Troax Group AB (publ)

STO:TROAX

Earnings Call Analysis

Troax Group's Strong Q3 Growth Driven by Strategic Expansion and Efficiency

In Q3, Troax Group experienced a commendable 8% growth in order intake, reaching EUR 67 million, alongside a 12% sales increase to EUR 69 million. The EBITA margin held strong at 19.7%, slightly down from 20.9% the previous year. New facilities in China are expected to fuel further growth, particularly in APAC. While organic growth was marginal at -1%, strong performance in North America and promising signs in markets such as automotive and warehousing were noted. The company aims for continued efficiency and expansion into new markets, with net debt improving to 0.9, indicating strong financial health for future investments.

A Promising Quarter Amid Mixed Market Conditions

Troax Group reported a solid performance for the third quarter of 2024, showcasing resilience and adaptability in a mixed market environment. The company achieved an order intake growth of 8%, increasing from EUR 62.3 million in Q3 2023 to EUR 67 million in Q3 2024, driven largely by structural growth from prior acquisitions rather than organic expansion, which saw a slight decline of 1%. Sales figures followed suit, rising by 12% year-over-year, from EUR 61.4 million to EUR 69 million, buoyed by a structural contribution of 10% and a 2% organic growth. This marks Troax's third consecutive quarter of sales and order intake growth, reflecting their effective strategies and market positioning.

Financial Metrics Showcase Stability

The company reported an EBITA of EUR 13.6 million for Q3 2024, resulting in an EBITA margin of 19.7%. This performance, while slightly lower than the 20.9% margin recorded in the same quarter last year, highlights Troax’s ability to maintain profitability despite fluctuating volumes. The company’s commitment to controlling sales and marketing costs has been effective, contributing to a strong cash flow from operations of EUR 13.7 million, an increase from EUR 12.5 million in Q3 2023. Notably, earnings per share remained stable at EUR 0.16, consistent with the previous year's figures.

Strong Cash Flow and Improved Balance Sheet

Troax continued to strengthen its financial position with reduced net debt, falling from 1.0 in Q2 to 0.9 in Q3, providing the company with ample room for future acquisitions. The working capital has also shown a controlled increase, moving from EUR 56.9 million last year to EUR 58.9 million. However, as a percentage of sales, working capital has decreased, reflecting improved efficiency.

Regional Performance: Divergent Trends

In terms of market dynamics, Troax faced mixed results across regions. North America exhibited a healthy growth of 12%, contrasting with a decline of 5% in Continental Europe, which remains the largest sales area. The Nordics, specifically, also showed a downward trend largely impacted by the construction sector, while activity in the U.K. was flat. The automotive segment, which comprises about 20% of Troax's business, reported positive growth driven by investments from major clients in both Europe and North America. The warehousing segment also showed promising signs, contributing positively to overall revenue despite challenges in other regions.

Strategic Developments and Future Prospects

Troax is focusing on strategic growth initiatives, including inaugurating a new facility in China, aimed at enhancing production efficiency and competitiveness in the APAC region. This facility is expected to facilitate faster delivery times and reduced costs, strengthening Troax's market share in both the Chinese and broader Asian markets. The company is also planning to invest between USD 8 million to USD 10 million in expanding its North American operations, emphasizing the importance of increasing capacity and efficiency within this key market. This proactive approach not only underscores Troax's growth strategy but also prepares the company for future market fluctuations.

Outlook: Cautious Optimism

Looking forward, Troax remains cautiously optimistic about the remaining quarters of 2024 and into 2025. While acknowledging mixed demand across different regions and sectors, particularly in Europe, the company is witnessing positive signals from larger projects and potential upturns in the warehousing market. The anticipated benefits from the strategic investments in capacity and efficiency, along with a sustained focus on acquisitions, position Troax favorably for sustainable growth.

Earnings Call Transcript 2024-Q3

[Martin Nystrom, executive]

All right. Good morning and good afternoon, everyone, and welcome to the Third Quarter Report for Troax Group. My name is Martin Nystrom, and I'm here together with Anders Eklof, who is the Group CFO, and we will present the key developments as well as the results for the third quarter. After the presentation, we will, as usual, have a Q&A, and we'll get back to that in due time.

So without further ado, I will start presenting the key developments and figures for the quarter. So if we summarize the third quarter, we had order intake growth in a bit of a mixed market environment. We saw a positive development in pretty much all sales regions, but Northern Europe, so Nordics as well as the German-speaking countries. Our order intake grew by 8%, and we also had a structural effect from the acquisitions made last year of 9%. We had a strong quarter when it came to sales, which grew by 12%, where we were supported by structure of 10%. Promising during the quarter is also that we start to see signs of the automated warehousing market, and there has been some more activity in the third quarter compared to the second quarter. And I think this is very promising that this market will pick up for both '25 as well as '26.

During the quarter, we delivered a strong EBITA margin despite the fact that we still are having relatively low volumes. We had a solid gross profit in line with our internal target. And also, we had sales and marketing costs in line with our plan and which is also kept well under control. So in total, we had an EBITA margin of 19.7% in the quarter. We also continue to deliver strong cash flow and continue to strengthen our balance sheet. So we had strong operating cash flow. Our net debt continued to reduce and our balance sheet continues to be strong for growth investment, both when it comes to organic investments as well as through acquisitions.

I think also very promising during the quarter is that we have a couple of key events. We already in the Q2 report talked about our acquisition of of our Czech Republican distributor, enabling further growth in Eastern Europe. We have also inaugurated our new facility in China, which I will come back to in a second, also very promising growth investment for the future in APAC. And we've also made a decision to invest in further capacity and more efficiency in our North American operations. So all-in-all, a very solid quarter, the third quarter.

If we then move into one of the Q3 highlights, we inaugurated our new facility in China in September, where we built a state-of-the-art world-class factory which will definitely be the key enabler to continue our profitable growth journey in APAC. And here in the picture, you see a pretty happy crowd taking part of that inauguration. So very positive for future growth in both China as well as in APAC.

If we then move into the market development in the quarter, and this is now the year-on-year comparison and organic. So it's excluding acquisitions or structure. If we start with the regional view, we had Continental Europe decreasing minus 5% in the quarter. Continental Europe is also our largest sales area. We saw North America growing 12% in the quarter. We saw the Nordics continuing to decline, driven mainly by the Construction segment. We saw almost flat or minus 1% in U.K. with a bit of a mixed development between the different segments. And our new markets continued to grow very nicely during the quarter with 33% up.

If we then move from geographical markets into segments, we look at the world through the lens of 5 segments. So if we start with automotive being roughly 20% of our business, we had an increase during the quarter. This was driven by Continental Europe and North America as well as new markets. I think we continue to ride on the wave of some customers investing in both Europe as well as North America. So I think this was positive during the quarter. And we've also done a good job when it comes to breaking new ground in new markets.

If we move over to warehousing being roughly 25% of our business, we also saw a positive development during the third quarter. Here, there has been a little bit of a mix between the different regions. But all-in-all, we can report that we saw an increase during the quarter. Continental Europe still being declining, but very positive trends and also a bit more light at the end of the tunnel when it comes to North America, Nordics, U.K. and new markets. Also here, I think I'm slightly more positive now than a quarter ago on the development going into '25 and '26.

Moving over to construction and we're in this area, we're down. Here, there is a bit of a mixed picture. I would say the main driver for this is our Nordic property protection business, which continues to be down based on still low volumes of new apartments built. But here, I'd say we could also see that there is a little bit of positive development on the renovation side during the quarter, so a bit more activity on that side. Process being very flat overall, a bit of a positive sign in U.K. And last but not least, the other segment, which is down, and you can see this pretty much as a proxy for general industry production. So we're down in most areas aside of new markets. So all-in-all, this takes us to a minus 1% in organic growth for the quarter versus the quarter last year.

If we then take a bit of a longer look or a longer term perspective on the Troax Group growth, on this page, you see the quarterly development, so the order intake and sales growth, respectively, year-on-year. And here, I think if we move back a bit in time, I think the over-investment and really the market momentum that we saw back in 2021, I think, sticks out really well in this picture, both when it comes to order intake as well as sales. Then as you know, we've been into a bit of a slump here from '22 through '23, but now we're into the third consecutive quarter of growth. And I should say here that we're still having a growth being driven predominantly by acquisition structures and not organic growth. But still, overall, we're now having the third consecutive quarter of order intake as well as sales growth, which I think find very promising.

With that, I would like to hand over to you, Anders, to go through a bit of the -- more into the details of the key metrics that we have. So please, Anders.

[Anders Eklof, executive]

Thank you very much, Martin.

If we start then looking at the order intake, we had a growth in the third quarter of 8%, going from EUR 62.3 million in Q3 of 2023 to EUR 67 million in Q3 of 2024. This growth came from a 9% structure, whereas the organic was down by 1%.

Next slide. If we then look at sales, here we saw a growth of 12% year-over-year, going from EUR 61.4 million to EUR 69 million in sales. And here, we had 10% structure in the numbers and a 2% organic growth in the quarter.

Next, looking at EBITA, we went from EUR 12.8 million in Q3 of 2023 and ended up at EUR 13.6 million in Q3 of 2024. This gives an EBITA margin of 19.7% in the quarter, which is below Q3 of last year, where we had 20.9%. If we then look at the comparable numbers, excluding structure, we had a 20.3% EBITA margin in Q3 of this year.

Next slide, please. And if we then look at working capital development, you can see the diagram here is very flat. We have gone up from EUR 56.9 million in working capital in Q3 of last year to EUR 58.9 million in Q3 of this year. And then if we look at the percentage of sales, the working capital is down compared to Q3 of last year.

Next slide. Net debt has developed well in the quarter. Sequentially, we went from 1.0 in Q2 of this year to 0.9 in Q3 of last year. So that gives us a good potential and good strength for future acquisitions as we see it.

Next slide. And then operating cash flow was also good in the quarter. We ended up at EUR 13.7 million in cash flow from operations compared to EUR 12.5 million in the same quarter of last year. So good development also there.

Next slide. And just to summarize then all the numbers, I have touched basically everything already in this chart. I just wanted to point out also that from an earnings per share standpoint, we ended up at EUR 0.16 for the quarter, which is the same level as Q3 of last year, so same level.

And with that, I hand over again back to Martin for conclusions.

[Martin Nystrom, executive]

Thank you, Anders. So to conclude the third quarter, I think we see a mixed demand picture, positive in many areas, but more challenging in the northern parts of Europe. But still, we had an order intake growth, which was good in the quarter. We delivered a strong EBITA margin despite lower volumes, and we continue to deliver good cash flow and strengthening our balance sheet. And during the quarter, we have also done some really good progress when it comes to our strategic priorities, when it comes to expanding our footprint in Eastern Europe, inaugurating our facility in APAC and China, and we're also looking forward to continue the positive development in North America.

Then before we move into the Q&A section, I just want to remind you why we exist and what we believe in, and we are a safety company caring for everyone's in everyday safety. And if you're a customer and partner to Troax, you partner up with the safety authority, making sure you get back home safe every day and bringing your businesses for business sustainably higher productivity. So play it safe and play it with Troax Group.

And with that, I'd like to move into the Q&A session.

[Martin Nystrom, executive]

[Operator Instructions] All right. Then we'll see how we start. I think we start with Zino.

[Zino Engdalen Ricciuti, analyst]

Just starting off a bit on Europe, nice to just hear a bit -- hear you elaborate a bit more. Sales were, of course, quite good, but the order intake on a bit on the weaker side compared with last year. If you can just elaborate a bit on how you're feeling about the region.

[Martin Nystrom, executive]

I think Europe is also a mixed bag of things. I think we have particularly -- we particularly see Nordics continuing to be quite weak. I think aside of a few key customers that we have in the German-speaking area, we also see the underlying market being -- continue to be weak, I'd say. I don't think that has gone any better during the third quarter. On the other hand, I think we continue to see pretty stable and perhaps a bit of a better development in the southern parts of Europe. But I think it's also inside Europe, South, North Nordic, U.K., I think it's different developments and also the different segments are developing differently. And I also think that we will continue to see a mixed picture going into the fourth quarter and also into 2025.

[Zino Engdalen Ricciuti, analyst]

Okay. And just to follow up on Europe from the picture, if I saw correctly, that automotive had a green arrow given what we're seeing and have read during the quarter. That's quite interesting. Could you just elaborate on what's going on there?

[Martin Nystrom, executive]

Yes. I think when it comes to automotive in a sense, we are relatively late into the investment cycle if you look at where we are in the chain. I think the investments that our key customers have decided to continue, they have continued, so to speak, in the quarter, which also means that we're seeing this green arrow. I'd say also that this is a bit of a -- you need to also consider what the comparable for the quarter last year was. But I'd say automotive, if we look at what we can read from newspapers and so I think it's surprisingly strong in Europe specifically.

[Zino Engdalen Ricciuti, analyst]

Okay. And just 2 questions on North America, which, of course, had a nice order intake. From what I saw in the report, you only highlighted active safety. Is it so that active safety is an important driver in the growth from year-to-year? Or have you seen an uptick from some of these late investments that have been postponed?

[Martin Nystrom, executive]

Yes. I'd say what drives the growth is not numbers-wise active safety. I think the active safety comment is more directed for the future. I think we have been working and the teams have been working really hard to break through with our active safety offering in the U.S. for pretty much the last year or 1.5 years. I think it's really good to see that, that starts to pay-off even though it's still low numbers, but it's promising to start getting reference customers into the U.S. And of course, there is a lot of potential in that. I think what drives the North American growth is what you'd say more of the conventional business. So it's the warehousing business as well as the automotive business that drives the plus the numbers.

[Zino Engdalen Ricciuti, analyst]

Okay. And staying in North America, just on the investment, which you wrote about in the report. Could you -- I don't know where you are in the process, but could you indicate the size of the investment and when do you expect it to start?

[Martin Nystrom, executive]

Yes. So we have now looked at our options to grow our North American business and also to make it a bit more efficient. So we're just into the process of evaluating what to do. That goes for location, that partly goes for the size of the investment as well. But to give you a ballpark, we're looking to make an investment somewhere between $8 million and perhaps $10 million in machinery until that there is, of course, buildings and other things, which might not technically be an investment. So that's a bit where we are in the process. Now we're evaluating where we want to locate this and what's the best option for us. And the aim for us is then to have a new facility up and running during 2026.

And the next one would be Anna.

[Anna Lindholm-Widström, analyst]

So my first question is regarding the inauguration of the China sites. My reading is that it sounds like it's both internal efficiency that we can see from it, but also that it's a bit growth related. Could you give us some more details?

[Martin Nystrom, executive]

Yes. No, absolutely. I think there you could say 2 things. I think there's certainly efficiency that we have now invested in a facility, which is just as efficient as the other sites we have in the group with the exception of the U.S., which we just talked about. So I think it's certainly being able to be more competitive side to this. At the same time, our products don't travel super well in terms of long lead times, costs, et cetera. So being close and being able to provide shorter lead times at lower cost. So for us, regionalization makes good sense. So in order for us to serve both the Chinese market as well as the other markets in the region, being closer to that market also from a production supply point of view makes a lot of sense and also will help us to be more competitive and hence, take market share.

[Anna Lindholm-Widström, analyst]

Okay. And then going into warehousing, these sort of positive signs that you see, do you see it from specifically larger customers? Or is it both larger customer, mid-sized and smaller? How does it look?

[Martin Nystrom, executive]

I think you should see that comment as a broad comment. I'd say specifically to where we see activities and a lot of a few larger projects on the horizon, so to speak. I think that comment comes mainly from the larger customers where we see activity picking up. Then there is, of course, for the smaller customers and the bread and butter, there is also a bit more activity in the pipeline. So I think the comment comes mainly from the specific customers, but I'd say it also goes for the bit broader customer base.

[Anna Lindholm-Widström, analyst]

Okay. Maybe a follow-up on that, if we could talk a bit on the Garantell development as it's also very affected by the warehousing segment.

[Martin Nystrom, executive]

Yes. No, absolutely. So I think we had a really good quarter in the third quarter, if we go back and remember the discussion we had after Q2. Garantell is, to a large extent, exposed to the warehousing business and also geographically to the Nordics and Continental Europe without words. That market has been during '23 and the beginning of '24 has been, as you know, very weak, even though now lately fairly stable. I think if we look at the performance of Garantell throughout '24 and we compare to what others are doing in these industries as well, I think it's fair to say that we believe -- we clearly believe that we have gained market share in a very tough environment. So during the third quarter, I'm pleased with the development that we see in Garantell. And hopefully, if we see now the warehousing markets starting to wake up a little bit, I think this would be very, very positive for the Troax Group in general, but specifically so for Garantell as well.

The next one would be Gustav.

[Gustav Österberg, analyst]

Maybe just to jump into the automotive comments and questions there. I mean, in a scenario where we see sort of Chinese automotive OEMs establishing a new production facility here in Europe, would you say that you have the same chance of winning this project versus a European automotive OEM sort of establishing a facility here in Europe?

[Martin Nystrom, executive]

I'd say that there is no material difference from our point of view in this regard. So there are super strongholds that we have in Europe and partly in North America. We might have a few super strongholds in China and APAC, but we're certainly definitely relevant and working with these players as well.

[Gustav Österberg, analyst]

Okay. Perfect. But are they using sort of the integrators that you collaborate today or?

[Martin Nystrom, executive]

Most could be different integrators, but they are also working mainly through integrators to -- when they are building up their facilities and factories indeed. But it might be a different name of the integrator.

[Gustav Österberg, analyst]

Yes. Okay. Perfect. And then just in terms of the comments you made here in the report regarding the summer weather and floods and so forth. Have you had to close down the factories here in Q3 or.

[Martin Nystrom, executive]

Nothing material, but it's been -- we have been fighting a bit during August to basically make sure that we deliver. So if we look to the outcome and the end-effect of this, I think we see that we've been pretty much or almost not impacted. But when it comes to the work and what the teams have done to make that happen, I think it's been really positive. So overall, I think it's just been a tougher quarter to deliver the numbers, mainly on the flooding site.

[Gustav Österberg, analyst]

Yes. Okay. Perfect. And then just the last one here because you also write in the report that the selling and admin expenses have been in line with your plan, but you have carried out major review before 2025 to sort of increase efficiency. Can you just elaborate a bit on what you mean there?

[Martin Nystrom, executive]

Yes. And I think as you know, we've been having a few quarters or quarter 2 mainly has been where we've had surprises. I think we also see that we have a weaker market. And I think we have just gone through our costs and the plan, what are we investing in, what should we perhaps do a little bit more, what should we perhaps do a little bit less of going into '25 versus '24 to be ready for both uptick as well as a continued perhaps a weaker development than what we see. So that means reviewing what we're doing, which activities we're doing, what are the growth activities, how can we make our processes more efficient, et cetera, et cetera. So I think it's part of how do we work perhaps not harder, but a little smarter.

The next one would be Johan Lindkvist.

[Daniel Lindkvist, analyst]

Just a few questions from my side. If we look at the -- I mean, the exclamation mark in this report maybe was the strong gross margin. And if we look at these levels, was there a favorable mix or would you say that these are sustainable gross margin levels going forward? I mean it's impressive given the capacity utilization.

[Martin Nystrom, executive]

Yes. I'd say we had a strong gross margin in the quarter, no doubt. I think we had -- also despite what we talked about on the supply chain side, I think we've done a really good job of selling value and keeping up our pricing during the quarter, similar to the other quarters. So I'd say that I wouldn't say this margin is something that came as a surprise. So I think we delivered a solid good quarter on the gross margin side despite the relatively low volumes. So I'm very pleased with the fact that we are very much in line with our internal target. And I don't expect us to deviate heavily from that either if we look into the crystal ball on volumes and where we are with our supply chain.

[Daniel Lindkvist, analyst]

Okay. Perfect. And then just a final one on the Garantell. Now we're going full circle in Q1. So I was just wondering if you could just elaborate on the split between Europe and the Nordics in their sales volumes, rough?

[Martin Nystrom, executive]

I think probably a 50-50 split between Nordics and Continental Europe would be a good start there, Daniel. All right. Let's see if we have more questions coming in. All right. I see no more questions here in the chat. So with that, I suggest that we end the earnings call. Thanks a lot for listening in, and I'll see you in a quarter's time again. Thank you, and bye-bye.