Welcome to the Ferronordic audiocast with teleconference Q1 2022. Today, I am pleased to present CEO Lars Corneliusson and CFO Erik Danemar. For the first part of this call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. Speakers, please begin.
All right. Good morning, everybody. This is Lars Corneliusson, and welcome to this presentation of our Q1 , 2022. If we move on to slide two, obviously, we are in troubled times. The business has been affected by the conflict in Ukraine from end of February. In Q1, we had a 38% revenue growth to SEK 1.746 million, as demand remained strong. All in all, in Russia, CIS revenue increased 32%, partly due to machine product mix and growth in aftermarket. We saw a 9% operating margin, which was affected by SEK 45 million in provisions. In Germany, we saw the truck sales increasing by 66% in units in a flat market. We took obviously market shares.
Revenue increased 62% due to strong new and used truck sales and growth in aftermarket sales. All in all, 38% revenue increase, 36% operating profit increase, 6.2% operating margin, and an earnings per share increase of 12%. Obviously on page three, after 24th of February, the EU and other countries have imposed far-reaching sanctions and restrictions on Russia, some of which affect our products. Some of our key partners, including the Volvo Group, have suspended sales and deliveries to Russia. Logistics and transportation to and within Russia is very difficult. Monetary and currency conditions have been volatile. Payment system works locally, but international transfers have some limitations. Obviously, we're working to adapt our organization to the new circumstances. We're not restricted by sanctions.
We continue to service our customers and sell products from inventory and from partners that continue to deliver. Demand in the market has so far remained high, and market strong. However, if this is protracting further, the situation poses significant risks to our business in Russia, and we are indeed considering continuances and our options for the future. We may need to review our financial objectives. Our businesses in Kazakhstan and Germany are not directly impacted by the situation, and we continue to develop these markets. If we move one slide to slide number four, again, some group highlights revenue up 38% to close to SEK 1.8 billion. CIS revenue up 32% in SEK, with equipment sales strong at 37%, aftermarket sales up 32% and contracting services 11%.
Even more growth in Germany with revenue up 62% to SEK 420 million. The equipment sales then was up 80%, and good growth also in aftermarket and other sales. That meant that our operating profits increased by 37.6% to SEK 108 million. Operating profit from Russia was SEK 119 million, whereas the German operating results increased to -SEK 10 million from a loss last year of SEK 14 million. We had negative cash flows on high working capital and investments made in January, and we ended the quarter with a net debt at SEK 255 million or 0.3x EBITDA. On slide four, more on Russia, Q1 operational highlights.
The market for construction equipment grew by 25%. Before February 24th, we saw strong demand due to pent-up demand, strong commodity prices, and continued spending on big infrastructure projects. Actually after February 24th, the private markets and the prices continued to grow, partly driven by concerns of ruble depreciation, inflation, and upcoming supply issues. As we said, key partners, including the Volvo Group, have suspended sales to Russia, so in March, our sales were made from existing inventories. Unit sales, construction equipment, increased by 17%, and average sales price increased by 18% in local currency and 14% in SEK. Very strong growth in aftermarket sales by 32%.
In contracting services, we had a challenging operating condition due to very severe winter conditions, and that affected production, and it actually declined slightly quarter-over-quarter. We have five machines and 84 components that were processed in our rebuild center. If we go to slide five and look at Germany, as we said, based on registrations, the total German market for heavy trucks was flat. Bridges declined a little and tractors were unchanged. We saw a continued recovery in economic activity and pent-up need for fleet replacement that boosted demand. The market growth is held back and is continuously held back by supply constraints.
In our area in Germany, new truck registration increased by 4%, and then our part of Germany is German market is 18% of the total. We then ourselves increased our unit sales by 66%, and obviously we took quite some market share for Volvo Trucks, further in the quarter. As I said, good development in the aftermarket sales. If we continue to slide number six, we started operations at a new workshop in Bad Hersfeld, which we're filling an important gap in our growing network. We continue to market and demo electric trucks to our customers.
In 2022, we signed the first orders for heavy fully electric Volvo truck that will start to be produced towards the end of the year. We installed first wallboxes for equipping our network for electrification, and we received state subsidies for promoting electric transport. We are very excited about working with our partners and customers to further develop e-mobility in Germany. A summary of our network expansion on slide eight. We added, as you can see, we have since we took over the German network or Germany in early 2020, we started our expansion when we closing transactions in January 2021, April 2021, June 2021.
We are as we speak building a greenfield state-of-the-art service and sales hub in Hanover, which we expect to be ready by Q3, Q4 this year. We took over Bergstraße in October 2021, Bingen in December 2021, and then we started operations in Bad Hersfeld in the end of the quarter. We now have 16 operational outlets in Germany as of March 2022. By that, I hand over to our CFO, Erik Danemar, to continue.
Yes. Thank you, Lars. I'll then continue on the next slide. First, with the big picture economic development, macro, as we typically do. Starting looking at Russia, local authorities reported GDP as up in the Q1 , 3.7%. Looking forward, using IMF forecasts, we're looking for a decline in the market of 8.5%. That is their forecast. In 2023, a negative 2.3% GDP development. Monetary conditions were volatile in the quarter, of course, especially in the latter part of it after February 24th. Inflation in March increased to 16.7%. That compares to 5.8% in the same period last year.
In response to this, the central bank raised key rates to 20%, that is from 9.5. A very significant increase. After the reporting period, rates were lowered 300 basis points in two occasions, down to 14%. That's where we are at this point. The ruble was also very volatile, depreciated very sharply and then appreciated. If we look at the reporting period, we see an average depreciation of 4%, that is affecting the translation of our income statement. If we look on the balance sheet, that is the end of the period, 10% compared to the previous quarter, at the end of 2021, that is.
Kazakhstan saw a strong growth in the Q1 , partly driven by strong commodity prices supporting the economy there. Growth is expected also in the full year 2022. It's expected to slow down to an average 2.3%, and then increase next year, 2023 to 4.4%. Germany also strong growth in the Q1 , and 2.1% expected in the full year and the 2.7% in 2023. If we then move on to look at the financials of the period, moving to the next slide, we'll see, as Lars mentioned, the total revenue of close to SEK 1.8 billion.
The revenue share of Germany increased up to 24%, so almost a quarter. That was driven by strong new truck sales, as Lars mentioned, in units up 66% and more so in revenue, but also a strong growth in our aftermarket, partly driven by acquisitions and partly by organic growth. The revenue mix was more or less as we typically have, so around two-thirds of equipment and truck sales, 65%, 23% aftermarket, and 10% contracting services. Then you have 1% other, which is mostly truck rental in Germany. Gross margin was stable at 7.2%.
SG&A, as a percent of revenue, stayed below 10%, down versus the same period last year, mainly driven by Russia with a lower rate at 8.6% and strong revenue in both segments. Operating margin declined, and that was partly due to additional provisions in Russia CIS. We took SEK 45.3 million in the quarter. Those were related, amongst other to contracts that may not be completed due to suspended supplies, but also to our stock inventory in Russia, and also potential credit losses. Operating profit then increased 36% to SEK 108 million, and the net income increased 12%.
We did have significant FX losses in the quarter, so that explains the drop from the operating profit to the net income, also slightly higher taxes in the period. If we move to the next slide to our EBIT bridge, which really just encapsulates what I said about the income statement here, we see a strong top-line driven growth picture in the EBIT. Some increase in SG&A, although not as a percentage of revenue, but rather in absolute terms. Then the provisions that I mentioned, all of them relating to our business in Russia. German gross profit increased, but so did also SG&A as we increased our network.
As a part of that is again driven by the acquisitions that we did through 2021, but also some sales-related costs that increased with the higher sales levels. If we move to the next slide, briefly on cash flows, we had a negative total cash flow from operations that was partly driven by an increase in working capital for the group, which in turn was on the German side. We did also pay higher income taxes and interests in the quarter, and taxes were partly related to withholding tax. Russian working capital was.
Sorry, Russia CIS, including Kazakhstan, was more or less stable, slightly down, mostly driven by lower inventories, and that's again mostly on the Russian side of Russia CIS, so Russia and Kazakhstan. In Germany, cash flows from operations were negative partly due to the operating results, but also an increase in working capital there, which was driven both by higher inventories and a coincidence of lower payables in the period. Investing activities in the Q1 related to acquisitions of trucks for the rental fleet in Germany, and also additions of machines to contracting services that were made in January of the period.
If we look at the balance sheet on the next slide, we can see a decrease in property, plant, and equipment, so our fixed asset, partly driven by depreciation and partly by ruble depreciation. Note the foreign exchange rates used for the translations there included in this slide. Again, Russia's working capital largely unchanged at 1% of last 12 months revenue, as they were. In Russia, we did sell down inventory in this situation and used it to pay down our payables, which then reduced the overall scale of the balance sheet. In Germany, we had the increase as mentioned in.
If we speak about working capital as a percentage of revenue, then an increase from 6%-12%. Net debt a small increase from year-end to SEK 255 million, which then equals 0.3x EBITDA over the last 12 months. If we move one slide forward. In this quarter, we released some additional financial information. We disclose Russia standalone financial statements. This is taking the Russia results separated from the Russia CIS part and disclose that for the end of last year. The Q4. If we look at the balance sheet, also the end of the Q1 so 31st of March, and then preliminary for April of this year.
April 2022. This is, of course, to give the market some insight into both the most recent position of the balance sheet, but also the movement in the balance sheet between these periods. I stress that these April numbers are still preliminary. I would also point to the FX rates which you have included, which has been applied to translate the balance sheet from Russian rubles to Swedish Krona, which explains part of movements in the balance sheet. You will also have a preliminary April sales results disclosed here. Again, they are preliminary, I stress, and you also have the FX rate used there for the translation.
If we move on to the next slide, Lars mentioned that due to the current situation, we may need to revise, review our financial objectives. We do need more visibility on how the current situation develops before we engage in that. At the moment, versus our stated financial objectives, we stand over the last 12 months at 1.4x 2020 revenue, 7.6 on an operating margin basis and 0.3x EBITDA. Within those financial objectives that we currently have. With that, I pass the word back to you, Lars.
Yeah. Obviously, if we try to look forward, obviously, as a result of the military conflict in Ukraine, the subsequent sanctions, counter-sanctions and suspended deliveries from some of our main partners, the prospects for operations in Russia have deteriorated significantly. In addition, the impact of the sanctions on the Russian economy could also be very significant. If the situation continues, it poses risks to our business in Russia. Our operations in Kazakhstan continue, but are a smaller part of sales and may also be adversely affected by worsening economic situation in Russia. In Germany, we believe that a continued recovery from the pandemic will lead to increased demand for trucks and service. The geopolitical situation may, however, also affect the German economy and markets.
In a longer perspective, we nevertheless believe that the underlying conditions and business opportunities in the German market remain strong. By that, I am handing over to the operator for questions and answers, please.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Thank you. The first question comes from Adrian Gilani from ABG. Please go ahead.
Hi, it's Adrian here from ABG. I'd like to start off just with a few questions on the preliminary April figures that you released. Starting off, you had SEK 900 million roughly in inventories in Russia. Is the strategy here to sell off the current inventory as quickly as possible, or are you looking to sort of spread out these sales to make the inventory last longer?
Thanks for the question, Adrian. I think we continue to work as we're allowed to comply with sanctions and provide products and sell products and services as needed in the market. I think we will pace it as we see reasonable in the market.
Just re garding the PP&E of roughly SEK 650 million, I assume that a fairly significant portion of these are the contracting services machines. Do you expect that these machines would have any significant reselling value as well if the Norilsk or the Irkutsk contracts were to be run out and you can't renew those contracts?
Yes. I mean, we again here also we continue in line with what's allowed in contracting services. Yes, we believe that there is a secondary market for machines as well. Again, we use them in the current operations now.
Okay. Do you have some sort of indication of how much of the PP&E in Russia roughly are the contracting services machines?
No, we don't provide further breakdown than we have here. You're right to point out, Adrian, that most of the fixed assets in Russia relate to contracting services. There is, as you're aware, also some real estate and some parts of the network that through IFRS 16 would come in there as well, but the bigger part relates to contracting services.
Okay. Just on the sort of current status of the operations, obviously contracting services, the current contracts are still running, but a t the moment you're saying that these could be renewed as well. Do you have some sort of indication on when the two main contracts here expire?
Well, they're continuing to operate and we don't disclose that contract terms, but they are continuing to work.
Yeah. I think, I mean, generally, Adrian, if you, if you remember, those contracts tend to be relatively long-term, so they're between three and five years typically.
Okay.
As Lars said.
Yep
We don't give, we don't disclose when they mature.
Okay. Also regarding the smaller suppliers that are still active, is it possible at all to sort of scale up the partnerships with these smaller suppliers to make up for some of the lost sales if Volvo doesn't return or takes time to return?
Yes. We do expect that part of the business to grow, for sure.
Okay. Just one final question on Germany, just to clarify the wording here. When you say that, Germany is expected to reach a positive operating profit in 2022.
Mm-hmm
Just to clarify, does that mean for the full year 2022, or that it will reach a positive result during the year sort of?
We expect it to reach a positive result for the full year.
Okay. Just wanted to clarify.
Mm-hmm.
In that case, that was all of my questions. Thank you.
Thank you.
Thank you. The next question comes from Victor Hansen from Nordea. Please go ahead.
Thank you. Hi, Lars and Erik. Victor here. First question on your Russian operations related to equipment and the aftermarket. If you could give an update on how the adaptations you mentioned of the Russian business is going, perhaps what the current OpEx run rate is, and also if you have materially reduced headcount or outlets.
Yeah. Thank you very much, Victor. I mean, we don't here provide numbers. What we say is that we have adapted the organization, and we've continued, after the reporting period to make adjustments to changing and very volatile operating conditions. We have not reduced the network footprint, but we have made cuts in the organization, and we will continue, Victor, to be responsive to how the situation develops and changes. I think that's what we can say at this point.
Yeah. Understood. On contracting services, perhaps to follow up on Adrian here, are you able to continue with contracting services? As I believe your efficiency could suffer without any new equipment or spare parts from Volvo Group. Would it be possible to perhaps exit your current contracts, which are going well into 2023, as you mentioned, and beyond, or what's happening here? Finally, on this topic, are you mainly using Volvo machinery, or are you using a lot of other equipment as well, perhaps if you have a split?
Yeah. I mean, it's very difficult to answer how we can see the future in these conditions that we are operating in. At the moment, yes, we can continue contracting services. Clearly as time goes, you're right that if we can't replace all the machines, it will have an effect on the productivity. Of course, contracting services main, so to speak, business concept is to have a high productivity. The vast majority of the machinery that we have in contracting services are Volvo machines. There are some other auxiliary equipment, for instance, and products that Volvo might not produce that are from other brands.
As it stands now, the vast majority are Volvo machines, yes.
Okay. Thank you. That's helpful, Lars. On Germany here, I believe you currently have a long-term target of a 5% operating margin. I'm wondering how much further outlet expansion would you say is needed to reach this target? I assume that there are efficiency and volume components to this to reach this target as well. Would it be possible to get a rough bridge or some sort of walkthrough on how you are planning to reach this 5% target?
I think, Victor, first thing, I don't think we actually gave ever a specific EBIT target. I think it's been backed out from our financial objectives when we changed those when we entered into Germany. But of course we do expect to move higher on the EBIT. Now, to get there when it comes to the strategy, the core of that is really to take a bigger share of the aftermarket in the area where we operate. To do that, in turn, we need to further build out the network. I understand you would like sort of a number of outlets.
It depends a bit on how we build the network. You know, it may be that we can provide more transparency on that at some point. At this time now, I would say that what we can say is that if you look at the map, there are points where we're not, and we need to be, and we need to have presence there. How many workshops there will be depends a bit on the format of those workshops. You can work in different, how do we say, strategies there. You can have bigger hubs serving a bigger area or a bigger number of smaller workshops. I think that depends.
I think you may be driving towards CapEx as well, over time, and that is also the reason why we have never specified that, is we want to help the market understand. It depends also if we do greenfield or if we acquire or if we lease something existing. Maybe there what we could indicate is that I think when it comes to acquisitions, we probably over these past two years found sort of the locations that we thought we had to purchase because they were in very strategic locations, and we needed those. Probably what's more left is more of greenfield slash leased current stations. I think that's what I can say now, Victor.
Of course, we expect there to be meaningful scale benefits of growing the top line. That's both in terms of new truck sales, of course, to build the population and build that aftermarket. Maybe more so from growing the aftermarket where the margins are also better.
Let me add there also. I mean, one very important part of the strategy to capture more aftermarket is actually to apply mobile service that is very, very common within the construction equipment also to trucks and basing in bigger hubs and actually going out to customers, serving customers on site, which is of course a very good offer, particularly for instance construction customers that are used to us for many years from working with construction equipment. We are entering into doing that in Germany to additionally reach a better coverage for our customers.
Yeah. That's very helpful. A follow-up on Germany here. Would you say that sale-leasebacks of your real estate that you acquired is an option here to improve the balance sheet if needed to?
Victor, I mean, I would say it is an option. We always look at opportunity to optimize our funding costs. Yes, it is one of many options that we would consider.
Great. Just a final question. Perhaps if you could remind us on what the leverage level your loan covenants are based on?
I don't think we have disclosed that, Victor. I think maybe for you, maybe more to look at the current financial objectives. I think it's reasonable for you to assume that they would be in line with our financial objectives.
Yeah. That's helpful. I had to try. Thanks a lot, Lars and Erik.
Yeah. Thanks, Victor.
Thank you. The next question comes from Kenneth Toll Johansson from Carnegie. Please go ahead.
Yeah. Thank you. A lot of questions have been asked, but what are the possibilities to bring on the new brands in Russia? I mean, there are producers of construction equipment that are based in countries that are not sanctioning Russia, such as China, for example. I know that those products coming out of China are very, very different from the Volvo products that you are used to work with. Would that be a possibility if these sanctions drag on for a very, very long time?
Well, first of all, Kenneth, as an EU company, we must abide by the EU rules and regulations, and
Mm-hmm
By the undertakings entailed by our agreements and with our suppliers. With regards to products that are not sanctioned by EU, we're in close dialogue, obviously, with our existing partners on potential changes to the portfolio. That's probably what I can say.
The Kazakhstan operations, when you moved in there, you said that this is like adding another region to Russia because there were trade agreements and same yeah the same language and everything. But if it becomes harder and harder to operate in Russia, would it be possible to operate the Kazakhstan operations a standalone apart from Russia? And would it be possible to get such operations profitable in such a case?
Yeah. I mean, we see a good traction on our business in Kazakhstan. We're developing that, we're expanding that. We're taking market shares, we're getting the brand known, both the Volvo brand but also the Ferronordic brand. Yes, it can operate standalone and yes, it can standalone be a profitable market. I think we've more or less built the platform in Kazakhstan, but it's going in a good direction. Yes, the answer is yes.
Okay. That's all for me. Wish you very good luck.
Thank you.
Thank you, Kenneth.
Thank you very much, ladies and gentlemen. Let me remind you again, if you want to ask a question, please press zero one on your telephone keypad. Thank you. The next question comes from Heinz Depier from Investor AM. Please go ahead.
Yes. Hello. Good morning. Thank you for taking my question. I just wanted a little bit clarification. It's a little bit unclear for me. Because the sales in April were still quite good. Are these sales then mostly coming just from your inventory?
The sales are coming from the inventories and from suppliers that continue to deliver to Russia. Yes.
Yeah.
Most of the sales are from inventories, yes.
Yes. I don't know if you can clarify on that because Volvo is your largest supplier.
Mm-hmm.
They don't want to supply to Russia anymore. Are they the only ones or do you have other suppliers who also don't want to supply Russia anymore?
We have other suppliers as well that have suspended deliveries. Yes.
Is it correct to assume that if the current situation stays like this for a long time, 'cause sales are now still quite good concerning how bad the situation actually is? Is it in a couple of quarters that we can assume there will be like a sales cliff or steep drop in sales once all inventories are depleted?
I mean, I think we say in the report that we do expect, in the current operating environment, sales to decline as the inventory decline. That's the environment we're currently working on.
Okay.
To some extent they're compensated by the suppliers we have, suppliers that continue to supply to Russia. Maybe some increase there. Again, the current inventory, yes, will.
Yeah.
The sales will decrease as the inventory declines.
Can you share with us the percentage of revenue that comes from suppliers which have suspended deliveries to Russia?
No, I don't think that's something we disclose here. I think what I could maybe, I mean, point towards would be for you to have a look at the annual report where we show sales that would be in 2021, so it wouldn't be directly applicable, but you would get a sense, a good sense I think, of the product and supplier mix that we have. You may be able to form an opinion.
Okay. Thank you. Concerning the limitations on payments, is it still possible for you to transfer money to Sweden or outside of Russia, or are you also limited there?
When it comes to payments, maybe to start in Russia. The payment system is restricted in various ways. When it comes to Russia, we can make payments, receive payments, et cetera. Some banks have been restricted by the regulations. In that case, we had found ways to work with our client base through different channels. When it comes to international transfers, the current account is open, so to say, to pay for services and products. That's still possible, so we can make international payments in all currencies there. When it comes to the capital account, so meaning debt and dividends, there are restrictions, and they are complex, and it comes down to case by case reviewing.
That's more complex.
That's then more limitations imposed by Russia itself then?
Correct.
Mm-hmm.
Those are from inside Russia. I mean, when it comes to restrictions in Russia, that's more driven by EU regulations.
Because I did not fully understand, I think the question was asked before, my apologies. I had a bit of a difficult line then. You expect the German market or your German business to be a bit positive for the entire 2022?
That's correct, yes.
Okay. Yeah. Okay. No, very good. I have no further questions at the moment. Thank you.
Thank you.
Thank you. There are no further questions at this time. Dear speakers, back to you.
Okay. Thank you very much for listening in to this presentation. I would certainly have hoped that we would have this conference under other circumstances than we see. Again, we're working with all contingencies and looking at all options for our business in Russia. Let's hope everything will work out. Thank you very much.