AGM 2021. CEO Lars Corneliusson comments on financial year 2020

Dear shareholders, as last year, due to the COVID pandemic and care for your and our health and safety, this year's AGM will be held without physical presence. We however encourage all shareholders to do advance voting and also send questions to myself or our chairman Staffan Dufvåse at [email protected]. Instructions and timelines for doing so are posted on our website under the corporate governance section.

Looking back at 2020, it was of course an unprecedented year. The COVID pandemic presented our organization with tremendous challenges and uncertainty. Despite that, we performed uninterrupted services to our customers, and I'm very proud how our organization adapted and performed to the challenges in 2020. To summarize 2020 for the group: we had a strong performance in very challenging conditions. Not only did the pandemic provide a lot of uncertainty and challenges, we also had headwinds with the ruble depreciating 36% towards the end of the year. We took steps to mitigate disruptions in both supply and demand. We focused on cash and costs without compromising uninterrupted service to our customers. And despite challenges, Russia CIS showed great resilience and performed its best operating result and cash flow ever. We continued to expand and grow our contracting services as well as our machine and component rebuild. In Germany, we started operations in January of 2020, and throughout the year implemented plans to improve the organization and expand the network. A lot of our focus was of course on health and safety of our employees and our customers. The board updated our financial objectives and dividend policy and has proposed a dividend of 7.50 Swedish kronor per share.

If we take a look at the operating environment in the countries we operate in: we saw Russia with a GDP decline of 3.1%, a significantly lower oil price compared to 2019, and again ruble depreciation of 36% towards the end of the year — it was on average 16% during the year. Towards COVID expectations for 2021 is a growth of 3.6–3.8%. In Germany, we saw a GDP decline of 4.9% and a very strong reduction in the market for trucks of 28%. Expectations for 2021 is an increase of GDP of 3.6%. So if we look at the financial highlights for 2020 for the group: our revenue increased by 24% to 4.6 billion. Group operating profit decreased 8% to 328 million kronor, and margin declined from 9.5% to 7.1%. The net result for the group was down 12% to 222 million kronor. Working capital as percentage of revenue declined from 20% to 5%, as we had very strong cash flows during the year of 693 million kronor. This led us to move from a net debt position of 593 million at the beginning of the year to a net cash position of 20 million.

In Russia CIS, we had our best operating result and cash flow ever, and we also continued to take market shares as we increased our unit sales with 15% in a market that declined 4%. Customers demonstrated resilience in their operations and they maintained utilization and capex programs. So total revenue in Russia CIS increased by 13% in rubles but had a decrease of 2% in Swedish kronor due to the ruble depreciation that was 16% on average during the year. Gross margin decreased from 20.7% to 19.5%, mainly due to a lower share of the aftermarket in our revenue mix and startup costs for our new contracting services in Norilsk. Thanks to our cost controls but also weaker ruble, our SG&A decreased with 17%. Throughout the year, operating profit grew 10% to 394 million Swedish kronor with an operating margin of 10.8%, which is the highest we've ever had in Russia CIS. And we had strong cash flows as working capital as percentage of revenue declined from 19% to 3%.

In Germany, the year was a year of integration and developing the business. We started our operations in Germany in January of 2020, and despite the COVID pandemic, we successfully launched service and sales operations. We worked throughout the year to implement our plans to integrate the organizations and to expand our service network. Ferronordic's sales area represented 19% of the total German truck market, and we sold 631 units. Revenue from our German operations was around 1 billion SEK and made up 21% of group sales. Gross margin amounted to 8.5%, and as planned in the startup phase first year, we noted an operating loss of 66 million kronor. Out of this, around 12 million were related to restructuring costs, one-off expenses, and similar startup costs.

Despite all the uncertainties regarding COVID, we continued our growth and development. When it comes to business development and new activities, we expanded our contracting services business. Our customer GV Gold in Irkutsk — we increased our cooperation. We started a new project for a platinum mine site in the area of Norilsk in northern Russia. We also saw very good traction and demand for our machine and component rebuild center in Yekaterinburg, and we expanded the capacity — that was finalized by the end of the year. We source machines and components both internally from contracting services but of course also from external sources, from our customers. More on business development: in March 2021, we became the distributor for Sandvik mobile crushers and screeners in the whole of Russia. Throughout 2020, we also saw very good expansion of our operations in Kazakhstan with positive contribution.

In Germany, we obviously executed on our strategy, which is to grow and expand, improve the network to grow Volvo and Renault market shares, but also to take a bigger share of the aftermarket in the territory where we are operating. Towards the end of 2020 and beginning of 2021, we announced the acquisitions of three strategically located workshops, and we also announced a new greenfield project in Hanover. In February of this year, Martin Balknecht was appointed new country manager for Germany.

When it comes to sustainability, Ferronordic has identified three main areas for our work with ESG: minimizing emissions and resource waste, being a good and fair employer providing a safe working place, and employing good corporate governance. The machines we are selling and servicing have a long life, high quality, and are safe and fuel efficient. We expanded our machine and component rebuild center, further contributing to the circular economy by giving a second or perhaps third life to machines, components, and parts. We target an injury-free workplace, and we had no serious worker-related accidents in 2020. We provided 4,300 training hours when it comes to health and safety, and overall 50,000 professional training hours to our team. In Russia CIS, we confirmed our ISO 14001 certification when it comes to occupational safety. We follow the Swedish Code of Corporate Governance, and we have an anti-corruption program based on policies, procedures, training, and a very widespread culture of zero tolerance.

We also wanted to touch upon the market potential upside in Russia and also to show our resilience as a company when things get bad. As you can see on this slide, we have indexed the market, our revenue, and operating profit back to 2011. In 2013–2015, we saw a dramatic decrease in the total market in Russia of 83%. Our revenue declined, but thanks to our focus on the aftermarket and other services, it only declined 40%, and our operating profit hardly moved at all. And since that time, the market has come back slightly every year and is now around 52% of what it used to be at that time, whereas our revenue is 51% higher than it used to be, and our operating profit, thanks to good leverage, is actually 320% higher than it used to be in those years.

We have six strategic objectives: leadership in the market for construction equipment and trucks, aftermarket absorption of more than one — meaning that the profit we make in the aftermarket should cover our fixed expenses — we want to expand into related business areas, we want to grow geographically, we should have industry-leading digital service and sales platforms, and we should further expand and develop our contracting services business.

The board has updated our financial objectives and dividend policy. The new target is to double the revenue from 2020 to 2025 within the markets we're operating in at the moment. We should have an operating margin of higher than 7%, and we should have a net debt to EBITDA of less than three times. Our dividend policy is that we should pay a dividend of 50% of the net income, provided that the net debt to EBITDA is less than one. In case it's higher than one, we should pay at least 25% of the net income.

So if we look forward a little, we obviously realize that uncertainty remains both on the supply and the demand side of our business. However, we do expect the markets we're operating in to start to recover. Our optimism is underpinned by high commodity prices and the fact that the so-called national projects are starting to be implemented now in Russia and CIS. In Germany but also in the rest of Europe, we see that the economic recovery is taking place. In the longer perspective, we remain very optimistic about our business because the fundamentals in our markets are strong. There is pent-up demand, and we see very strong business opportunities going forward.