Welcome to the Ferronordic Q2 2024 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 five on their telephone keypad. Now, I will hand the conference over to speakers, CEO Lars Corneliusson and CFO Erik Danemar. Please go ahead.
Thank you, and hello, everybody. This is Lars Corneliusson here, and welcome to this presentation of the second quarter results for Ferronordic of 2024. We see continued strength in the U.S., in the quarter. Overall, we had 62% revenue growth, and that is driven by the addition of the U.S. operations, operating results -SEK 4 million, and net profit decreased to -SEK 81 million, and that was mainly as a result of exchange rate losses. Net debt increased slightly to SEK 167.1 million, after obviously the acquisition and consolidation of balance sheets in the U.S. operations, and total equity then decreased to SEK 1.627 million. If we talk about the U.S., it's continuing to perform well.
We had a revenue of slightly above SEK 700 million in Q2, with an operating margin of 7.3%, SEK 51 million. We saw the market in the U.S.; the first five months was going down slightly from a very high base in 2023, 6% lower. We, however, delivered more machines to customers, and obviously then we gained quite some market shares, actually. As we saw the construction season started during the quarter also, we saw utilization of the rental fleet improving and also demand for aftermarket increasing. However, in Germany, we had a challenging quarter. Overall, the market grew by 11%, but our own deliveries of new trucks in units declined.
Aftermarket business, however, is stable, despite high level of actually absence among our mechanics and quite a lot of work in progress moving into Q3. One important thing in Germany we talked about is our cost reduction program, and we see now that we are expecting the result of that saving of approximately SEK 60 million from the end of Q2. We believe we are there. In Kazakhstan, also challenging in Q2. The economy is still growing, but the market for construction equipment declined. So, due to the slow sales in Germany and Kazakhstan, inventory are still too high, and we will work to normalize those stock levels throughout 2024. Very brief on financials.
As I said, 62% to close to SEK 1.1 billion, with the U.S. SEK 700 million. German revenue down -44% to SEK 332 million, and Central Asia, then Kazakhstan down to SEK 56 million. Profit contribution from the U.S. operation SEK 51 million, German decreased to SEK 27 million, and in Kazakhstan to -SEK 1 million. If we take... Go to the next slide. A bit more on the operations. The market for construction equipment in North America is historically around 52,000-56,000 units. Our area then covers approximately 8% of the North American market.
In the quarter, actually, we estimate that the market for larger construction equipment or general purpose equipment segment has decreased by 27% in the area by a decrease in crawler excavators and articulated haulers. However, our own sales actually only then decreased by 7% compared to Q2 2023. And obviously, we continued to gain the market share that we started doing in Q1. And we see solid actually demand continues despite the drop in 27 in Q2. There is a lot of activities going on, and we sold 70 new units, 25 used units, and also 10 units that were converted to sales from rental, and also service and parts business remaining strong in Q2 2024.
So basically, then 39% of the revenue came from after market business and 11% related to other sales, mainly, mainly rentals, so 50% then from equipment sales. So, continuously good performance and looking good in the United States. If we go to Germany, the total market then for heavy trucks increased by 11% in Q2 and increased by 3% in the first half year, despite the economy indicators pointing downwards for quite some time now. In our own area, it was increased by 22%, and then that's again, approximately 18% of the total German market. Our own new truck sales decreased by 65% to 101 units. This was compared to a strong Q2 in 2023.
This is a result of us maybe not responding to the price competition that we saw in previous quarters as the supply starting to from a low supply base to maybe an oversupply base. We saw price competition from certain competitors in the market, and we refrained from acting to that, and we obviously lost market shares. What is very, very positive, though, is that a great share of our new truck sales were rigid trucks, and they generally have a much better potential for service and parts sales going forward. The main competition was in truck tractors, which are running on the highways.
Used vehicle sales performed better and declined 10% to 80 units, and we are continuing, obviously, to decrease our used trucks inventory and our rental fleet to reduce capital commitment and focus on how these operations can support new sales and the aftermarket business in a weaker market. Aftermarket sales were broadly flat year-on-year. Aftermarket sales share of revenue up 19 percentage points to 43%. We also launched the efficiency program to make our business in Germany more efficient and resilient. Obviously, we need to get to an absorption level of 100%. So that means that how much of the fixed costs we can cover by the gross profit from a growing aftermarket business. We're looking into all vertical, horizontal, administrative units. We reduced the number of regions, removed a number of middle management roles.
We unfortunately, the program has taken more time and cost more than we initially anticipated, but we are confident now that starting from end Q2, we see an annual saving going forward of SEK 60 million. Obviously, we continue to work on streamlining the organization, and at the same time, continue to invest in our aftermarket business and in e-mobility. When it comes to Kazakhstan, Central Asia, as I said, fairly strong economy. Going forward, we see supportive government investments, but the equipment market stays challenging. We estimate that the total market might have grown by 9%, but its complex tender structures, Chinese competition, and the lack of funding in the market that come creates hurdles for premium segments and premium brands.
So our sales in Q2 decreased to 11 units, and the used equipment to 12 units, and we saw a slight decline in aftermarket sales. We do have high inventory in Kazakhstan, as I mentioned, and we work to normalize that, and we expect to have that normalized by the end of 2024. So next slide, we see our U.S. network. We have 13 outlets, and we're active in a number of states in the Midwest, and as I mentioned, so far, so good, and it's looking good going forward as well. German network looked like this. We closed one sub-dealer, the only one we had actually, in May. So now we have 21 network outlets in Germany.
And the Kazakh network, we have seven outlets, and they're placed like this in the geography. So, by that, I hand over to Erik for some more on economy and the financials. Please, Erik.
Thank you very much, Lars. I start off, as I usually do, with a bit of the macro context. There are a number of indicators one can follow below the GDP level, but GDP is also really a macro indicator of the activity of the economy, and that trickles down to the construction industry. So starting in what is now our biggest segment or biggest market, the United States, we had 2.8% GDP growth in the second quarter, and more than 2%, 2.1% is expected in 2024. That's still a good strong growth. Meanwhile, core PCE inflation is trading lower, so it was 2.6% in June.
You may have heard that the CPI yesterday was reported at 2.9%, which was the lowest reading in quite some time. So very high likelihood now being priced in by futures for a cut next month by the Fed. From the current level, which is a bit above 5%. So potentially some interest rate cutting there, providing a bit more liquidity into the economy. Germany, very different picture, sluggish in Q2, - 0.1%. Lars said that the market was up, so it was, but really, we look at industrial production, we look at purchasing managers index and IFO, which is the business sentiment, and they're all still pointing negatively in Germany.
So sentiment is still not there, but there is an expectation for a turn in GDP, as you can see, positive reading and with inflation lower, the ECB is taking steps to lower the rate. So we are hoping for a bit of the revival coming to the German economy. But at the moment, it's been fairly sluggish going. Kazakhstan strong growth still in 2023 reported and still expected in 2024, even if less so, from 5.1% to 3.1%. Inflation rate there very high by our standards, but much lower from where it was. So it continues to trail down and therefore also the central bank rate.
That is not unimportant. I mean, Lars mentioned hurdles in the market for construction equipment and funding conditions in the market. Funding for local customers is one of the problems in Kazakhstan. Moving on to the numbers, Lars has discussed how the business was doing. This is how it's reflected in the numbers. Starting with a more of a top view of the situation. We can see that revenue, yes, is up 62%, that's much driven by the U.S. acquisition. The business now for the group, 65% of revenue is U.S., so that's about 2/3. Bit more than a quarter, 30% is Germany, and Kazakhstan is about 5% of the total.
If we look at the revenue mix, a bit more than half is equipment and trucks. So, new equipment sales really and used and aftermarket being high in this quarter, clearly driven partly by lower revenue in Germany and Kazakhstan than we would expect to see there. So, just below 40%, and then 9% other. In other, you will have mainly the rental income from the rental fleets in the U.S. and also in Germany. If we look at the single indicators, that they're mostly driven by the acquisition of the U.S., so that's why you would see the big increases in the gross profit, SG&A, and the other metrics.
I would rather maybe look in the table to our left of the text there, and on the right side of that, we see again, strong U.S. performance, lower EBIT margin, but still very healthy at 7.3%, and a SEK 51 million operating profit from that revenue of SEK 707 million. Germany, a big decline in revenue, as we have discussed, and it's very much driven by the truck sales. That feeds through to a significantly lower gross profit, SEK 35 million lower than the same period in 2023. With a cost base that then, in the quarter, still remained too high.
Again, this cost program that we have been driving since really mid-November last year, we estimate we wanted at the end of this quarter, the second quarter that is, but still through big parts of the quarter, our cost base remained too high. And on that lower sale and gross profit, that balance just doesn't make. So we need to get the revenue up again and then see the fruits of these cost cuts that we've been working hard on to reach in Germany. And then Kazakhstan, a negative minus one on the operating profit line.
Less impact from Kazakhstan, but of course, we want Kazakhstan to be a positive contribution to the group as a whole, as it was in the same period of last year, as you can see, of SEK 7 million there, and we believe that there is indeed more potential in Kazakhstan. When we take group costs into account, we end up at - 4% in the period versus the positive number that we posted in the previous quarter. Below operating profit, worth noting that we're seeing the other side of foreign exchange.
In the first quarter, you may recall that we had a significant positive effect of a weaker Swedish krona, or rather a stronger euro and dollar versus the Swedish krona. In this quarter, we had the opposite effect, and therefore, foreign exchange loss is also dragging the net results, the net income down. This slide is really taking from the report just to show how we report the different segments, year-on-year. Worth maybe commenting as well, you will see there an increase in the group overhead costs, but it's really, it was the release of a provision, as we wrote in our report last year. So I highlight that for you, that lowered the group costs in that period last year.
Moving on to the balance sheet. Again, a lot of it driven by the addition of the U.S. If we look year-on-year, some effects also there having impact on what the balance sheet looks like. Looking at some of the separate segments at working capital, Lars mentioned that we're still too high in Kazakhstan. We are. Net working capital is down there both on lower receivables and lower inventories. But again, we want to trim that inventory position further to be more efficient in our return on capital as a whole. Germany different, but shares some similarities, still too high working capital there as well.
There we have a small increase, but the inventory is lower there, and it's more a reflection of the lower revenue when we look at it as a percentage of revenue. In the U.S., you have a more normal inventory situation, arguably at 15% there. The net debt increased. Part of that is driven by transfers from payables to debt in the U.S., as part of inventory are moved from inventory to the rental fleet in the U.S. So that's what I probably would mention on the balance sheet. Happy to take your questions on that. Further on, looking at the EBIT dynamics year-on-year, last year we were at -10%, and we see here the very positive contribution.
So this is again, mind you, the difference versus last year. We didn't have a U.S. in the second quarter of last year, so this is pure Q2 2024, therefore, +51%. In Germany, we have a negative result and dynamic versus last year, as we do in Kazakhstan, again, a +7% last year versus the -1% of this year. And then we have a negative effect on the headquarters as well.
So despite this very strong contribution and performance in the U.S., we're not there yet in Germany, clearly, and that needs to become a contributor also as we plan to make it for the group as a whole, and also, of course, bring Kazakhstan to positive contribution levels. A quick look at the net equity and our NAV. To show you where the net assets are, we see that we have trade and receivables at your far left there, and then a meaningful inventory position.
And then you have the U.S. rental fleet, which I remind you, it is rented, but it's also used for so-called sales conversions in the U.S., meaning customers buy out vehicles from the rental fleet. And then we have property, plant, and equipment, which also contain the German rental fleet in that piece, actually, and then you have, of course, property, plant, and equipment in more traditional sense, or buildings, fixtures and fittings, and infrastructure. And then you have the liability side, so still a healthy NAV there for the group as a whole. And with that, I hand back to you, Lars, to say something about the outlook.
Yeah, thank you. So looking forward, we are obviously, we're optimistic about our expansion into the United States, and the further opportunities we see there. It's the second biggest market in the world for construction equipment, and we continue to see a dynamic economy and a significant need to upgrade the country's infrastructure, with extensive federal and state programs for those investments. And they should provide them a stable foundation for construction equipment demand, even in case of broader fluctuations in the general economy. In particular, maybe in our area, we see further large construction projects, including data centers, battery plants, and logistic centers that have started or are about to start, quite some gigantic projects actually, planned and starting up.
What we see in Germany is that it remains weak, the economy and the market sentiment is negative. And as we've talked about, we are taking actions to make our organization and cost structure more resilient. We believe, however, in continued strong demand in the aftermarket business and about the long-term potential in the German market. And we are continuing to promote e-mobility and sustainable transport solutions, and we believe very much in the opportunities they provide us with. And also Kazakhstan, it's a small part of our business, but we continue to see long-term potential in the country. So I think that was about what we wanted to present to you. So, I open up for questions, please.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Anders Akerblom from Nordea. Please go ahead.
Hi, Erik and Lars. Good morning. I have a few questions. Just firstly, on kind of what you mentioned about cancellations and kind of orders in the German market. Could you give any flavor on where in the quarter this has occurred? If it's kind of an accelerating pace towards the end of the quarter or kind of at the start, and something of a catch-up, so kind of just the timing of this.
Well, I mean, Anders, hi, by the way, it's Lars here. The, I mean, our business, it doesn't happen in a quarter, it happens over time, and you have deliveries, and you have things changing over time. This is really something that hasn't occurred maybe in the quarter, but in previous quarters. If anything, I would say that we saw a correction in the quarter, maybe more positive, if I put it that way. I mean, we saw already last year, we mentioned that the market, the supply chain is normalizing, and you come from a situation of undersupply to a situation of normalization or possibly even oversupply, and then certain competitors behave in different ways. We decided not to join them.
I think we create more credibility among our customers to long-term take your responsibility and create better relations with your customers, not to join that. Which can lead to cancellations from certain customers, and it did. And we saw result of that in the quarter from some things that possibly happened before the quarter. So, everything else equal in a way, like goes like it does in our industry. It should potentially not have that big effect going forward, but in the quarter, it was hitting us badly, really.
Yeah. No, that's fair. Kind of on the competitive landscape then in Germany and how competitors have been behaving, could you kind of specify a bit what they have been doing to kind of support sales? And more in detail, what kind of the market losses have been due to, and how you intend to kind of win this back going forward?
Well, I think we've done the right thing. I mean, we've been focusing on getting the deals where we see a long-term potential in the aftermarket, meaning the rigid trucks, which are the trucks, you know, it's the tipper trucks, it's the forestry trucks, it's the waste trucks that are running around our workshops and have a good long-term potential in the aftermarket. Whereas maybe in the tractor market, where the aftermarket potential is less and the price competition is higher, and but the volumes are quite significant, that's where we've seen the biggest battle, if I put it that way.
So, we've been focusing on getting a better mix in our population and creating a more sustainable future for us, without risking relations with our customers in the tractor markets, for a short-term market share gain, if I put it that way.
Yeah. No, that sounds fair. But kind of on then, the consequence of the more muted sales in Germany and Kazakhstan, you comment on stock levels being too high. I mean, we saw an inventory writedown here, I think it was after Q4. What's kind of the risk of that going forward?
I think maybe I jump in there. Yeah, I mean, in the Q4, we took a look, and it was a specific product group there that we did take a impairment or-
... write them on. And, you know, Anders, this is a sort of an ongoing process. Every quarter we go out to our sales force. We go out to the used team, the team that works with our used vehicles or machines, and also to the rental fleet. And we look so I think, you know, inevitably as the longer equipment is in inventory, that risks increase, but we try each quarter to take again, a critical look of what—where we are versus the book values we carry out.
So I think that that's again a process that will happen every quarter, and we'll just have to see where we are there, and we have that review now as well.
Yeah. Okay. Thank you so much. I'll step back in line. I'm finished with my questions for now. Thanks.
Thanks, Anders.
The next question comes from Adrian Gilani from ABG Sundal Collier. Please go ahead.
Yes. Hello. I'd like to start off in the U.S. business and regarding your sort of optimistic view on the expansion opportunities in that region, but then contrasting that with the fact that in the near term future, you still have some fairly high leverage following the Rudd acquisition. So are you focusing in the near term on reducing that before further U.S. expansion, or are you open to doing both on acquisitions, you know, in the near term, even with the higher leverage?
Maybe I start, Lars, and you can-
Mm-hmm
... continue. I think, Adrian, I mean, first thing to say, just I mean, in general, our thing to give guidance on, I think it's part of our core strategy to look for expansion opportunities. But that said, I think we said before that, we took on Rudd. It's a big piece. We're very excited about it. We think it's working very well to integrate it into the rest of the group, and it's performing very well. But we also said that we want to sort of digest this now, and we still have a lot of focus on getting Germany in order to perform well and contribute to the group. Same thing for Kazakhstan, but again, Kazakhstan is a smaller piece.
Now, is there room for any bolt-on acquisitions? I would say our core case is again to work on the integration now and to focus on getting Germany and contributing to the group. Then we would need to look at, Adrian, at the specifics of a potential acquisition. I think it also depends there, you know, what's the cash flow contribution of such an acquisition? Would it fund or more itself? Well, then one could look at it. If it would be more of a turnaround, maybe it's a bit further afield in the future to look at, rather than in the immediate near term. That's probably how I would put it.
Okay. That's very clear. Thank you. On the sort of federal infrastructure programs in the U.S., do you see any political risk to these, given the elections coming up, or would you say that the current programs are fairly safe regardless of the outcome of the U.S. election?
Well, I mean, if we should believe what both parties have done and what they are saying, that they are intending to continue these investments, and they are needed, so at least from that, we don't see a big risk, frankly speaking, no.
Nothing from your customers directly, either on any hesitance on investing ahead of the election, that is. Okay.
Well, I mean, there is probably, Adrian, as in any country, there are some hesitation maybe on investing just ahead of an election. But there is not. That's a very common thing that happens in any market, any time, but not long term. We don't see anybody talking that there should be a problem with that, really. No.
Okay, thank you. And then, in Germany, just you mentioned that the savings program reached full run rate at the end of Q2.
Mm-hmm.
Are you able to sort of quantify how much that impacted during the quarter, so that we can get a picture of how much the costs can come down sequentially in Q3 compared to Q2?
I think that would be difficult for me to do, Adrian. I mean, I think, you know, the easiest way, I mean, to look at it would be that we have achieved, if you would take this, you know, 60 that we referred to, and sort of... I really think, I mean, the best approximation would be to draw a sort of a sloping line from November last year, or potentially from end of December, rather. And that's sort of how we work through it. Of course, it hasn't been like that, but I think it would be the most reasonable approximation for you.
Okay.
Yeah.
I understand. Just a final question, also a bit of a detail question on the, on the savings program. You said that it's costing more than you initially thought, and I just looked at the Q1 report. You booked a SEK 23 million restructuring provision in the Q1 report, but I couldn't really find the, sort of the equivalent number in the Q2 report. Are you able to sort of quantify how much extra restructuring costs were taken in Q2?
We're not giving a number there. I think it's costs that come again with a time that has taken more rather, Adrian, than further provisions that we need to make. So we, if you remember, we initially targeted to be done in Q2, so somewhere in the middle, and then it dragged out until the end of it. So that's probably more what I would look at. In the sort of rear view mirror, it's taken longer, and that implies more cost. Carrying the burden of cost we had longer, if that makes sense. So-
Yeah, yeah, I understand. Okay, perfect. Thank you. In that case, that's all for me.
Thank you, Adrian.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Yeah, we, we have received some questions by email. One is contracting services, which seems like it did not work out in Kazakhstan. Is that correct? And what lessons can you draw? Are the odds better in the U.S. for Rudd? If so, how come? And so far, you-- that's a correct statement. We haven't been able to start working on contracting services in Kazakhstan for many reasons, and one of the reasons is that we haven't really been able to convince customers to pay for what to make those investments into productivity that the services entail. They are not free of charge, and they cost more, but they also give much better return for the customer.
But as the economy is such at the moment, and with high interest rates and quite short-sighted, unfortunately, as we talked about, it's a difficult sell so far in Kazakhstan, so we haven't been able to do that. I mean, obviously, in countries where situations are different, both in the U.S. and potentially also for expanding electrification in Germany, it's a different story. So we have that in our future plans, but at the moment, we're focusing on making sure to develop what we have and looking forward to developing other services in our countries as well. Another question is: Could you provide an estimate of the remaining capacity in your German service workshops before you reach an optimal utilization level?
That is a very good question and something we're working on every day. It's a very complex question because there are so many factors going into that question. It's obviously a matter of, first of all, demand. How many trucks are out there? How much can we sell to them? And how good are we at selling everything we can? Then you have a supply question. Do we have the right mechanics? Do we have enough mechanics? Do we have qualified mechanics enough? Do we have equipment enough? Do we have well-prepared workshops that can? Do we have shifts enough? How do we work? So it's—I can't say that, but clearly, we are still not there in full efficiency rather than utilization, I would say, in our network.
So we still have a way to go. We have done a lot. We have in the last couple of years, we've increased productivity and efficiency, and also had a better utilization, but to give a number there, I think is very difficult. But there are still opportunities in the existing network, for sure, to grow. And then there is a question, quite a detailed question on one of our partners, competitors or colleagues in the U.S., a Volvo dealer, but rather a question on how the structure of the dealer network looks like in the U.S., and it is quite fragmented at the moment.
The last couple of years, there's been a consolidation in the market, and one of the reasons why, why we are there is because we're part of that consolidation. And that's why it makes the U.S. interesting, is that that's it is a consolidation that we believe will continue, and that's why we see future opportunities in continued expansion, really. So there are plenty of opportunities. That's what I can say regarding that question. Were there any more, Erik?
We had one question about the increase of rental fleet in the United States over the year. What the drivers is behind that?
Yeah.
You wanna take that one or?
Yeah, I mean, that's a very good question, and that's because we see opportunities in growing the rental fleet. And particularly, we do that in the excavator segment, because the market in the U.S. is such that for certain products, that's how you sell. You actually customers are first renting the machines, and then they buy them out from the rental fleet, and that's how the market looks like, and particularly so in the excavator segment. And we want to grow our share both in terms of sales in excavator segment, but also obviously selling more aftermarket subsequently. And that's why we have deliberately increased our rental fleet in the excavator segment to take more market share.
And so far, we have been, as you can see from the numbers, we have been successful in doing that. So that's the reason.
... And there is another question from the same sender. Even though the aftermarket share has increased in Germany of revenue, the gross margin decreased compared to Q1. What is the reason behind this? Maybe I start, or so you can, you can add on to it. I think, yeah, typically you would see a relationship, the bigger share of the total revenue would be aftermarket. More aftermarket has more margin, so you would drive up the average margin. And that happens, but I think in those, in this case, the decline in the overall revenue, driven by equipment sales or truck sales rather, used and new, was too big.
You also had a margin effect in that part, which Lars has discussed some of the price pressure that filtered through, and even some of the cancellations we had. So, correct assumption about the higher aftermarket share, higher gross margin. But in this case, the overall mix was such that we didn't see that effect. It didn't help. So that's on that question, I would say. And I think that's in terms of email questions that I have, Lars. I don't see anything more. So if no more questions from the audience, if there is, please ask us now. Otherwise, we will pass back to the operator.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
All right. Thank you very much, and thank you for, for listening in to this presentation, and have a very good day. Thank you. Bye-bye.