Welcome to the Ferronordic Q3 presentation for 2023. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now, I will hand the conference over to the CEO, Lars Corneliusson, and CFO, Erik Danemar. Please begin your meeting. Please begin your meeting. This call is being recorded.
Good morning, everybody. I hope this works now. This is Lars Corneliusson, the CEO of Ferronordic. With me, I have Erik Danemar, CFO. We wanted to present to you the results of the third quarter for us in 2023, and also talk more about our recent acquisition of a major US dealer, which we will talk about after the presentation of the third quarter. If we then look at the quarter as such, we call it weak operationally, but it was key strategically. We then, as a subsequent event, had the acquisition of the Volvo Construction Equipment dealer, Rudd Equipment, in the US. As for the quarter, the group, we had 56% increase in revenue, and both operating segments.
However, we had low margins, we had high costs, and we had higher working capital, and this resulted in a operating loss of SEK 28 million and an operating margin which decreased to -4.4%. In Germany, sales of new trucks and units increased by 45%, which was in line with the market. But we had a negative operating profit of SEK -16 million and an operating margin of -2.8%. Good news is, however, that we will receive the first subsidies for electric trucks. We expect here now in end of November. In Central Asia, Kazakhstan, our unit sales increased by 6% in a market that decreased by 15%. Operating profit of SEK 0 and we continue our efforts to offer contracting services in Central Asia.
Again, it was a tough quarter for us, disappointing quarter, but transformational. We, on November thirteenth, we then agreed to acquire the Rudd Equipment Company, a major dealer of Volvo construction equipment and other certain brands in the US. In 2022, Rudd had revenue of just above $300 million and an operating result of $16.5 million. Obviously, this is a transformative transaction for us, first step into the important US market, and we see it as a big step towards rebuilding Ferronordic as a leading service and sales company, and also a major partner to our to Volvo, obviously. However, in current markets, it was a disappointing quarter.
We had good sales growth, however, that was less than what we had hoped for and expected, and with lower growth margins and higher costs. Then after 2 quarters of positive operating profits, Germany slipped back to a negative operating result, unfortunately. In Kazakhstan, the operating result decreased to break even. So in line with weakening markets and slow economy in Germany, mainly, we have then taken measures to reduce the group's costs and to reduce our working capital to improve our resilience. Most of these cost cuts will be in Germany, and they will affect mainly administrative functions. We expect these measures to become visible and the effects of them in 2024. However, we remain convinced that the long-term potential in Germany and Kazakhstan is very strong.
We touch quickly upon the financials again. Again, group revenue up 56% to SEK 646 million. German revenue up 60% in krona, 44% in euro. Truck sales, 88% and very, and importantly, aftermarket sales up 27% in Swedish krona. In also in Kazakhstan, we had a revenue increase of 30%, 23% in local currency. And so good growth in equipment sales, less growth in aftermarket sales. We'll talk a little more about that later. But then, group operating profit of -SEK 28 million. And still, the strong balance sheet provides options for us. We had, 62% equity to total assets and a net cash at SEK 378 million. A little on the German operations.
The market again, up 45% in Q3 compared to 2022. Tractors by 50% and rigids grew by 40%. Obviously, the market grew mainly as supply then improved and, and, you know, meet now the pent-up demand that we have seen, for a long, long time, and, and, this is what is driving the registrations at the moment. We had a slightly higher increase in, in new trucks registered in our sales area, increased by 64%, and represented 20% of the total German market. And, and then our, increase was, was, 57%, 232 units, heavy, heavy vehicles. Used sales, very strong also at 72 units to 103.
However, obviously in a market that is weakening, there is a pressure on margins in the used business, and that we have noticed during the quarter. Aftermarket sales grew 27%, both on a combination of organic growth of approximately 14% and acquisitions. Again, product mix and price realization issues pushed the gross margin down from 13.5% to 11.5%. In Central Asia, Kazakhstan, the market for construction equipment is supported by the growing role of Kazakhstan as regional hub, strong commodity prices and, interestingly and very encouragingly, big infrastructure projects on the way. We see good traction on the road construction segment where we are strong.
And if we exclude then the smaller Chinese wheel loaders, the Kazakh market for construction equipment, we estimate or mainly maybe, even, a slowdown, due to a slowdown in the mining sector, which is actually driven by less demand from China. Our new machine sales increased by 6% to 17. We also sold 17 used construction equipment that increased by 89%. And equipment sales, 41% up, which is a strong product mix there. Aftermarket sales increased by 4%. There were some issues in the quarter with our mining customers, we hope that that will be resolved during this quarter. The gross margin decreased to 13.7%, due to change in revenue and product mix.
We are still very intensively continuing to explore potential project work for contracting services, which we have had a very successful experience of running before, and we see very long-term potential for contracting services in Kazakhstan. As for business development, we in Germany started operations in a new workshop in Northeim in October 2023. In the E-trucks business, in E-rental, we rented out our first heavy duty tractors in our fleet. And our E-trucks then became eligible for the THG quota, which is basically greenhouse gas quota, which are emission rights, more or less, that we could trade for the savings that we make in our own fleet. And obviously, we launched a cost optimization program.
In Kazakhstan, again, road construction high on the agenda, and we arranged a joint second customer event for customers in Hameln, in Germany, where the asphalt pavers are produced, ABG ones. We have good traction there and we had a metals and mining conference in Almaty, and again, keep exploring opportunities for contracting services. And for the group, as we will talk more about, we acquired the Rudd Equipment Company in the U.S., and we continue to look for new expansion in market and business opportunities. So if we take a look at the German network as it looks now, we have then added Northeim to the list, and we are now looking in 22 outlets in Germany.
As for Kazakhstan, we are currently operating seven outlets in the main areas of economic activity in Kazakhstan, and we are looking for opportunities where we can expand there further in Kazakhstan. So by that, I hand over to Erik for a bit more economic development.
Thank you, Lars. Looking first at the macro picture, as we usually do, Germany has slowed over the year. GDP in negative territory, +0.2% in Q1, -0.4% in Q2, and now likely in Q3, -0.8%, so close to -1%. That said, only -0.1% is expected for the full year so far, which could imply an improvement in Q4, which we are yet to see any signs of. In 2024, positive growth is expected from the lower than base in 2023 in the German economy. Speaking of some maybe nascent positive signs, inflation, as you will probably be aware, has come down.
So from 8% or 7.9 in 2022, it measured 3.8 in October, and eurozone area was down at 2.9. Potentially giving some more leeway for Miss Lagarde and the ECB. Manufacturing PMI and IFO Business Climate in October, so after the end of the period, also showed some positive signs, turning a corner. We hope that will translate into more sustainable improvement in the economy, but we will see going forward. Again, we did see lower activity in Q3, noticeably.
Looking at Kazakhstan, a different macroeconomic picture, even if the market there, in terms of equipment, construction equipment, as Lars mentioned, was down, but 4.6% GDP growth expected in 2023, and 4.2% growth in 2024. Inflation rate there also come down, but from higher levels, more than 20% in 2022, and now 10.8%, the bank keeps rates high. Funding access is an issue in Kazakhstan, including for our customers. So that's an issue that we note, and see customers struggling to raise the funding to invest in their CapEx programs. There are concerns about a slowdown in China spilling over to Kazakhstan in Central Asia.
But again, at the moment, Kazakhstan's growing role as a hub in the region is feeding macroeconomic growth. If we move to the next slide, look at our income statement. Again, Q3 2023, not a quarter that we're happy with. Looking at some of the details in the income statement, total revenue grew strongly for the group, 56% up to SEK 640 million, 89% of revenue in Germany, 11% in Kazakhstan. And product mix more or less in line, 70% equipment, 27% aftermarket and 3% other, other being mostly rental business in Germany. Gross profit clearly here, as you can see, failed to keep pace with revenues.
Revenue up 56%, but gross profit only 31% to SEK 75 million. And that's then due to a lower gross margin, which in turn is driven both to some extent by revenue mix. So revenue mix, I refer to aftermarket as share of the total aftermarket having higher gross margin than new equipment sales, but to some extent also product mix. So what products we sell in a certain quarter, and that can be volatile between the quarters, especially in construction equipment, even if that's a smaller part of the revenue stream, and then general price realization. So gross profit up 31%, and that then wasn't enough to cover the investment that we did in the organization. So SG&A up 36% if we look year-on-year. And-...
If we look also at other costs, worth noting here that, for example, credit cost is something we mentioned in the report. We had positive effects in this period last year, i.e., we reduced reserves that we had for bad debt on our receivables. We did so as well in the second quarter of this year, but in this quarter, both in Germany and Kazakhstan, we increased those reserves, so you had an opposite effect, which hit us in this quarter. Looking quarter-on-quarter, I mean, it's a similar picture, but their revenue was down 5% for the group. Gross margin also declined, and therefore, the gross profit was down 11%, while our operating costs were up 3%. So not getting the return that we had anticipated.
We said in the report, sales growth was strong, but it was not as we had planned or hoped for, nor was the gross profit margin. And as a result, now, Lars mentioned, we will take measures on the cost side, and we started in the third quarter, and we continue in the fourth quarter with that. As a result of this, our operating margin for the group as a whole declined year-on-year to -4.4%. And operating profit decreased to SEK 28 million.
And we also, looking at the net income line, carried foreign exchange losses, given the euro-based assets and the strengthening of the Swedish krona, the presentation currency and the functional currency of the parent company, as the krona strengthened, from the beginning to the end of the period, which is what's used for the balance sheet. I move to the next slide, and here is really just taken from the report as we now present the results. I remind the audience here that up until the beginning of this year, we allocated the group costs, the overheads so that the group carries starting this year, to make more clear what the underlying costs are and what the group costs are, we separate them, as you can see from this chart.
You will see that we had a decline year-on-year, but here, as we disclose in the report, there is the effect also of a reversal of a claim of about SEK 7 million. So without that, it was rather SEK 19 million here. There were other effects as well, but that was a meaningful one, so a small increase versus last year, rather. And looking at the whole group in Q3 2022, I remind you also the reference period there, that we had a one-off compensation paid from VCE in Q3 of 2022, which we adjust for in the main report. Moving to next slide, here is a trend where we were all hoping to show a continued growth in positive results. We had a positive EBIT in Germany in Q1 and Q2.
And again, not happy to see us trail down again, but we build up from this point going forward with efforts taken both on cost side, but also, of course, to grow revenue. Our SG&A, as a percentage of sales, was definitely higher in the period than we want to see, and that again will be an effort both growing the revenue side, but also trimming the costs and optimizing on the cost side of the equation. Similarly, in Kazakhstan, again, both segments were affected by some one-offs, but costs were an issue in both segments.
Credit costs, Lars mentioned mining customers having some delayed payments and that feeding on to us, and with overdues there, we took a more cautious approach, and that had contributed to increasing other costs in the quarter. Moving on to the balance sheet. Looking year-on-year, we see again a big effect of the disposal of the Russian subsidiaries on the PPE side, and so the property, plant, and equipment. Looking then at Central Asia, as we now call it, for the time being, Kazakhstan, we can see that net working capital decreased slightly from 32 to 23. That's the effect of higher revenue, but also lower inventories, slightly lower inventories and lower receivables.
In Germany, net working capital grew from 17%-22%, and that's a result of higher receivables and also lower payables. We feel that working capital is high in both segments, and as Lars mentioned, that's also initiatives that we're working on to bring that down, effects expected to be seen as with the cost program in 2024. Net debt, or in our case, net cash, decreased by SEK 161 million to SEK 378 million.
That is mainly effect of that very working capital increase for the group, but also exchange rate effects that I mentioned also were reflected in below EBIT, and here also feeding through on our cash position, given that we keep most of our cash in euros, and to some extent in dollars. The overall balance sheet remained strong with an equity to assets of 62%. Moving to the next slide, to our NAV. Less change here versus the previous quarter, 1.822, I believe it was then, so 72 below as- and that NAV equity being built by a strong cash position.
And then you will see the receivables part and inventory, which, again, is higher than we would expect at this point, part of our program to work that down. And then you have the property, plant and equipment, to a large extent being the properties in Germany, the real estate there, and also, of course, the rental fleet there. Moving to next slide, quickly on the net cash position. A decline, as we said, driven by, to the biggest extent by the increase in working capital, to a lesser extent by CapEx, that's mostly into the rental fleet in Germany, then again, FX, and also a smaller part of other effects there.
With that, I give back to you, Lars, for something on the outlook.
Yeah, thank you. Well, obviously, the uncertainty about the German economy increased during the quarter. We have seen some signs of improvement in recent weeks. However, you know, higher interest rates and inflation make customers more cautious, clearly. The market recovery seen in 2023 will likely slow down. However, as we expect, strong demand for service and spare parts. And obviously, we will adapt our organization and cost structure to a weaker market. In the longer term, we remain optimistic. Our sales area is at the heart of Europe's transport business and benefits from commercial activity across industries and countries, and we see growing interest in electric trucks, and we remain firmly committed to this promising business area and working very, very hard in promoting electro mobility.
Our operations in Kazakhstan, they continue to develop, and we see opportunities to grow our business portfolio. The demand for construction equipment is supported by Kazakhstan's growing role as a regional hub, infrastructure projects and commodity prices. We're obviously excited about the great opportunities in the important U.S. market. The U.S. market is supported by a dynamic economy and strategic infrastructure projects, and we believe that the underlying conditions and business opportunities in all our markets are strong.
With that, we would like to proceed to speak about our exciting developments across the plant.
Yeah. So, we'll do that, and we're very happy to then announce that we are entering the United States, where we have entered into agreement to purchase 100% of the shares of Rudd Equipment Company, which is one of the largest dealers of all the construction equipment in the United States. And for those of you who have been with us for a long time, you remember that geographic expansion was always a strategic objective for Ferronordic. And following the successful sale of our Russian business at the end of 2022, we have been even more intensely looking for opportunities to expand geographically in different regions and mainly then in developed markets.
The U.S. is the world's second largest market for construction equipment, and there is substantial infrastructure investment programs going on and will hopefully go on for many years. Rudd is a great strategic fit for us, which provides significant scale and a good platform in the U.S. So the acquisition of Rudd gives us a strong base in the dynamic markets and also opens potential to expand further in North America. We see this as a first, this transaction as a first major step to rebuild Ferronordic as a leading business sales company and further build on our strong partnership with Volvo Construction Equipment. Then we have for a long time now been leadership in the market for construction equipment and trucks. We want to expand and develop our contracting services business.
We want to have industry-leading digital service and sales platform. We have always said that our strategic objective is to have an aftermarket absorption rate of at least one, meaning that the profit we make from the very important aftermarket should cover our fixed costs. We want to expand into related business areas, and obviously, we want to expand geographically. The strategic cornerstones for us for doing that is customer orientation, customer centricity, leading service and product availability, and tailored customer solutions, superior infrastructure, and build on the strong brand that Volvo is. It's a world-leading manufacturer of trucks and construction equipment, has a very strong brand position, and then we want to develop through additional strong brands, and Rudd fits this very, very well as well.
Operational excellence, safety, and sustainability, continuous improvement of our practices and processes, and business-driven digital service and sales processes, and close cooperation with manufacturers, and probably one of the most important, high employee engagement in the great team that we are building across our organizations in the middle of everything, obviously. So about Rudd itself, it's, it was actually established in 1952. It's based in Louisville, Kentucky. It has 13 outlets and approximately 360 full-time employees. It's one of the largest distributors of road construction in the U.S., with operations in all or parts of 9 states. And the company is also representing other very strong brands such as Hitachi, Sandvik, and Link-Belt Cranes.
In 2022, sales of equipment and parts relating to Volvo Construction made up approximately 70% of the total revenue, with in 2022, a sales of $308 million and an adjusted IFRS EBIT of $16.5 million and earnings before tax of $16.4 million. In this year, first six months, Rudd had a revenue of $138 million, with EBIT of $9.7 million and earnings before tax of $9.3 million. So by that, I hand over to Erik for a bit more on financial history.
Yeah, thank you, Lars. Lars mentioned some of the key numbers here that we also left in the press release. So in 2022, as you see in the table here, $208 million of revenue, and IFRS adjusted EBIT of 16.5 and an EBT, so earnings before tax, close to that number. That implies an EBIT margin of 5.4% in 2022. Point out here that the 2019-2022 numbers are based on the company's audited US GAAP numbers, which then by an audit and consulting firm has been converted to IFRS. So that's what you see from 2019 to 2022.
Whereas the figures you have for six months, 2023, which we provide to be able to compare with the rest of the group for that period, but also eight months of this year is based on the company's internal management accounts, and they are unaudited. RUD is currently operated as a so-called S corporation, which means that it's taxed at the shareholder level, and that's why we provide the EBT here rather than the net income. But as part of the Ferronordic Group, it would of course be taxed on a company level, corporate level, and RUD would then pay corporate income tax in the United States.
Looking at this history, you will see softer numbers in 2020 and 2021, and it should probably come as no surprise that COVID-19 affected the business of Rudd during that period. Costs were kept high to keep employment in place and preserve capacity, whereas the revenue trailed lower. In 2021, you will see EBT, so earnings before tax, being significantly higher than EBIT, and that was due to the forgiveness of a COVID-related support loan. So that's what explained the slight anomaly there, so to say. And that again, then, reported below EBIT level, of course. Moving to the next slide, speaking a little bit about the transaction itself.
Ferronordic will then purchase 100% of the shares in Rudd Equipment Company for a price of $95 million. In addition to that, Ferronordic will also buy two real estate properties for $10 million, which the company is currently using. After the transaction, Rudd will then own eight of its 13 locations, meaning five are leased on long-term contracts. Total price for Rudd and the two properties, then $105 million. Out of this amount, we, Ferronordic, will fund $60 million from our own cash position, and $45 million with bank debt. That's new debt raised for the purpose of this acquisition.
We have secured a commitment letter from Nordea for a three-year $45 million term loan facility, and also have a commitment for a $35 million US working capital facility. All consents and approval that we need for this transactions are now in place, and that includes the important one, of course, from Volvo Construction Equipment itself. We expect this transaction to close on the thirtieth of November, so at the end of this month, in about two weeks time. Moving one slide forward. The purchase price then corresponds to about 5.8x the 2022 IFRS-adjusted EBT, earnings before tax.
Based on the expected net debt at the time of closing, i.e., the end of November, we expect the enterprise value to be $113 million. So, $18 million above the equity value, and that will then translate into a 6.9x 2022 IFRS-adjusted EBIT valuation of the business. The price itself is based on an expected net asset value of Rudd at the time of closing, and that expectation is $86.8 million. That would then imply, again, in US GAAP, a goodwill of $8.2 million. The purchase price will be trued up post-closing.
So once we have an order to close in of as of November thirtieth, there will be a true up, depending on whether the net asset value is higher or lower at that point than was anticipated in the agreement. The final goodwill amount, based on IFRS, we disclose later, once the purchase price has been determined and Rudd is consolidated into the group, and IFRS numbers have been provided. As mentioned, we'll also acquire two real estate properties. These are in Cincinnati and in Louisville, and the current owner of Rudd owns these properties. We will purchase them from the owner.
The price for the property is $10 million, and as part of the operating expenses in 2022, these properties have a charge of 0.7 on the company. So that's a bit on the transaction and purchase price, and I hand back to Lars to speak a little bit about the background and the rationale.
Yeah. So as we talked about, the U.S. is the world's second largest market for construction equipment, and there are large infrastructure investment programs likely to support strong demand going forward as well. The company sales area for Volvo Construction Equipment covers all the parts of nine states, which is Kentucky, West Virginia, partly Ohio, Indiana, partly Western Pennsylvania, Eastern Missouri, Southern Illinois, and several counties in Tennessee and Maryland. Rudd Equipment has long traditions. They have strong customer relationship and a solid business that showed almost 22% revenue growth from 2021 to 2022. In 2022, the market for volume construction equipment products, several purpose equipments in Rudd sales area amounted to approximately 4,000 machines.
Last four years, the average market area has been around 3,700 units, but of course, there were significant drops in 2020 and 2021 related to COVID-19. Rudd has historically had a very strong focus and presence in the excavation and extractive industries, particularly in Kentucky and West Virginia. In the last couple of years, the company has focused more on general construction segments, and we see potential to increase the company's market share in the construction segment further, and that is especially in certain larger cities in the sales area like St. Louis, Pittsburgh, and Cleveland. Our ambition over time is to invest in improved facilities in some of these larger cities in the sales area.
And again, the acquisition gives Ferronordic base in a dynamic market that also opens potential for further expansion in North America. And Erik will touch upon the effects on Ferronordic.
I will. Thank you, Lars. Starting with the organization in the business acquired, we do not foresee any major changes to the current organization of Rudd, and we have committed to retain current employees at current terms and conditions for at least 12 months after closing. With regards to financial impact, I have mentioned the facilities provided already. As a result of the transaction, Ferronordic's net debt is expected to increase by approximately SEK 1.3 billion. That's the EV taken over and also SEK 10 million paid for the properties. And based on our financial position as reported this morning on...
As of the thirtieth of September, as the end of the third quarter, the transaction would then turn the net cash position of SEK 378 million to a net debt position of SEK 962 million. After closing, RUD will be a fully owned subsidiary of Ferronordic, and it would be, of course, integrated into our general corporate governance and internal controls. And we do expect RUD to generate positive profit and cash flow immediately from closing. And worth pointing out that we do not expect this transaction to have any direct impact on our businesses in Germany or Kazakhstan. With that, I hand back, I think, to Lars for a few final comments.
Yeah, these are comments from our press release, and obviously it is a transformational transaction for us. We talked about that. We have been looking for opportunities to expand geographically in different regions, mainly in developed markets. And as the world's second largest market for construction equipment, the US does have substantive infrastructure investment programs, and will likely that will likely support strong demand going forward. As we've talked about, we have a very, very strong and good cooperation with Volvo Construction Equipment. Here is a comment from Scott Young, who's the President of Volvo CE in North America, and he welcomes us to the dealer network and talk about co-cultivating strategic partnerships.
We share his view that there are incredible opportunities ahead as we continue to provide best-in-class equipment solutions and support our customers. Again, it's a good strategic fit for us and provides the platform and the scale that we've been looking for, and it gives us a strong base in North America for further potential expansion. We see this as a major step to rebuild Ferronordic as a leading service and sales company, in addition to our businesses in Germany and Kazakhstan.
Thank you, Lars. And last short note on the last slide. Ferronordic will review, we've said for some time since the sale of Russia, our financial objectives and dividend policy, and we will revert to the market once that work has been done internally and processed properly, and communicate that clearly to the market, but not at this point. So with that, I think we are ready to turn to questions and answers. Operator, will you moderate?
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Victor Hansen from Nordea. Please go ahead.
Thank you, operator, and hi, Lars and Erik. It's Victor here. So starting on the U.S. acquisition, a couple of questions here. So firstly, I was hoping that you could tell us more about your near-term plans for developing the U.S. business and what your main focus for sales expansion lies. I know there are a few levers you can pull, of course, geographic expansion, adding new brands, additional services, just to name a few here. So which drivers do you expect will be the most important for you to grow in the U.S. going forward?
Oh, I think... Hi, Victor. I think this is the first step. It's a big step, and we're actually acquiring one of the biggest construction equipment dealers in the U.S. And we see this as a base for potential expansion further. Obviously, clearly, we need to do our homework here with the acquisition of Rudd. It is a well performing company at the moment. They have a very strong customer relationship and good profitability. We see opportunities to grow further in the area where we which we are acquiring now. But clearly, we're looking also at further expansion in North America.
It is indeed a very dynamic market with a lot of infrastructure projects going on. We can going forward apply our digital sales systems, et cetera, that we have very successfully developed for our markets in the eastern part of the world, and we see very big opportunities. I mean, you see also here, so that Rudd is already engaged in other very strong brands like Hitachi and Sandvik and Link-Belt Cranes. So, we see very big opportunities. I will not go into details on which and where we're looking at, but you have been studying us for a while. You know that we're looking both at product development, product expansion, and geographical expansion.
Excellent. Thank you. Next question. On the resilience side of the US acquisition, given the tough macro environment we have currently, I'm wondering if you could give us the sales split for aftermarket currently, and what level you believe is reachable for you in this geography?
I'll take that, Victor. Sorry. No, I mean, we're not disclosing that at the moment. And I think you know the rules. I mean, we can really just discuss and clarify what we publish. So not at this point. We will, of course, return with that, Victor, in due course.
Okay, understood. Next question here on the US. I'm wondering what capital needs do you, do you see to run the US business? I tried to calculate based on your press release that I believe working capital to sales levels are about 11%-13%. So let's say, depending on which sales you use, of course. So, so let's say low to mid-teens percentage-wise of, of sales for working capital needs. Is this correct? And where do you expect that you will be in the long term?
I think again we're cautious on providing guidance, but I think you're probably making reasonable assumptions. Working capital will be similar to what we've had in other markets to some extent. The model is slightly different. There is more of a rental setup where customers rent equipment for up to a year and then typically purchase the equipment from the dealer. So that sort of ties up a bit more working capital, but on the other hand, the supply terms would typically be adapted for that kind of business setup as well.
So I think when it comes to detail, that's something we'll have to return to you about, but yeah, overall, I think you're probably making reasonable assumptions there. And then, of course, to say that the facilities we put in place is meant to cover the needs we have together with supplier funding as well.
Yeah. Okay. So, a few more questions from Coastal, if that's okay. Quite big news here that you announced. Quite a few questions. The next one being, so for the group, I'm wondering about the near-term capital allocation, in general here. So you take on quite a bit of debt now, and I'm wondering if we should expect that you will focus more on the leveraging and dividends rather than M&A in the very near term, and also what the net debt to EBITDA levels you are comfortable to have in your business.
Mm. Well, I understand. It's very good relevant questions. As I said, we will revert with revised financial targets. So the last question you asked is directly related to that exercise. I think if anything, I mean, our past is probably in finance, as you often not, but for us, I think it's a reasonable guide for where we see ourselves going forward. In terms of capital allocation across the group, what we're saying is that we, we're now at a point of relatively high working capital, and that's something that we should move away from, and that's a gradual process.
Then, I mean, in the current businesses, not in the acquired one, but in the current businesses. So we would expect to see some release of capital from that. In terms of how that capital will be deployed, we would revert back to our strategic objectives, and really, at every point, Victor, trying to optimize, making sure that we can have a sustainable and stable degree of leverage for the operations that we have. And while preserving, I would say, I mean, Lars mentioned we continue to look for opportunities. So we want to make sure that we're in a position also to seize opportunities when we see them in the market.
... Understood. So I was hoping that you have time for two quick questions on your current business, as well. Yeah, I'll go ahead. So on Kazakhstan here briefly, you mentioned additional resources for contracting services where you currently have no contracting services. So I guess that we should interpret this, that a deal is quite close for you to, as you commit more resources to it. Is that correct?
We're, Victor, we're looking for projects in Kazakhstan and we need resources to do that. So it's not that strange. We haven't had that business in Kazakhstan yet. I mean, you know how we were doing it in Russia, and we think we can more or less copy and paste that very nicely, and that requires resources to go and discuss those projects. It's a time-consuming and very intense process, and you know very well that it can take a long time. It requires tremendous calculations and cooperation with potential customers to make sure that we do it right. So I don't think it's so strange that we have resources for marketing, basically, the contracting services.
Hopefully, hopefully soon we will be able to communicate something, but at this stage, we can't.
Yeah. Understood. A final question here, on Germany. You mentioned a savings program in Germany. I was hoping that you could expand on what you're doing and perhaps also quantify it. Thank you.
I'll start on that one. Victor, again, good to understand the questions. If we would quantify it at this point, we would have put it in the report. As we mentioned in the report, we started in Q3, we're continuing in Q4. So we have elected to go back to the market and when we have more visibility on the scale and scope of it. What we do mention in the report and can say is that it's really focused on the administrative part of the organization there. So, changing and cutting some in the central and administrative functions. Looking at productive, which is if you're going down to mechanics, there is no...
We're actually continuing to look to expand that and get more mechanics because the aftermarket is, as we often say, resilient and we see still very good potential there. So that's, I think, what I can say at this point, Victor.
Understood. Thank you very much. That's all for me.
Thank you.
The next question comes from Adrian Gilani from ABG. Please go ahead.
Yes, hi. I will focus my questions mostly on the Rudd acquisition here. First of all, I understand you won't give any specific guidance on this, but can you talk a bit about the margin profile in the U.S.? How much room there is to improve from the 5.4% in 2022? Should we expect the mature margins to be roughly in line with where you expect the German business to be when that's mature? Can you give some color on that front?
Let me have a stab at that question. Adrian, thank you. I think we provide a history for you guys to be able to form an opinion at this point. You know, we're quite sparse on the forward guidance. We will again revert to the market with financial objectives that will give you sort of the very broad outlines of what we see. But when it comes to forecasting for the U.S. market, I would probably may use the financial history that we provided, but adjusted for the COVID-affected years.
Of course, remind you, Adrian, that this is construction equipment, so it's different from Germany in a lot of ways, not just market-wise, but in some ways, in that way, it's more similar to, you know, Kazakhstan and what we had in Russia than Germany, product-wise and how the market functions. When it comes to, I mean, really, the U.S. as a market, then, well, I think here we have our opinion. We think it's a very interesting dynamic, leading market in a lot of ways, product-wise, but economically as well. We think we're in an interesting part of the U.S. market where you have both mining industry, extractive industries, and a lot of construction.
So we see a lot of potential there. And then you have a backdrop also of big infrastructure investments in the U.S. economy, which will support the market overall. So I think these are the sort of pieces of the puzzle I would work with on the one hand, as we see the very strong macro backdrop for the market, again, underpinned by infrastructure investment, and then healthy margins, as you can read from the performance, excluding those COVID years.
... Okay, that's, that's helpful. And then you talked a bit about the end markets there in your answer, but just, looking at the webpage for Rudd, it seems fairly heavily tilted towards mining equipment at the moment. Can you give us some sort of rough indication on, what the split is between different end markets for Rudd?
Adrian, not more than we've provided in the press release at this point. We're really here trying to clarify a lot of, you know, offer you a chance to ask any questions with regards to that press release. But with more details on the splits between different sector areas, I think we'll revert on that.
Okay. And then, you mentioned the employee retention or that you are committed to retaining the employees. First of all, will the Rudd family themselves stay with the company, and or are they sort of handing over the keys to you? And how active have they been in recent years in actually running the operations?
The current owner will remain with us for a certain period. I think when it comes to his involvement in the business, I would probably not comment so much on that. I mean, what I would say is that he's put a very strong management in place to run the day-by-day business in Rudd, and that management will remain in place.
Okay. Then, another question on just the competitive landscape in general in these areas that Rudd operates. Are there any big competitors you can mention, both on other Volvo dealers or competing brands? And, what Rudd's share is on these 4,000 units that you mentioned?
Sorry, Adrian, can you repeat that question, please? It was a bit vague.
In general, on the big competitors in the region, on other Volvo dealers or other brands, is the fragmented or consolidated market, and what is sort of Rudd's share of that market?
Okay. So I mean, the U.S. in general, you have obviously the usual suspects there, which is Caterpillar and Deere, obviously, very strong home market. Then, Komatsu is very active as well. And Volvo. Volvo has a strong position in the U.S. market, obviously with intentions and aspirations to become even stronger. And I will not touch upon Rudd's overall market share in comparison to that, but what I can say, and what we write, is that we see opportunities to expand and grow in certain areas of the territory that we're buying. I mean, very, very strong in West Virginia and Kentucky, and we see opportunities for expansion in the other states, basically.
That, that is what I can say. Maybe you can draw some conclusions from that.
Yeah, that's that gives some info for me to work with, at least. In that case, I think that's all of the questions I wanted to ask, and so thank you for taking my questions, and congrats on the acquisition.
Thank you.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Okay, we've had two additional questions coming in from the site here. Just one second. Yeah, one... Sorry, here. We have actually three. One, please, could you give more color on the book bill ratio in Germany? What's the order intake versus sales deliveries like in Germany? And I can't give you exact numbers on that, but what we see in the market is, of course, that customers are hesitating to take on trucks that they've ordered because they're they are uncertain about the economy. However, certain segments are still performing well, and we see also good traction and shift from traditional, conventional diesel engines to electric trucks, which we're very happy about. And of course, we are in the forefront there.
But clearly, we've seen a lower order intake in the quarter than we have done previously. That goes without saying when you see the numbers here. But we're still getting them out. We're focusing very much to deliver what has been ordered. There have been some cancellation from customers, and obviously, then we're trying to find a new home for these trucks with other customers. And that is part of why we are a higher working capital in Germany than what we would like to see. So we're working very hard with taking that down. But clearly, I think all in all, we see a, what should we call it?
A normalization of the market, which has two, three years been very, very good, if I put it that way. I mean, we've had delivery times of 10 months to over a year, and that is now being slowly but coming back to a normal situation. I think that's what we can say. And our task is basically to adapt ourselves to that situation. And then I'm coming back to another question, which was asked, if we had bad cost control in Germany.
And the truth of the matter is that we planned for this, although we had also planned for a higher sales and in particular, higher margins, and that did not realize in Q3, and now we need to, you know, adapt our costing to what is out there in the market, and that's what we're doing. And it's not the first time we're doing this. It goes up and down, and we have to do our own work, and that's what we're doing. But still, some positive signs lately in the last couple of weeks, at least on macro in Germany, gives us hope that the hesitation among customers might soon maybe be a bit less than it has been before.
And then we had another question on how we view Sandvik in Germany mainly, and are we happy with that? And we're never happy. We always want to improve, and I think we can and we should, and we can do better on Sandvik than we have done for sure. So I think that was the three questions we had from the webcast. Maybe, Erik, one more?
Yeah, I actually have a few more to try to address them. Some of them are crossing over, so have been answered already, I think. One question with regards again to the cost cutting in Germany, if we can quantify it, and again, not at this point because it is ongoing. With regards to working capital facility in the U.S., is that there to run the business differently from before? No, it's not. It's there to run the business as it has been run. Of course, we will take initiatives to improve and further increase market positions and being as efficient as we can.
But, again, the purpose of the facilities we are now putting in place is to continue the traction of the business that we acquired. There is a question with regards to leverage and if we are looking at sale and lease back of properties. We are always looking at ways to optimize our funding. So in that very general way, I would address the question that, again, we look across the portfolio of assets, liquid and less liquid, and try to consider how we can achieve the best funding and to match asset liabilities to manage risks also on the balance sheet, both maturity, liquidity, and currency-wise.
Of course, we operate now in at least four currencies. How we expect to bring down working capital? I think Lars was on to that. What I would mention, and I think Lars input toward it, there's been a period of particularly long lead times during or in the aftermath of COVID. We had these supply constraints, so we had to order as much as 12 months ahead. And that's then a ship that doesn't stop on a dime. So deliveries keep coming in, and then we need to adjust. But at some point, the ship it stops, and then the deliveries decrease, and then you have a time or an opportunity to bring down the working capital and the inventory.
And as we say in the Q3 report, we expect results of the initiatives on working capital and of cost cuts to be seen in the beginning of 2024. There is a question about gross profit in and OpEx in Germany, the relation between them, and I think we touched on it from different angles on this call.
But gross profit, yes, we wanted to see better results on gross profit, and that's both driving revenue mix as I refer to it, i.e., the split between new and used equipment sales versus aftermarket, but also price realization, so margins on the products and to some extent, product mix as well, the different products we sell. So we didn't achieve our objectives there in this quarter, and the OpEx was built for achieving higher objectives. And that's where we now need to make corrections. And beyond that, there were also some one-offs. I mentioned credit costs, which you know helped us, so to say, in the second quarter and worked against us here.
But I think not sort of shying away from the issue here, which was that we built sort of an organization for bigger sales and higher margins, and we need to work on both sides to achieve those sales and margins, but with a lower cost base, and that's work that we're now engaging in. A question which I tried to address on one of the slides, but maybe not clear enough on the unallocated group costs, that they decreased significantly and if that's a new level. And here in the second quarter, we had the reversal of a reserve that had been built. It was related to the sale of the Russian assets of SEK 7 million.
So that was a positive effect, which should be considered one-off in the quarter. So we showed SEK 12, and the other result would then be closer to SEK 19, which is again, more in line with previous quarters and also last year. A question, if we will release financial targets? Yes, as communicated, we will get back to the market on that to give those more broader objectives for the market. I think that's it, really. There was also one question with regards to separate valuation of the properties in RAD, but that's not something we disclose at this point.
And also a question on order book development, which we also never did, and at this point at least, will not comment on. We have commented on the general outlook in Germany and Kazakhstan for that matter, but in Germany, maybe in particular, where we said that investors or, sorry, customers, partly driven by higher interest rates and inflation, are more cautious to place orders with future delivery. So with that, I think I've tried to address the questions I got online as well, and hand over to the operator to see if there are any more questions from the audience.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Okay. Thank you very much for listening in, and we're excited about this new development in our company, and looking forward to speaking to you again next quarter. Thank you very much, everybody, and bye-bye.