is slightly down year on year rather in Germany. In the US looking specifically, networking capital decreased somewhat from 17% to 14% of last 12 months revenue as a result of inventory and receivables decreasing more than payables. In Germany, networking capital also decreased meaningfully as a percent of last 12 months revenue from 16% to 11%. Mainly there, a result of lower receivables. Receivables were down 85 million Swedish krona quarter on quarter. that in turn was much driven by receipt of subsidies from the state on our electric trucks rental fleet. In Kazakhstan, networking capital was done in currency, in SEC, but slightly higher as a percentage of revenue due to lower revenue. rather than higher working capital. So overall, I think we brought down working capital, as you can see in the table to your left there, quite significantly year on year, but also about 200 million Krona Swedish movement quarter on quarter, reducing debt while growing sales. is in line with our effort to increase capital turnover and also raise our return on capital. So happy to see that come through and it is also reflected in lower debt and financing costs. as we have pointed out and net debt indeed being down 146 million quarter on quarter to 1.679 million Swedish krona and then equity to assets slightly higher by one percent at 31 percent With that, I turn to the next slide, slightly technical, just to remind those of you that follow our business, and of course, those of you who are new to our business as well, that we have, as of the start of this year, made a change in the presentation of the income statement of our US segment. We present in the report and hear to your left what the US segment looked like in Q2 when released last year and what it looks like now following these changes in presentations. in the pink colored column here, the difference between the two. So you can follow that and you will see that we have brought some costs from SG&A up to cost of goods sold and also made an adjustment of some other income rather being classified as revenue. The net of this is a reduction in the gross profit and therefore the margin, but it has no impact on the operating profit or below. So it is a difference in presentation. So moving to the big dynamics in terms of operating profit year on year, just to summarize really a decline in the US if we look year on year, which we talked about. an improvement in Germany, which lifts the group's results. But we're not in Germany where we want to be. We're still negative. We are making progress and we're confident that we'll get there. Kazakhstan being largely flat year on year. And then again, efforts to rein in on group costs, also a reduction on the group level there. And that brings us to more or less a stable year on year down by 1 million Swedish krona. And then I summarized for us our balance sheet. Looking at the asset side first on this slide, you will see that the biggest part of our assets are in our rental fleets, red being the United States and gray here on this slide being Germany. Inventories further to the right on this ladder graph being another big piece or the next biggest piece on the asset side of the balance sheet. a smaller blue line there also for the inventory in Kazakhstan. And to the right of inventories, you will see trade and receivables also being a meaningful part. And then to your far left, it's worth noting also the real estate that we have in the United States and in Germany. In Kazakhstan, we only have short-term leases really. Liability side, to bring the balance sheet together, to our far left, you'll see our trade and other payables, interest-free, and then moving right, our bank loans, and then our floor plan directly linked to inventory and rental fleet there, bringing us to the book equity position of 1.3 billion. With that, I am sort of, I reach our financial objectives. So last 12 months in Q2, we're at 1.02, the revenue we started from. So still a long way to go, but we want to make sure that we are efficient in growing in terms of our capital structure. And again, making sure that We increase capital turnover when we grow, so we improve return on capital also as we expand our revenue. And in terms of operating margin working there as well, we want to again expand aftermarket and the business in Germany. An important component of that is getting these service technicians up and running, qualified and trained, and that's something we're working hard on. And then, of course, in the US, to keep those margins and continue to grow the business, it is encouraging to see really that our customers are in good spirit and there is good backlogs in their order books and strong demand in the market. Our net debt EBITDA is lower, and we will continue to watch that KPI also to get to our target levels. And with that, Henrik, I hand back to you for an outlook before we pass over to Q&A.

Thank you, Erik. Recapping the outlook statement from the report, we remain optimistic about the operations in the US and the long-term opportunities there. We expect activity in the infrastructure sector to remain good, as the need to maintain American roads and other infrastructure is significant. We see clear opportunities to further develop and expand the US operations going forward. In Germany, truck demand remains low, but demand for service and parts is holding up relatively well. When the economy eventually starts to recover, demand for both new trucks and service and parts should increase as well. And we must then ensure that we have enough capacity in our workshops to fully meet the demand. Meanwhile, we have reduced our cost base in Germany. We have reduced our inventory levels and we have reduced our financing costs. And overall, we are optimistic about the operations in Germany too. Kazakhstan is currently a small part of the group's business, but we see promising opportunities in that market as well over the longer term. That concludes our presentation. We are now open for questions.

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 Galani from ABG Sundal Collier. Please go ahead.

Yes, hello. A couple questions from my end. the US and trying to understand the different components and the gross margin you mentioned you're selling some machines from the rental fleet at a loss to replace them with better ones is that sort of a one-time thing in this quarter or is this something we should expect will continue going forward I would say that

We have plenty of opportunities to grow in the US and to gain market share, particularly in big metropolitan areas. We have invested in the rental fleet to approach some newer customer segments for us that has taken a little bit more time when it comes to certain machine models and for that reason we decided to rip the band-aid and sell off some machines that we had low utilization on overall the rental fleet is balanced both when it comes to size and composition And as we've seen during the quarter, our rental utilization has improved and rental revenue has followed consistently throughout the quarter.

And maybe to add to that, Emil, we also, as you saw, took an impairment on some of the spare parts and that, I mean, we would classify as a single event. We obviously constantly review our inventory, but that was something that we made a decision on in this quarter specifically.

Okay, that was going to be my next question, but it sounds like, so you're confident that there's not any more inventory that might not be sellable at book value?

No, in general, we find the rental fleet imbalance.

Okay, understood. And then I remember last quarter, you talked about the gross margin being pressured by price pressure on certain machines. I mean, that might be the thing you mentioned before and selling at lower, selling certain machines at a loss. But in general, the pricing situation, has it gotten better or worse? Or is it the same as in Q1?

I would say that, I mean, the market remains strong, but it's also a competitive market. And we are fighting on every deal. And in general, I think we are protecting our margin pretty well. And if you take away the... special events that happen during the quarter, our underlying margin is more or less the same as last year.

And then a final one on the cash flow. Since you sort of switched to booking the US rental business under working capital instead of capital employed, we've seen some big sort of swings in the working capital levels. Can you give us some indication of With this new or with this change in accounting, what's the normal working capital level that we should expect in a, I guess, medium term sense?

Adrian, if I understand your question correctly, I mean, the working capital itself, I mean, that's built up from the balance sheet, right? So that's not going to... We've always kept the US rental fleet and the German rental fleet in... PPE and then, you know, inventory for direct sales in inventory clearly and receivables and then deducted the payables we have. So that I don't think is going to change. And if you're rather looking at the cash flow statement, then I think you can use, I mean, have this way of presenting this year. So I think you can use and obviously we corrected the previous years as well to be in line. So I think you can use the current quarter and the previous quarter. I mean, we were stable also, as you'll see year on year. If we're looking at operating cash flow at 262, I think it was versus 270. So that's probably, you know, something you should be looking out for going forward.

Okay, but to maintain that 200 level, you will need to release further working capital as well, because that's been boosted quite a bit by working capital releases. So you're expecting that part to continue?

Well, Adrian, so we're clear on that. I mean, the operating cash flow is, you'll see in the financing adjustments, there you have floor plan coming down as a result of the release of capital. uh working capital so you see the operating cash flow coming out but then again in the financing you see repayment of that uh to floor plan providers in addition to to which you have of course usual redemption of of bank debt that we do so you need to to match those together yep i understood uh perfect in that case that's all for me so thank you thank you

The next question comes from Anders Akerblom from Nordia. Please go ahead.

Yes, good morning. Thank you for taking my questions. So just two quick ones from my end. On the first, it would be interesting to hear you again just elaborate a bit on your view that you do not expect to be more adversely affected by the current tariff scheme in the U.S. relative to competitors. That's my first question.

Okay, I'll take that. I mean, first of all, the situation has been changing throughout the quarter and it remains quite unclear what the final outcome will be. What the situation looks like today, however, is that basically all goods that are imported to the United States are subject to tariffs. And that goes for complete machines or components that are needed for local production. and all players in the market whether they are sort of considered local or they would be headquartered outside of the United States. They all import a lot of things to the US, both complete machines that are made in factories abroad, as well as components and raw material for domestic production. So based on that, we don't really see that the brands that we represent would be affected by this worse than others. The important thing for us here is that customers remain busy, which we think they will be based on the continued high activity in the market.

Yeah, makes sense. Thank you. And in Germany, it would also be interesting to hear just sort of the diverging performance between, I guess, your sales and the clearly negative market growth in Germany. If you could elaborate a bit on the components driving this, and also if there is sort of a component of recent product launches from Volvo having been supportive for your performance, or if you expect that to come through in the quarters ahead, that would be interesting to hear as well.

Yeah, we had good traction on truck sales and we've gained market share during the first half of the year, which is clear then from our sales in units in Germany. And that's positive because we build a population of trucks that we can continue to maintain and repair in our workshops and grow our service and parts business further.

And recent product launches from Volvo, do you expect sort of a supportive dynamic from that?

I don't speculate. I mean, it's a great truck that should help us to grow and improve in Germany. But to what extent? I don't want to speculate, but it's a great product.

Okay, but nothing you've really seen thus far?

No, I can't really say that.

Okay, okay. That's all from my end. Thank you very much. Thank you, Anders.

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

We have one question over email. I think maybe Henrik, it's close to what you just touched on from a London-based fund. Could you give some flavor on pricing of trucks in Germany, please? So some of the price tension in the German market, anything we can comment on there?

I can only say that the market remains highly competitive. We have been successful in the first part of the year to grow share. We continue to fight for every deal.

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

I seem to have no more questions online or over email. So Henrik, I think we're ready to wrap up.

Sounds good. Thank you all for your interest in Farinordic and I wish you all a great day. Thank you very much.

Thank you.