Engcon AB

STO:ENGCON B

Earnings Call Transcript 2024-Q1

[Krister Blomgren, executive]

Hello, everyone, and warm welcome to engcon's presentation of the first quarter 2024. My name is Krister Blomgren, and I'm the CEO here at engcon. With me today, I have our CFO, Jens Blom. Together, we will -- Together, we'll take you through the highlights of the quarter, and then we will move on to the Q&A session. So let's start with Engcon's vision then. And Engcon's vision is to change the world of digging. So far, we have started with 16 markets from North America to Australia. The penetration rate is in approximate 2% of all the world's excavators, so a lot of potential left. And we can see that we have started to change the world of digging with our doughnut chart. We reached a milestone last year with the Nordic market or region on 43%. That's the first time ever the rest of the world were over 50%.

Our biggest growth region and also where we have come the furthest is Europe, where we had 34% of our revenue last year. And Americas also had a good growth last year and ended up on 15% of our revenue. And the smallest region so far is Asia-Oceania that ended up on 8% last year. And some short facts about last year, we ended up on approximately SEK 1.9 billion in revenue. We had a dip in our growth path with a minus 6% growth. The 2 years before, we had an average growth of above 30%. We had a good profit level on 20% EBIT when it was a turbulent year 2023.

We're moving on and talking more about our highlights in the quarter. For the fourth quarter in a row, we see continued stabilization. There are increasing signs that demand has bottomed out and is now on the rise. European region is showing clear signs of strength with a sharp rise in order intake, more new customers and higher activity among major customers. Europe had also another strong quarter on order intake and to make it even more positive, most of our countries contributed in a good way. We also had a trend break with a net sales increase from last quarter after 3 quarters of a drop. And after a really weak Q4, we are now back on a more healthy profitable level. We are approximately 15% on the EBIT level.

And innovation is a key to success, and we have always tried to be at the forefront of technology within income. During the first quarter, we filed a patent application related to self-learning configuration. That will be together with our third-generation tiltrotator, and I will begin a little bit deeper to our third generation on the next slide here. We are launching our third-generation tiltrotator. Sales have started in Q1. And we start with our top seller size, EC319, that's our for excavators up to 19 tonnes.

Our key unique selling points for the third-generation tiltrotators are that we're having this self-learning configuration. This will simplify installation and optimize the configuration between the tiltrotator and the machine, saving energy, increasing precision and providing an optimal experience for the operator. An optimized third-generation tiltrotator compared to a good configurated generation 2 saves a minimum of 30% energy for the tiltrotator. With this self-learning program, we will get always the optimized installation on the third-generation tilt data.

The second generation is more depending on the skill set of the installers. So that's why it can vary a lot more compared to the third generation where the skill set of the installer doesn't matter. We're having a program to fix that. And we will also save approximately 50% of the installation time, and we will also simplify it. So we will need less skill set to do that. And this is a normal a bottleneck for us on new markets. So that's why it's really important that we have been achieving this with our new tiltrotator.

In our third-generation tiltrotator, we will get higher flow through the tiltrotator. So we can use even more different type of tools that needs high flow, and this makes the excreted to the perfect tool carrier or the Swiss Army knife or whatever you like to call it. But they will be even more useful for different tools, and we probably can replace even more other machines in that way. Our new app will be available both for iOS and Android. So now more or less everybody can get their remote support. We also have been in that, so the operator can customize the settings depending on how he wants to have them. A little bit like in the car when I push Krister. I get the seat settings, the steering wheel in the right position, the mirrors and so on.

Here in the excavator, you will get the right speed on the tilting or rotation or whatever you want to change with that. But -- so we will get that every time you step into the machine even if somebody has changed it before. We also have been prepared it for electrified and autonomous and semiautonomous excavators. The important thing for those electrified machines are that we're using less energy. And for those autonomous machines, the smoothness is the key.

We're also having load sensing technology together with the new software or control system, DC3. That's where the smartness is. The control system controls the load-sensing valves and make everything smooth and efficient. With all this new technology in the third-generation tiltrotator, it is a little bit like Tina Turner would said, you're simply the best, better than all the rest.

Looking in then to Q4 figures -- or not Q4, Q1, a brief overview of the Q1 figures, sorry. Looking on the organic net sales, it's a decrease of 43% compared with last year, but that's when we reported exceptional deliveries and broke our sales records. Sales have declined from this record level in 2023. But pleasingly, this quarter breaks the negative trend. Take a look at the organic order intake, we can see a small increase from last year. This is yet another sign that the demand has bottomed and is now on the rise. And we also see strong recovery in our growth read in Europe that I will come back to later on.

The gross margin level reaching 42% and it's an increase from previous quarter and is now on a good level. EBIT margin is back on a healthy level, 15% EBIT, and this is mainly due to increased revenue and a strong cost focus. The ROCE amounts to 28%. If we take a look on the order intake and the net sales, we are having a growth trend on the order intake. We reached SEK 410 million in this quarter, which is actually our modest increase both to last year. And if we also exclude the prebuy effect we had in Q4 2023.

We also have a trend break, as I mentioned earlier, with the net sales. It's going up this quarter after 3 quarters dip and reaching SEK 394 million. You can also see that we have built a small book to build the last 2 quarters, and we will dig in deeper in both net sales and order intake in the regions on the coming slides then. We're starting with the Nordics. We're having a positive trend on the order intake for the third quarter in a row. It's a little bit mixed signals with Sweden and Finland have a stronger positive trend than Denmark and Norway. Denmark and Norway was a little bit slower into the dip and they are not yet out of it. So we still have a lot of growth left in this region, both in Sweden and Finland, but especially then in Denmark and Norway.

The Nordic region is our most cyclic region. And here, we need some positive macro signals to get the big increase. The signals we see so far is mainly from Sweden then, where we're talking about lower the interest rate, maybe as early as in May, otherwise most likely then latest in June. And hopefully, also that will follow so that the residential and commercial and industrial buildings can start all over again.

Another thing that is important right now is also that the dealers have excavators in stock. So it's important to have short lead times in production. Moving over to Americas. And here, we have had the first on-site spring training with John Deere. We've been having digital trainings before during the COVID. And last year, there were no spring training because of the Conexpo.

John Deere invited all their dealers. They have more than 1,500 dealer sites down to Arizona. And we have trained them on the benefits of the tiltrotator, they also have tried the tiltrotators. This will spread the awareness of tiltrotator to the dealerships within the John Deeres and hopefully, they can spread it further on to the end customers also.

Our service organization in Americas are now on pace to meet the customers' demand. We have sent senior central resources to North America that earlier have worked on growth markets and understand what customer needs in North America. I feel positive that we'll be back pretty soon with the best service and support. If we look on the trend for both order intake and net sales, we can see that we still have a negative trend. Our sales cycle is normally 3 to 6 months from start to an order. So it will take some time before we see any bigger results. During this time, we have been running sales training for our staff, also pushed extra for our go-to-market strategy and the focus on the end customers. And we think that will also pay results later on then for us with. And I think we will bounce back.

We need to make a couple of adjustments and keep grinding. If it was easy, everybody would do it. Asia-Oceania, in Asia-Oceania, we have 2 really strong quarters in a row. All countries in the region are doing good. Korea and Australia, where we have our own sales office. We now have good -- we have a good sales organization and they have the right focus, they're working with the end customer in building the market from the bottom up in that way. Both markets, Korea and Australia show a record high Q1 in order intake.

We also have signed a new a nonexclusive agreement with our distributor in Japan, which gives us the opportunity to be more active in the Japanese market and work with more partners or by ourselves. This region is getting more and more important for us. The order intake in this quarter around SEK 40 million. We also have a positive trend on the rolling 12 for 3 quarters in a row. So Asia-Oceania have been having a couple of strong quarters here, and hopefully, we'll continue with that.

Moving over then to Europe. Here, we're also having 2 strong quarters in a row from the European region. Important is that most of the other countries are doing really good. France have starting really strong and also having the INTERMAT right now than actually than in France, in Paris. We're having a good trend on rolling 12 months on the order intake. And another positive thing is also that all this have happened without any major positive macro trends, expect that the risk of increased interest rate is gone. The feeling is that the tiltrotator is becoming a more established product in more and more countries in Europe.

Europe is now our biggest region in Q1 with 41% of our total order intake. Europe is also the biggest region on rolling 12 months with SEK 608 million or 40% of our total order intake. So Europe is becoming more and more important or actually they are the biggest one, and that's why they are so important.

And all this with a lot of potential left in Europe since most of the countries still are under 10% penetration rate. And speaking of penetration rate, if you're taking a look at this graph that shows the penetration per market, we can see that we have a lot of opportunities left. The growth region that are closest to reach the tipping point are Europe, with Netherlands in the front, but also the bigger countries like France, Germany and U.K. are right there. So in the short term, Europe is important for our growth. We can get the bigger volumes there faster than from the other growth regions. Americas and Asia-Oceania will also follow, but there are some steps behind. Another thing that also speaks for Europe is that we also have the sales organization, we have the management and we have the service network in place in Europe.

We have historically been weak in the DACH region, but with the strategic partnership with [indiscernible] in the DACH region from last year, we are much stronger there, too, and German is the biggest excavator market in Europe. So that's also really important and a big step for us. And also the awareness of tiltrotator system is more spread, and we see that even the rental companies are starting to invest in tiltrotators in Europe. With that, I will hand it over to Jens, who will guide you through the financial performance in more details. So go ahead, Jens.

[Jens Blom, executive]

Thank you, Krister. And we start looking shortly on the EBIT and on the EBIT margin. We have an EBIT that has decreased 70% to SEK 60 million compared to SEK 198 million last year was a record number. The margin is 15.2% compared to 28.7%. And as Krister mentioned, we are now on a more healthy level in the first quarter compared to what we ended 2023 with. And we're going to have an overview of the profit and loss. We have a net sales of SEK 394 million compared to SEK 691 million. And on the rolling 12 months, we are at SEK 1.6 billion. The gross margin is on 42% compared to 45% last year.

If we go further down in the profit and loss. We have cost for the ERP implementation of SEK 8 million compared to SEK 9 million last year. The R&D expenses are SEK 11 million compared to SEK 8 million, and they are due to the third-generation tiltrotator. And we also have an effect, a negative impact of the rates with SEK 4 million compared to a positive last year around SEK 4 million. So at the bottom line, the EBIT is SEK 60 million for the quarter. And on the rolling 12 months, we end up at SEK 238 million with a margin on 14.9%.

Then we're going to look a little bit on the cash flow and on net working capital. We have a negative operating cash flow on SEK 44 million compared to a positive SEK 5 million last year, and that's due to lower operating profit and tax payment. And also, we have an effect of the positive trend break when we see the demand increase, our inventories and accounts receivable are also rising. Net working capital as part of net sales on rolling 12 months is 29% compared to 35% last year and 21% in the full year of 2023.

Then we're going to look more closely on the capital structure and on the ROCE level. That drops to 27.8%. That's due to a lower profitability on a 12-month basis and also that we are on a higher level on the capital on the average. So with that said, I will hand over to Krister, who will summarize and give us some outlook for the upcoming quarters.

[Krister Blomgren, executive]

Thank you, Jens. I will start with our financial targets. Our targets are measured over a business cycle. So that sometimes makes a little bit harder compared to quarters. But growth, we have a big drop from an exceptional first quarter last year. On the profitability, we are back on a healthy level from our weak fourth quarter. We aren't pleased with the 15%. But if we can invest in ERP system, our sales force on launch new products during a downturn and keep it at this level, I think we're doing a pretty good job.

If you're taking on the capital efficiency, we are lower than our target, as Jens talked about. Capital structure, we are well above our target, but we'll also pay out dividend in Q2. So we'll lower that a little bit after that. Then we moving over to the summary and outlook. If we start with a little bit summary. We have 3 out of 4 regions that are doing good. We are working on getting Americas back on track again. So totally a positive trend and a gradual increase of the order intake and net sales. It is also really important for us that the net sales trend break and also that we are back on a healthy level on the profitability.

And it feels really positive that our biggest region, Europe have had 2 strong quarters in a row with a good contribution from more or less all markets. And right now, we are having the world's third biggest exhibition in Paris. We have a great booth there. We're also having units in other boots, for example, Takeuchi, Devlon, Kobelco and others. So we will have a good presence there in the INTERMAT in Paris.

And April is also start for the exhibition season with a focus on marketing the third generation there. The very best part of the creating a new business is to be able to physically show the benefits of the tiltrotator on site and how we together can change the world of digging. We have launched our third-generation tiltrotator with a lot of new technology like the self-learning configuration.

This will simplify the installation and optimize the configuration between the tiltrotator and the machine, saving energy, increasing position and providing an optimal experience for the operator. The first model, EC319 for machines up to 19 tonnes of our third generation is now on sale, and we are progressively offering more models of our most advanced system up to date.

As we enter the next quarter, we predict a gradual positive trend for the remainder of the year. We continue to work hard to meet our customers' needs while creating a flexible and cost-conscious organization. We are looking forward to an intense period with exhibitions and demo days, where we will have the opportunity to meet our end customers around the world and trying to fulfill our founders [indiscernible] of having all then end users in the world in our CRM system. We will now open up for questions that can be asked in the telephone conference. So operator, please.

[Operator]

[Operator Instrucions] The next question comes from Agnieska VilelaAgnieszka Vilela from Nordea.

[Agnieszka Vilela, analyst]

Perfect. Maybe starting with Europe. You said that you see quite positive signals right now. Can you comment if it's kind of the development in the market at large? Or is it due that you are more successful now with approaching new customers? And also maybe if you can give us a bit more color on the interest for the tiltrotator technology and what you see at the Paris short right now?

[Krister Blomgren, executive]

If we're starting with the market in large, we see a drop of machine sales more or less in all European countries, some really big drops. But we see that we're having a good growth in most of them compared to last year. So that means the penetration rate is -- are increasing. The feeling is that we're also taking market share from our competitors on most of the markets. So it's a positive trend, absolutely, especially in Europe and as I mentioned earlier.

I mean, U.K. was down like 35%, something like that on machine sales, and we are up more or less the same. And same with France also machine sales is down, but we're up. Netherlands are also doing really good, increasing compared to last year. Germany, the same thing together with our partners there. And on INTERMAT, yes, the report is -- I haven't been there myself, but the report is that there are big interest and a lot of questions regarding the third generation that we're, of course, pushing hard for there. And we also see that we are having a lot of units out there in the other booths and so on. It's also a good sign that the OEMs are interested in tiltrotators and in engcon.

[Agnieszka Vilela, analyst]

So is it fair to assume that you do expect order intake in Europe to continue to improve even though the construction markets are still quite depressed?

[Krister Blomgren, executive]

So far, we have been doing really good. I don't have the crystal balls to look into the future, but we're having a good feeling. That's what we can say. And we believe it will be a continuous gradual increase, not a big jump. I said we need to help them with those macro signals to get a bigger increase also in Europe. But especially in the Nordic, we do definitely need these macro signals to get the bigger increase.

[Agnieszka Vilela, analyst]

Yes. Perfect. And kind of similar question on Americas, if you could comment on the kind of total market development, both for construction machines and tiltrotators and what's happening with the penetration rates for tiltrotators and also on your own performance? And maybe in connection with that, what expectations do you have after the John Deere trainings?

[Krister Blomgren, executive]

When I was over a couple of weeks ago, then we had meetings with different OEMs in North America, and it's a little bit tougher market, but there's still a good market. They still have growth, but they don't have the big growth that they've been having. So they're looking pretty optimistic on the market, even though it's an election year. They don't know exactly what will happen with that. So the market in big is still pretty good if you're looking on the construction or the yellow industry.

We have been struggling a little bit as we've been open with and you also see in the numbers. We don't have an increase, we actually having a decrease on order intake and net sales. So for us, it's more like we need to do a better job. And we think the key thing for us to start with is, of course, the service and support to make sure that the customers that we're having is happy and pleased with our products that will make them by the second and third unit and so on. And we've also been working with our sales staff on working more towards the end users and then selling in the benefits we're having with the tiltrotator.

We're probably relying a little bit more on the dealerships in North America than what we prefer to do. And that's been now hurting us a little bit more when they are a little bit more strict regarding financing other stuff than their own stuff because the interest rate is so high. So -- and they subsidize the financing, and then they don't want to throw in other things than their own things like John Deere financing their excavators on a lower interest rate than what actually the interest rate are, then those like [Kobolta], Kobelco and so on, they don't want to finance the tools and so on.

So that's one thing that we see that may be been hurting us a little bit towards the end customer. They're having a bigger problem financing things right now than in North America. So that's one reason. I think the tiltrotator has been going down a little bit in North America and also signals are getting from our colleagues or competitors that they also see a drop there. But we can do better. We expect more from us on the American market, and we hope we'll be back on track there in a couple of months or 3 to 6 months, as I said earlier. I don't know if I answered all your questions there.

[Agnieszka Vilela, analyst]

Yes. Sure. And then just I wanted to check one thing. On the Slide 12, showing the penetration rates. That's the status from 2021? Or have you updated it...

[Krister Blomgren, executive]

That is not from the annual report. So it is updated with guesstimates of course, a little bit. It's not 100% fact in it, but it's some guesstimates in it.

[Agnieszka Vilela, analyst]

All right. Perfect. And then I have 2 more questions, if I may. So on the OpEx level, I mean, you seem to have squeezed your admin selling and R&D expenses quite a lot. You have very good control there, as you say. But what kind of level for this cost do you expect in the coming quarters?

[Krister Blomgren, executive]

As we said, we will keep on having, if we're looking on the admin, we were still working with the ERP implementation now in Poland. So I will have continuous cost there. We still have work to do with R&D and all the other models, even if the control system is done. So there will be maybe a little bit less cost, but it will still be cost on the R&D level for the other models to come after the EC319.

So-- and it will be also an exhibition season, as I mentioned. That's normally drives cost, but also should drive sales. So I don't think we should cap those type of costs that are long-term good for us. All these 3 that I mentioned is long term good for us. So maybe it will be hard to squeeze a little bit like this, but we are also saying the hope or believe that we will see the gradual increase of revenue that will also help us to keep EBIT margin.

[Agnieszka Vilela, analyst]

Perfect. And then the last one on the Generation 3 tiltrotators. Can you share with us what the interest is? Also maybe talk a bit about the kind of price points compared to Generation 2 and also on the kind of product costs. So basically, I'm trying to find out what is the gross margin on that product versus the Generation 2? And also, if you look at the competition, do you see any comparable product on the market right now?

[Krister Blomgren, executive]

So starting with the price increase will be around, if I remember correctly, 10% up. Of course, in the beginning, you're always having a little bit higher cost on the components and so on before you start getting all the volumes up on the right levels. So I don't expect it to be -- that we can get the full 10% in that case on that product.

Regarding the competition, I still state what Tina Turner said, this is simply the best, better than all the rest. We -- all the things we've been adding. I think both rototilt and [indiscernible] have been doing good developments and are having on their new tiltrotators. They are having new features and so on, but I still think we are in the front where we are by ourselves. We are at one technical level ahead of the competitors on the third generation.

So we still can work with the same idea as we've been having before. And I'm really proud of that, what we have done with we also made the patent application for because that will both give the operators a much better feeling for the tiltrotator. It will be perfectly synced with whatever machine they have, and it will simplify. It also for the dealerships or the installers, and we will cut time there. So there are a lot of benefits with it, and we will more like secure that everybody getting a good experience from the tiltrotator.

There will not be any bad install that makes somebody having a bad experience of the tiltrotator. So that's a really good thing. And then, of course, the other things that we talked more about earlier on with smoothness and efficientness and so on with less energy and working good together with the autonomous machines and so on. We're definitely ahead of the competitors.

[Agnieszka Vilela, analyst]

Perfect. Maybe a follow-up on that. I think you said that you -- the customers would save 30% on energy using the Gen 3 versus Gen 2. And given that price is up just say 10%, it should be quite a good selling point, I guess, or...

[Krister Blomgren, executive]

Yes. But 30% on the tiltrotator energy juice, and that means it's down to 2%, 3% of the full excavator Houston.

[Agnieszka Vilela, analyst]

Sorry, I didn't follow up. Can you explain?

[Krister Blomgren, executive]

Yes. It's 30% less energy to drive the tiltrotator, but if you're looking then how much that will be on the full excavator like how much energy save, that's...

[Agnieszka Vilela, analyst]

All right, 2%, 3%. All right. I understand. And then capacity-wise, the last one for me. On this new model or new generation. Do you have it in place? Or do you need to invest somewhere? Is it easy to produce Gen 3 versus Gen 2?

[Krister Blomgren, executive]

There are not a big difference in producing it. We're still buying components and putting them together. Of course, it is a little bit new for our assembly personnel. But I don't think it will be a big challenge, and we're having the testing facility to still test everything in a good way. And so that will not be a big thing. Of course, there are to getting all the volumes from the beginning then to fit into the demand of it. But we're starting with one size. That's the top seller of course.

So hopefully, we'll get a really good response from market. The feeling is that it's a big interest. They've been asking for it. And I think the exhibition season will really kick off with and we'll see that big interest and people can feel the difference and understand everything we have done with it better.

[Operator]

The next question comes from Simon Johnson from Berenberg.

[Simon Jonsson, analyst]

Storage from Berenberg. I have a couple of questions. First, in your CEO comments, Christer, you are mentioning that the market in the Nordic is showing mixed signals. And now you mentioned that Sweden and Finland are doing slightly better. Is there anything else to highlight here in terms of differences between regions or customer groups?

[Krister Blomgren, executive]

Yes. I mean if you -- do you mean only in the Nordics or generally in between all the regions?

[Simon Jonsson, analyst]

No, just in Nordics.

[Krister Blomgren, executive]

Yes. The Nordics, it's been a little bit strange. We're having Sweden, I can understand. We have some positive signals. Finland, we don't have that many positive signals, but they are looking good, having a good growth and so on, and we're really strong in Finland. So it's a little bit unclear. What is clear is we've been having a long winter, and that's in both Finland, Sweden and Norway, that's been actually slowing down, I think, the growth because they're digging season starting a little bit later.

In Denmark, they've been having a really rainy winter or they've also been slowing down, the digging season a little bit. But no, I can't really say that the difference I need to look in maybe a little bit deeper on sizes and so on if there are different segments that are going better or worse than normally then. But sorry, I can't really see now more difference in the Nordics than that.

[Simon Jonsson, analyst]

All right. No worries. And then maybe also if you could comment on your performance in Germany during the quarter. How is the collaboration with BD solutions developing any further orders you've seen in the quarter?

[Krister Blomgren, executive]

[indiscernible], we're having regular contact with them, and they're doing really good work on -- in the DACH region, where we're getting a lot of new orders, but they also order for stock. So they right now have been taking those orders from stock. So -- but we are in talk with them regularly, and we're getting these positive signals how they're working on the market. And we had an exhibition in Austria last week that also they were really positive from that, and we see definitely positive growth there and future growth.

[Simon Jonsson, analyst]

Okay. Perfect. And then the final one on the ERP implementation. Do you have any updates here? And is there a risk that we will see some further disruptions in the coming quarters?

[Krister Blomgren, executive]

Risk. You always have risks. But I think we did the hardest part in Q4 when we did the -- in the biggest production company and the first sales company. And that was really disturbing for us and as we talked about it. But now we're working with Poland and the Poland production facility. And they already also work a little bit more in the way as we have been setting up the new system. It was a bigger change for the Nordics compared to Poland. So my expectations are that it will not be any similar disturbance as it was in Q4. But of course, we will have a continuous cost regarding it and maybe a little bit spike when the plan go live in Q3 regarding the cost there when we need the extra help from our consultant company then.

But the feeling is it's getting better and better. We learn to understand it and see the benefits with it. From beginning almost when you're doing a change, everybody think what we had was much, much better. But after a while, you start picking up the good things that the new system provides. So normally, when you don't hear that much, it's a good sign. So I feel pretty positive about the ERP system and the change that the worst part or disturbance for the companies behind us.

[Operator]

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

[Krister Blomgren, executive]

Thank you then, everybody, 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. And thank you for listening in today, and we hope to see you all soon again. Thank you very much, and have a nice weekend.