The conference is now being recorded.
Welcome to Ferronordic's quarterly report 2022. Throughout the call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. If you wish to ask a question, please press zero one on your telephone keypad. Today I'm pleased to present CEO Lars Corneliusson and CFO Erik Danemar. Please begin your meeting.
All right. Good morning, everybody. This is Lars Corneliusson here, and welcome to this conference on the second quarter 2022 for Ferronordic. If we move to slide two, we have as a headline for this evaluating strategic options, obviously for the group concerning our business in Russia. It's obviously heavily impacted by the conflict in Ukraine. As we wrote in the first quarter report, troubled times, and they have continued, and they have become increasingly worse, and the environment is difficult to operate in. Despite that, we saw during the quarter revenue growth of 6% for the group to almost SEK 1.7 billion, and this was partly due to currency effects. We will come back to those effects later.
As you can see, Russia/CIS, our equipment sales in units actually decreased by 64%. Revenue in local currency decreased by 20%, but again, thanks to currency and strong ruble, it increased 5% then in Swedish krona. In Germany, truck sales in units decreased by 4% in a market that declined 6%. Revenue increased 12%, again, partly due to FX, but also strong used truck sales and growth in aftermarket sales. We are further promoting and investing into electric trucks. If we go to slide three, please. As we said, evaluating our strategic options, the conditions for our business in Russia have continued to deteriorate. Further sanctions have been introduced and Volvo and other of our key partners keep sales to Russia suspended.
Obviously, we take all measures to ensure that our operations in Russia comply with applicable laws. However, where permitted, we have continued to service our customers. However, going forward, it's actually questionable whether Ferronordic, we are able to continue meaningful operations in Russia, and taking this in mind, we're obviously evaluating all strategic options for the Russian business, and that includes partial or full divestment or downsizing and continuing on a more limited scale. Well, we're targeting the quarter to ensure that any negative effects from the Russian business will not spill over on our businesses elsewhere. It's good to see, though, that our businesses in Kazakhstan and Germany are developing well, and we continue to strengthen our positions in these markets.
In Germany, we are indeed marketing electric trucks from both Volvo and Renault Trucks, and we're about to launch a rental business for electric trucks in Germany. Obviously, in this situation, we continue to look for both product, service and market opportunities to grow the business, obviously outside of Russia. Take on slide four a bit more deep dive into the financials. As I said, the group revenue SEK 1.7 billion. Russia revenue down 20% local currency, but 5% up in SEK to SEK 1.3 billion. Equipment sales down 32% in SEK, actually 48% in rubles, and you see here what the currency is giving us.
Aftermarket sales up 43%, plus 10 in rubles, and contracting services was very strong, with a growth of 98% in Swedish krona and 52% in rubles. Obviously, this is related to that last year's comparison numbers. We were ramping up some projects during last year, and now we see these comparables. German revenue plus 12% to SEK 375 million, and equipment sales was flat more or less. Aftermarket sales up 28%. The group operating profit increased by 2% to SEK 147 million, of which SEK 157 million came from Russia and CIS. German operating profit also increased to -SEK 10 million from -SEK 30 million last year. Operating margin of 8.7%.
Erik will talk about the reason for the 63% decrease in earnings per share. Net debt higher on high working capital and currency effects. The net debt then on, of around SEK 700 million or 0.9 times EBITDA. If we can move to slide number five. What has happened in Russia from an operational standpoint in the quarter is that the market, overall market for construction equipment declined by 37%. What we saw after 24th of February and into April in Q2, we saw a strong demand and prices remaining firm, obviously, partly supported by customers' efforts to manage risks from ruble volatility, inflation, and supply constraints. Since then, however, the market has declined due to restricted supply and lower demand.
That you can then see in our new machine sales in units, which decreased by 64%. We expect sales to continue to decline as our sellable inventories decline and new restrictions take effect. Again, we take all measures to ensure that our business complies with the applicable sanction laws and regulations. Aftermarket activity was stable, as we could see, it's slight growth there, and production continuing contracting services. As I've said, compared to last year, it's mainly due to growth of business in the second half of last year and also, of course, currency effects. Moving to slide six, Germany, as I said, market for heavy trucks declined by 6%, reduced by 16%, and tractors grew by 3%. Supply remained constrained, which held back market growth.
Obviously, rising inflation and energy prices, higher interest rates, and weakened business indicators are obviously also affecting the business sentiment in Germany. For instance, the manufacturing PMI declined through the quarter as order levels decreased. If we talk about our own area, new trucks registered decreased by 9% and then represented 18% of the total German market. Whereas we then decreased by 4% to 206 units, and obviously we continue then to take market shares for Volvo Trucks in the quarter. Aftermarket sales increased by 28%, of which 11% was organic growth and the rest from acquisitions made. And gross margin increased to 9.7%. We take slide seven, more on business development.
In Germany, as I said, marketing electric trucks from both Volvo and Renault Trucks, we are in the midst of launching a rental business for electric trucks with a vision to offer sustainable transport services to our customers. We think that this is a good way to go to market for e-mobility and show what electric trucks can do. We are continuing to invest into our network and organization, and we started operations in a new workshop for us in Bad Hersfeld. On the next slide, number eight, you can see the map where we are today in Germany and how we have expanded the network. Since we took it over then from Volvo in the beginning of 2020, 10 outlets, and we are now at 16 outlets.
The last one then which we opened in March, and sales started in Q2, is in Bad Hersfeld. We have then added Fulda, Limburg, Nordhausen, Wetzlar, Saarbrücken, and Bad Hersfeld. We are hopefully then we should open in Q3 our new greenfield service and sales hub in Hanover. All in all, we have six, as we speak, 16 Nordic outlets in Germany. With that, I hand over to Erik to continue on slide number nine with economic developments. Please go ahead, Erik.
Thank you very much, Lars. Yes. I will start with the macroeconomic context in which we're working when we are making these strategic considerations that Lars has mentioned for the business overall and for our activities in Russia. In Q2, we see GDP down 4%, that's according to the Ministry of the Economy, probably less down than expected. IMF expects the full year to be down 6%. We have an expectation for the next year of a decline of 3.5%. Inflation has abated somewhat.
It was up at 20% in the first quarter, now down to just below 16%, which still is almost 10% points above where it was last year. The Central Bank has reacted to that. You recall there was an aggressive rising of rates to 20% in Q1, and since then the rates have come down. In the second quarter to 9.5%, and then after the reporting period, another 1.5%- 8%. The ruble has moved significantly. We saw it weaken sharply in the first quarter, beginning of the second quarter, but then strengthen.
This is important to how the numbers look in both income statement, but even more so on the balance sheet, where there really was a strong point on the ruble on the thirtieth of June. As you can see, we mentioned here a 44% strengthening of the ruble quarter-over-quarter, so between the thirty-first of March and the thirtieth of June. 41% year-over-year. If we look at the average rate, which is applied to the translation of the income statement, that's also 24% stronger. A very meaningful effect there as well.
The markets where our business is growing and developing well, as Lars mentioned, we see support also from the economy in Kazakhstan, 3.4% reported in the first half of this year, 2.3% expected for the full year and a further growth in the year to come expected at 4.4%. That creates some good backdrop for the growth that we have in mind for the business there. In Germany, 1.5% in second quarter. The growth forecasts have been revised lower there, but we are still in growth territory and 1.2% expected in the full year, and then a lower 0.8% in the year to follow in 2023.
If we move on to the next slide, number 11, give you an overview in our standard format of the income statement. Again, a revenue slightly short of SEK 1.7 billion, that's +6%, but again, a meaningful foreign exchange translation effect there. The Russian business actually down 20% in local currency, but then up 5% in Swedish krona. Revenue mix between the segments still remain roughly where it has been, partly driven by lower sales of trucks in Germany. We will see that shift towards Germany going forward. As we said, we expect lower sales from Russia, of course, going forward as a result of inventories and restrictions that apply.
Mix of revenue reflects a different picture also in the segments, but above all Russia, where again the new and used equipment sales have declined. On a group basis, we see about half, 46% in the first quarter that was 65% from equipment and trucks and 28% aftermarket. So that coming up, that was 23%. Then contracting services making up 24% versus 10% in the first quarter. Again, FX important factors there. Then as Lars mentioned also, when it comes to contracting services, we did ramp up in the second half of last year. There is a low base number there as well.
As a result of that shift in mix as an important driver, we see slightly higher gross margin. SG&A as a % of revenue is also slightly higher there. Again, there are important currency effect translation. In Germany, as we know, we have integrated new businesses as we expanded in 2021, which also has a at least temporary effect during the integration phase there. Operating margin declined. We did take additional provisions in Russia of almost SEK 100 million, SEK 99 million. And that's mostly relating to receivables, doubtful receivables and to some extent to inventory as well. Operating profit largely flat on last year.
We had a significant foreign exchange loss in the quarter, SEK 81 million. That is a result of the stronger ruble. We have discussed before our currency exposure, our matching of payables with receivables and inventory in Russia. As it were, we have had payables from our Kazakh entity in rubles. Not anymore. Any new orders after February were invoiced in US dollars or to a lesser extent euros. Outstanding payables were in rubles and the correlation which was very strong between the Kazakh tenge and the ruble did break down in this quarter.
We saw the ruble strengthening against the tenge causing this big part of this loss in the second quarter. We note that in the subsequent event that the ruble has since lost some ground about 20% from the closing date, 30th of June up until this reporting date. Some of that would be reversed. Again, that's what's really the key driver of that FX loss that we see. If we move on to cash flows on slide number 15, we see a decrease in cash flows to SEK 39 million. That's operating cash flows for the group partly driven by an increase in working capital.
That in turn is driven by a reduction in payables that outpaced reduction in inventory, and we also saw an increase in receivables. We have, as Lars mentioned, made efforts to isolate Russia from the rest of the group, so that there is no spillover effect. Part of that has been settling payables as speedily as practical for us. Again, that is one part of the driver of the increase in working capital, which in turn impacts the free cash flow, of course. If we look at investments in the quarter, it relates to trucks in Germany, and then also to machines and contracting services.
Here I note also that the machines to contracting services are shown as investment flows when they're paid for to the supplier. So not actually when they're delivered. So meaning that the payment that went through as these payables, as we settled, are for machines that were ordered some time ago for delivering on projects that were agreed upon again previous year. If we move onward to next slide, briefly on balance sheet. Again, I want to stress here that you will see the currency effects. Some of the increases in the group balances are really driven by that 44%.
If we look quarter-on-quarter, strengthening of the Russian ruble against the Swedish krona 41% year-on-year as well. That explains really most of the PPE increase to some extent net working capital as well. But as we discussed, that's also the effect that I just noted that we pay down payables more quickly than inventories decreased. Also we saw some increase in receivables. In Germany also a less significant but also an increase in net working capital, which balances to the group level there of 14% of LTM revenue versus 3% where we were.
In net debt then at SEK 712 million or 0.9x LTM EBITDA. With that, we can move to next slide, which is really an extract from the report where we make additional disclosure. What we bring to the market there, given the turbulent situation and big uncertainty that surrounds the Russian business. Here we show balance sheet standalone Russia so without Kazakhstan or any allocations. For the first quarter, second quarter, and also for the preliminary balance sheet for the 31st of July. This is preliminary and subject to change. This is what we see.
You note here also the 20% change in the exchange rate from 5.04- 6.03 since the end of the quarter. That's one of the determinants of the balance sheet positions here. You will see a general trend of especially machine inventory decreasing and reaching indeed quite low levels. Parts staying up a bit higher in the inventory situation here. You will also see the movement in PPE partly driven by the exchange rate. There is also preliminary sales for July.
Again, it drives home the decline in unit sales as well as sales overall in the business and, as flagged, we do expect this trend to continue. On the next slide, you will really see the Q2 table that we just saw on the previous slide in a ladder presentation, just to show you a illustration of the NAV as we have it at the moment with the cash and equivalents, receivables that we have at the moment, and then new and used machine inventory being a smaller part, and then parts and other inventory, which includes attachments, being a bigger part.
You have PPE and contracting services, which is really mainly the machines in contracting services, but also to some extent the car pool and some of the equipment and facilities they use there. On the other side of this balance sheet, you will see the matching labels that we had outstanding at that point. Again, this is in Swedish krona, so worth bearing in mind that there is a meaningful FX effect in these numbers. The borrowings that support the contracting services business and as well as other borrowings and also leases at the end there. If we move to the next slide, we keep our slide on our financial objectives and dividend policy.
We say that this is subject to potential review. We mentioned this in the first quarter report already that given the big changes in our operating and strategic environment, these are likely to change when we have more visibility on where we're going in the Russian business. As it was at the end of this quarter, we were at 1.5x 2020 revenue and still above our operating margin target and also well within our leverage target. With that, Lars, I give the word back to you for something on the outlook.
Yeah. If we can turn the slide to outlook then, obviously, there's a prospect for our operations in Russia that they continue to deteriorate. Business conditions are becoming increasingly difficult. As we have mentioned, we are exploring all strategic options. Operations in Kazakhstan, they continue, but they're so far a smaller part of the sales. In Germany, we believe that a recovery from the pandemic may lead to increased demand for trucks or service. However, the geopolitical situation and higher energy prices may also affect the German economy. In a longer perspective, we believe that the underlying conditions and business opportunities in the Kazakh and German markets remain strong. By that, I'm handing over to questions, please.
Thank you. If you wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two. Our first question comes from Adrian Gilani, ABG. Please go ahead. Your line is now open.
Hi, it's Adrian here at ABG. I'd like to start off by asking, when you say that it's becoming more difficult to conduct operations in Russia, does that also include it being more difficult to make payments within the country as well as to and from the country?
Maybe I'll start there, Lars. Within the country, I would say it's still not a big problem. We can make payments within the country. As you know, Adrian, there are a lot of banks that are restricted and fully blocked. With those banks, we can have nothing to do. There are limitations there, but there are still several other banks that are operating in a normal fashion, like UniCredit and Raiffeisen and banks in Petersburg, et cetera. There are channels to facilitate payments in Russia. International payments are more restricted and more procedural.
Okay. As a follow-up to that, there's fairly significant increase in receivables in Russia. Should we take that to believe that that's not a result of your customers not being able to make payments?
No. It's not sort of a effect of them not being able in the financial system to make payments. I mean, except for the currency effect that you will have there as well, of course, there we have a growth in receivables. We have made sort of additional provisions for receivables. In general, if one would sort of look back, then so far customers are still paying and we do collect receivables. It's not driven by the system. That's what I would say.
Okay. Thank you. Also on the contracting services side, I mean, productivity seems to be holding up fairly well so far there, but you have flagged that this could deteriorate over time. Is this something we're gonna see already in Q3, this sort of decreased efficiency, or will it take longer?
Well, it will decrease over time, most likely. I don't believe we will see something short term, but over time it will happen.
Okay. A fairly specific question. You used the phrasing sellable inventory as opposed to just inventory, in the report and in the presentation.
Mm-hmm.
Should we assume that not all of the remaining inventory in Russia is sellable due to sanctions? If so, how much of the inventory is not sellable?
Well, you're correct in the word sellable that we do have certain inventory that are not sellable. How much that is, we don't disclose it. It's not a majority, for sure.
I mean, where Adrian, where we concretely know that there are things that are restricted then, that's provided for, so that wouldn't be a part. I think a challenge is for you and for us is that the rules are changing very rapidly. So you know, it's quite uncertain how the future will look. If we look at the moment, then you know, we provide for what we know we cannot or we are restricted on.
It is fair to assume that it's a relatively small percentage that's not sellable.
At the moment, yeah.
Yeah. Looking at Germany, if new unit sales were to slow down, which is looking like it might happen, are you sort of nearing a point with your current workshop network where you're able to absorb those lost equipment sales with higher aftermarket sales, as you have been able to do in Russia previously? Or do you still have to sort of build out that workshop network before you reach good absorption rates?
No, we're on a good track, Adrian. We can't really say what level we are at. Of course, the more we build it out, the higher that level becomes. We also do have some capacity within those workshops to take on and sell more service hours and parts. We also then have a good used business and a rental business on top of that, which is working fine. We're getting closer to breakeven in Germany, even if the truck sales would go down, which we so far is restricted by supply, not. We haven't yet seen any demand issues.
The supply is really continuously the issue.
Okay. Just a final one from my end. You might have mentioned this during the presentation, and I might have missed it, but is the profitability timeline for Germany still the same regarding wanting to be profitable this year in Germany?
Yeah. We're hoping to break even during the second half or to reach a point, breakeven point when we break even in Germany, yes, in the second half.
Okay. Those were all of my questions, so thank you.
Thank you.
Thank you. Our next question comes from Kenneth Toll Johansson, Carnegie. Please go ahead. Your line is now open.
Thank you. If I understand it correctly, you took this write-down of SEK 99 million. If we correct for that and look at the adjusted earnings, they were very strong actually. Where does this strength come from in Russia? Is it very good profitability on spare parts?
Take that, Erik Danemar.
Yeah, I can jump in there then. Yeah. Thank you. Thank you, Kenneth. I think if you look what you have is a shift in the revenue mix towards the revenue activities, contracting services and aftermarket, which traditionally have higher margin. On top of that, you also have the currency effect which worked to sort of increase the volume or the revenue in this quarter.
I think really those two factors and then probably also in the beginning of the quarter when most of actually the equipment sales that were done in the beginning of the quarter, the prices were quite elevated as well.
Mm. Mm-hmm. Yeah.
A hypothetical question. You're saying that you work on sort of separating the Russian business from the rest of the operations. I guess that would be from a sort of legal and economic way and so on. Do you think it would be possible if all options run out to put the Russian operations, sorry, in bankruptcy without sort of affecting the financials of the rest of the business?
That is indeed what we are working towards and to make sure that any ties from the Russian business guarantees that stretch over the group are cut so that the rest of the group is not affected by development in Russia.
Mm-hmm.
We are working hard on that. I think It's usually hard. We are cautious, as you know, Kenneth, in making any forecasts, even in
Mm-hmm.
a stable environment.
Mm-hmm.
It is very much not a stable environment where we're operating in. Rules of the game are changing day by day. That's why I would be cautious to comment on the prospects for how that would develop.
Mm-hmm. Okay. Yeah. Thank you.
Yeah. I think maybe, Kenneth, just to comment, one of the things we try to do for the market is to provide the NAV for Russia itself, as it stood, and then also preliminary for thirty-first of July to give you a sense.
Mm-hmm.
On where we are. There are, again, to Adrian's question also about what can be monetized and what cannot. These rules are changing very rapidly, so there are a lot of uncertainties there.
Mm-hmm.
We try to provide sort of the visibility that you can use as much as possible.
Mm-hmm. Mm-hmm. Yeah. Great. Thanks.
Thank you. Our next question comes from Victor Hanson of Hoover.
Please go ahead. Your line is now open.
Thank you. Hi Lars and Erik. Victor here. Firstly, you mentioned that you are exploring new opportunities to grow your business, and I was hoping you could elaborate on what kind of services, products, and new markets you are considering.
Yeah, well, we are looking at opportunities. We cannot say any specifics on that at this stage. Obviously, as the situation is as it is, we are kind of increasing the tempo in looking for other opportunities. We'll come back when those might be materialized obviously. At the same time, as we are doing everything we do in Russia, obviously we're looking outside Russia to see where we can grow our business.
Yeah, that's understandable. Do you have a timeframe in mind for your strategic evaluation regarding the Russian operations?
It's, as Erik has mentioned, and I probably have mentioned also, the environment is extremely, how should we call it? Vulnerable and uncertain. Rule changes, restrictions added, so it's very difficult to give a timeline. Obviously, we want to be able to do it as soon as possible. Within this environment, it would be probably unwise even to try to have a timeline on it. It's very uncertain, really.
Yeah. That's understood. Understandable. Yeah. You mentioned you're isolating the Russian operations. Has this resulted in any meaningful increase in your OpEx run rate?
No, I wouldn't say so. Probably not at all meaningfully. I mean, it's really more of a question on how we structure the business from a financial and, to a lesser extent at this point, legal point of view. It's not a big driver of OpEx at this point.
Switching over to CapEx, in the quarter, it was SEK 89 million related to Russia. I'm wondering here, are you continuously investing in additional machines for your contracting services operations, or is this mainly payments for already delivered machines? How should we view this?
It's the latter, Victor. I mean, I think actually if you go back to the last year reports, the quarter reports, and you go into the group cash flow section, it's something that we've described there that the way the investment outflows is shown in the cash flow statement when the payment goes through to the supplier. That's what I try to stress also in the presentation there that these are machines that were delivered last year really, possibly in the beginning of this year, but I think it was last year.
I mean, if nothing else, as you know, yeah, Volvo stopped deliveries after the conflict broke out, so there are no more deliveries coming in. These are our payments for previously delivered, and they were delivered or to create capacity for projects that were previously agreed on in terms of our production capacity.
Okay. Understood. On CapEx in Germany, it would be interesting to know the split between your greenfield investment and your truck rental business that you mentioned CapEx in.
Yeah. I don't think we give that a breakdown, exactly. Maybe that's something we can get back to provide to the market more detail there. At this point we haven't given that yet.
Okay. Finally, perhaps a further clarification on what you spoke about and what you also wrote, Lars, regarding the profitability in Germany.
Mm-hmm.
Are you targeting a positive EBIT for the full year 2022, or are you targeting a positive EBIT in either Q3 or Q4 standalone?
We're targeting an EBIT breakeven point in the second half of the year. Yeah. Not for the full year, due to the results that we've had so far in the year.
Okay. H2 combined Q3 and Q4 positive EBITs, or at least, zero. Okay. Understood.
Yeah.
Well, we should break even at some point in time during the second half of the year. That's the target.
Okay. It's more of the run rate.
Yeah.
Yeah.
Okay. Understood. Thank you.
Thank you. There are no further questions at this time. I hand over the word to the speakers for any closing remarks.
Yes. Okay. Thank you very much for listening in, and thank you for your questions. We can't answer all of them. Visibility is low, as you can perfectly well understand. Thanks again, and we will see you and hear you all, next quarter. Thank you very much.