Hello everyone, and welcome back to ABG Investor Days. My name is Adrian Gilani, and I'm an Equity Research Analyst here at ABG, and I will be moderating our upcoming presentation, which will be given by CFO of Ferronordic, Mr. Erik Danemar. He will hold a roughly 20-minute presentation, and then after that, we'll have time for some Q&A. So with that being said, Erik, please go ahead.
Thank you very much, Adrian. Thank you, everybody, for taking interest in our company. I'm Erik Danemar. I'm the group CFO for Ferronordic. Very briefly on Ferronordic, we were founded in 2010, and we were listed on the Nasdaq in 2017. When we started in Russia. We were the dealer for Volvo Construction Equipment and several other brands in Russia. In December 2022, following the conflict in Ukraine, we sold the assets there, and we were then left with our business in Kazakhstan and Germany.
In Kazakhstan, we are a dealer for Volvo Construction Equipment since 2019, and also Mecalac and a smaller part of Sandvik's business, mobile crushers and screens. In Germany, we started in January 2020, intensive period, given the outbreak of COVID that time. There, we are the dealer for Volvo Trucks, so not construction equipment, but the trucks business, and similarly Sandvik mobile crushers and screens. We do, besides sales, rental and a used business as well. We have that to some scale in Kazakhstan as well. Quite recently, we announced an acquisition in the U.S. I'll get back to that later, but that's expected to close actually on the 30th of November, so very shortly.
Something about where we were and where we are now, and there was a big hump between these periods, when we were at our biggest level in Russia. But when we started, 160 people, a little bit more than SEK 1 billion revenue and 66 outlets. Today, 502 employees across group, Kazakhstan and Germany, 360 coming in from the U.S. business once that closes. Revenue, SEK 2.6 billion. U.S. revenue in 2022 was $308 million. Those are audited numbers. And outlets, 29, and 13 coming in from the U.S..
Below, very briefly, you see a distribution between aftermarket sales and new equipment sales, and then other, mostly rental. Aftermarket is where the bigger margins are. So that's a very important part of the business. You see also the geographical split, the high emphasis on Germany, as it is now. And then to your top right there, we try to stress that we're fairly diversified in terms of our customers. They come from a range of different industries in both countries. Strategic objectives, very important. They've been unchanged since we IPO'd, and actually before then. Want to point to geographic expansion at your lower right there. We've always pursued that from Russia into Kazakhstan, into Germany, and now taking that step into the U.S.
Expansion into related business areas, that's really when we take on other brands to work with. We also try to get better utilization of our infrastructure, both organization and physical infrastructure, so workshops, by doing that and our IT systems. We want to drive digital processes in the industry, predictive maintenance and those projects, and we have been quite successful in that in the past, and that's something we want to leverage going forward as well. Aftermarket absorption, that's when we can cover our fixed costs with the gross margin or gross profit from our aftermarket business. So even if we don't sell new trucks, we can still cover the fixed cost. We had that when Russia was there.
We do not now, but that will remain a strategic objective for us to always strive towards. We'll not stop long on this, but our business touches on a lot of issues, especially the upstream and downstream from us. And we try to work very, work very actively with our partners and customers to make sure that we have the minimum footprint. And having Volvo as the key leading partner gives us a great strength in this area, given their focus on sustainability and having a minimal ecological footprint. Product offering, at this time, Volvo CE, that's Kazakhstan, and then you have the trucks business, both conventional, but Renault Trucks, the electric trucks also taking a big leap forward now, in Germany.
Then we have Mecalac, which does backhoe loaders and small machines, compact equipment for city use, and have very strong market positions in Europe in that area, and we see the potential for that in other markets as well, in Kazakhstan, in this case. And then we have the Sandvik crushers. I'll get back to U.S. again, so won't dwell on that here. On this slide, I really only want to stress again the focus we place is on the aftermarket. This is because as we see it, service and maintenance and really customer uptime, that comes first. When we can assure our customers that their machines will work all the time or their trucks will be running all the time, that's when we can make the sale.
The biggest cost to our customers is not fuel, it's not depreciation, it's not operator or service maintenance. It's really if the machine shuts down, that's when they suffer the heavy cost. So that's why it's such an important part of selling the new equipment. So a big focus for us is always on the service and maintenance part to our customers, which allows us again to build the population. So it's a virtuous circle in cycling in that way. This slide stresses again strategic direction that we have, which is always to get closer to the customers.
The digital sales platform that we've built, where the telematics from the machines send signals that we use to create sales leads, so that both our mechanics and our salespeople can reach out to customer before something stops, or just keeping a dialogue on them when they should update their fleet and bring in new equipment, and if there is more appropriate equipment for them. Another area which we are now looking at in Kazakhstan at several potential projects there, and we did quite a bit of in Russia, is something we call contracting services. This, we are quite convinced, is part of the future, especially in construction equipment, potentially in trucks as well. Transport as a service, it is usually referred to there.
But in construction equipment, instead of buying excavators and articulated haulers from us, the customers pay us per cubic meter delivered. So we own the machines, we hire the operators, we run the service, we have the spare parts storage on site, and the customers pay us, again, per cubic meter, or ton, or kilometer, usually a combination of the three that we deliver to the point that they need. This aligns, I would say, incentives in a different way. The more efficient we can be, the more we can lower the charge we take on them, and the more profitable they will be. So, again, quite certain that that's a big part of the future and a space that we wanna occupy.
This slide, really just to show you where we are in Germany. In the heart of Europe and transport is one of the way we look at it, Germany in the middle as the biggest industrial country in Europe, and us in the middle of Germany. And again, to get you a sense of what it looks like in Kazakhstan, this is where we are at the moment. We have a head office in Almaty on the very border to China there, and a special focus on road construction we have in Astana. That's a very big area in Kazakhstan. It's a country that puts a lot of investments into infrastructure at the moment. U.S. then, our new frontier.
We will then be the dealer for Volvo Construction Equipment in all or parts of nine states in the U.S.: Kentucky, West Virginia, Ohio, Indiana, Western Pennsylvania, Eastern Missouri, Southern Illinois, and several counties in Tennessee and Maryland. So this is what some of you will know of as the Rust Belt. There is a lot of mining in this area. There is also a lot of general construction, and when we look at the U.S. plans for infrastructure investment, this is an important area in the U.S., where there will be such infrastructure investment. Market at 4,000 machines in our GPE class, so it's a narrower band than if you look at the total sales of machines. Dropped a little bit in 2021, and...
Sorry, in 2020 and 2021, due to COVID in that period. Something about the rationale here. I mentioned earlier when we looked at our strategic objectives, that geographical expansion has always been something that we've been looking at. To get a more diversified portfolio of countries in the world, to build on our relationship with VCE and Volvo, Volvo Trucks as well, across market, to become a bigger partner for Volvo, which allows us to make more brand-specific investments, both in workshops but also in organization, which again aligns very well with VCE and Volvo Trucks. Following the sale of Russia at the end of '2022, we intensified these. We got money out of Russia.
We would probably like to got more, but the situation was such that we were very fortunate, as we see it, and worked hard to create the opportunity to exit. And again, we said early in our communication to the market that we would look to expand with the resources we got from Russia. And U.S. being the second biggest market in the world for construction equipment, after China, with, again, a very big infrastructure program, something that the two sides in U.S. politics actually happen to agree on, is that they have to update their infrastructure. So that's something that seems quite sure that we'll see big investments in that area.
We think then that Rudd Equipment Company is a very good fit for us, given the scale and the platform that they have. This is a well-functioning company. We took over Germany in very different circumstances. We took assets from Volvo. We bought several small family workshops, so a very different structure, whereas here a well-run, very company going far back with very solid customer relationships. And it gives us a very strong base in the U.S. for potential further expansion as well.
But first, to really develop the potential that we see in this business, and we do think that it can be driven further and that there is more potential than is currently being found in the company. A little bit about Rudd again, it was founded in 1952 by the current owners' father, based in Louisville, Kentucky, 13 outlets, 360 employees. And it's one of the biggest distributors for VCE in the U.S. They have a few more big ones, but it's a bit of a patchwork in the rest of the U.S., so this is one of the bigger ones. And they also have other brands.
Hitachi is on the Link-Belt. A Link-Belt does cranes, and as you can see here from the next bullet, VCE is however about 70% of the total revenue, so that's clearly the leading part. In 2022, Rudd had sales of $308 million, and an EBIT of $16.5 million. That's converted to IFRS. They report on U.S. GAAP, by the company we have worked with on the due diligence for the acquisition. So 5.3% EBIT margin there, on that basis.
We can see in the first six months of 2023 a little bit lower, if you would pace it over the year on revenue, but as it were, a bit stronger, so close to 7% there on EBIT. You have the earnings before tax numbers there as well. On the transaction, we then acquire 100% of the stock, the shares in Rudd Equipment Company for $95 million. In addition to this, we acquire two of the properties that the business is currently using. After that, Rudd will own eight of the 13 locations, the rest being leased on long-term contracts.
So total price for the business is $105 million, and we will acquire that partly with own cash. So again, the resources we have on the balance sheet, and $45 million, we will use bank debt, and we have a commitment letter from Nordea for that. And also in addition to that, for a working capital facility in the U.S. as well, and of course, we will continue our work with VFS as well, Volvo Financial Services, as we do in all our markets. Consents and approvals for the transactions have all been obtained, the key one of that being, of course, that Volvo CE itself is supportive of the transaction. And we expect to close that very soon, next week, basically.
Very briefly on third quarter, we said weak operationally, key strategically, so we were not happy with our performance in the third quarter. But then key strategically, I think the big acquisition, which is transformative for Ferronordic. I mean, double the revenue, so it really changes the profile of the business and the weight of the different business segments. But in the quarter, we had strong growth, but we had too high costs, and it really comes most from Germany, where we built an organization for stronger growth than we were able to achieve, and that's both in new sales and aftermarket.
We can see it when we look at the group level, 56% increase in revenue, that that's then across both operating segments. But overall, lower margins, higher costs, and also a higher working capital. And of course, that higher working capital ties in to our expectation versus the outcome, as we were left with more inventory than we had planned for. So across the group, we were at negative operating result of SEK -28, margin -4.4%. And again, a disappointment for us. We built momentum in Germany and Kazakhstan, and now we fell back, but we will work hard to get back to first where we were, and then far beyond that, we continue to see great potential.
Germany itself, 45% more sales, and we were in line with market, including LCV sales. Excluding the LCVs, we were actually taking market share, so we increased, but a negative operating profit after two positive quarters, and that was, again, disappointing. We got our first subsidies for electric trucks, which is very encouraging, so that process is now running. The German government compensates 80% of the difference in price between electric and diesel trucks to the user. So we received the first subsidies. In Kazakhstan, we took market shares, but sold less than we had anticipated and carried a higher cost there as well, some of which I probably would maybe consider more one-off.
But again, a disappointing result, we'll work hard to correct that. In Germany, we launched a cost reduction program in Q3, which will continue into Q4, as well, to basically make the organization more fit for current conditions and more efficient. Just highlighting again, the trend, we were creating profitability over a time, and we were very confident that we would be able to build on that. But the market did falter, and we need to adapt to that and make our organization more efficient. Kazakhstan, still in positive territory, but again, a disappointment that we weren't able to grow on Q1 and Q2 there. So with that, I think I'm holding the time fairly well.
A summary in terms of outlook, we have clearly seen signs in Germany of a slowing economy. Customers pressed under interest rates and in inflation, so they are more cautious to place orders going forward. On the other hand, we're quite upbeat on aftermarket, which again should be a buffer to the business, where again margins are also a bit higher. When customers buy less new trucks, they need to maintain the previous one more, and that sort of brings some balance in the near term. In the longer term, I mentioned Germany and our area being really in the dead center of all European economic activity, so we're still confident in the potential that we have in that area.
Seeing growing interest in electric trucks, special concern for customers, as I'm sure you can guess, is the loading capacity, the charging capacity. But that's being reeled out now, also getting subsidies from the state, and with that comes more comfort in electric. And with the subsidies, the economics are very compelling, so quite confident that will grow as well. In Kazakhstan, we continue to develop the business and also look to broaden the portfolio. I mentioned contracting services. That's something we want to do there in partnership with VCE, who are also very interested to see that part of the business grow.
Kazakhstan, again, being also in an interesting position with China and Turkey also investing a lot in the market, the Chinese Silk Way going partly through the country. So we think it's also in an interesting position. There are also a lot of infrastructure investments. And excited, of course, about the opportunities in the U.S., and the promises that that market holds. With that, I'll... I'm one minute past, I think. I'll pass over for questions.
Yeah, that's okay. We have time for some questions. I'll go straight ahead, focusing on the Rudd acquisition, since that's probably the most exciting thing going on right now. First of all, if we disregard the financials and the fact that it, it's a profitable company and all that, what was it that made Rudd a good strategic fit for Ferronordic?
I think, I mean, this is all a... When we look at expansion opportunities, we have a dialogue with Volvo, where we see potential to develop markets. And when we look at the organization, it's a very good fit, both how they operate in terms of their network and how they're structured as an organization, and also the portfolio of products they have. So we really think, coming in there, we see some growth opportunities, maybe especially in the general construction area, but also in mining.
Mm-hmm.
And our experience in the mining area with contracting services, we think is also a concept that is valid there, so there we also see potential. Adding to that, the digital sales tools that we used a lot, as you know, Adrian, in Russia, but also in Kazakhstan now, really helped to drive growth there, something that we also think that we have potential to develop in the U.S. So, really, besides the financials and the fit in structure, financially, I think also, again, operationally, it's a very attractive fit for us.
Mm-hmm.
It provides us that platform into the U.S. market.
Yeah. And, when you announced the acquisition, you called it a first step in expanding-
Mm
... North America, implying that there is a second and a third and a fourth step here.
Mm.
Can you talk a bit about, obviously, you can't say anything specific, but does that imply more M&A in North America? Does it imply that you are going to do some organic investments in opening new workshops? What-
Mm
... what are those next steps, so to say?
Well, you're right, I can't say anything concrete.
Yeah.
I think we really have stuck and will stick to that second or third slide on our strategic cornerstones, our strategic objectives. So strategic... Or sorry, geographic expansion will remain a core objective. Then I'm thinking more M&A. It could be, I mean, if there is a market where there is no one present, but there really aren't such markets in the world. But then I'm thinking more that we will continue to look for such opportunities, meaning M&A. I think also we have to digest and pace ourselves and make sure that we have, you know, the financial stability and financial strength to move forward, but look at opportunities.
Mm.
We will continue to do so. And then organically, yes, there is more room for workshops in our area, but it's running well as it is now, so we will be probably quite cautious or methodological in how we develop that. And also expansion into different business areas. We'll continue to review the portfolio. Is there potential? And here it has to be a complementary product to VCE. That's how we see it, or to Volvo Trucks in Germany, so that we build more.
Mm
... we have that in Kazakhstan, where customers want a product package, and if we can only offer parts of that package, they sometimes turn to competitors, like Caterpillar or Komatsu. So we want to make sure that we can offer everything, and if Volvo doesn't have everything, they're only happy for us to bring in complementary products.
Mm.
And then, contracting services, also an expansion opportunity there in the U.S. as well.
Yeah. Then from an organizational standpoint, you become sort of a global company now, or as of 30th November, at least. Is this going to impact the German business, or are we going to see some synergies between Germany and the U.S., or are these going to operate more like two separate units?
I think more... I mean, if we look operationally, and especially initially, more as separate operational units. And I think given that, Germany is Volvo Trucks, and Kazakhstan is Construction Equipment, U.S. is Construction Truck and Equipment. I see maybe more, actually,
Yeah
... cooperation between cooperation. It's more crossover, that we can, again, the way we utilize the digital sales in Kazakhstan is something that we can apply in the U.S. as well. Probably best practices in the U.S. that we can bring to Kazakhstan, et cetera. So of course, we'll try to look at such synergies also with, I mean, the trucks business, where we have practices that we think work well. We'll bring them across the rest of the organization. And we have a few such initiatives that we note specifically. But I think, I mean, to your question, at least initially, operated quite separately-
Mm
... as a group when it comes to balance sheet and financial effects, then of course, it’s inevitable that we’ll be grouped there, where we try to operate as efficiently as possible across the financial markets that we’re involved in.
Okay, that's very helpful. And with that being said, I think we've unfortunately run out of time, so I'll just take the opportunity to thank you for your presentation and for answering all of my questions.
Thank you, and thank everybody for their interest in Ferronordic.