AGM 2020. CEO Lars Corneliusson comments on financial year 2019 and Q1 2020

Dear shareholders, thank you for your interest in Ferronordic. Due to the extraordinary situation with the COVID-19 pandemic, travel restrictions, and concern for your and our health, this year's annual general meeting will not be held with physical presence. We however encourage all shareholders to do advance voting and also to send questions to myself or the Chairman at AGM at ferronordic.com. Timelines and instructions for doing that are posted on our website. So instead of being in Stockholm in person presenting to you, I address you virtually from our Moscow office.

Obviously, in many ways 2019 might seem like more than half a year away. However, many of our actions in 2019 were directed at business development which will have an impact on our business in 2020 and beyond. I will therefore briefly present to you our financial result for 2019 and then touch more upon our business development initiatives. Following that, I will give a short brief update on how we're managing Q1 of this year.

So 2019 was for us, Ferronordic, our best year ever. Our revenue increased by 16% to around 3.7 billion Swedish kronor. The revenue growth was mainly driven by our aftermarket business which continued to increase nicely, and also contracting services that was up 159% compared to 2018. We also grew our operating profits by 1.1 percentage point to 9.55%, which is the highest operating profit margin we have ever had. Also the margin growth was driven mainly by aftermarket services and contracting services. Net income was up 20% to 251 million kronor and we paid an extraordinary dividend.

If we look a little upon the operating environment for 2019, Russia continued to grow albeit at a low pace of 1.3%. Oil price declined, inflation also declined, and we saw good development on the gold prices. There were continuous preparations in Russia for the implementation of the so-called national projects with 175 billion dollars earmarked for infrastructure investments. However, the preparations did not yet materialize in any strong implementation of these projects. The total market continued to recover and imported machines expanded by 14%, but we should remember that this market level is still only less than two-thirds of what the market was in 2012 to 2014. Also, the Kazakh economy grew by as much as 4% in 2019.

In 2019, Volvo CE constituted around 75% of our total sales. Our customer base remains diversified; we have no customers that represent more than 5% of our sales. And as you can see from the last pie, we're operating in segments that are really driving the Russian economy.

In 2019 we saw continued increased sales in a very important aspect of our business, which is our aftermarket services and contracting services. We grew our aftermarket sales by 17% and we have since 2015 had a CAGR of 16% growth per year in a machine population that hasn't really increased in this period. So aftermarket sales now constitute around 25% of our total sales. One of the reasons for such a good growth in the aftermarket revenue is of course the investments we have made into digital sales systems for our sales persons, but also for our aftermarket sales persons. We continue to invest and develop these systems and we see good traction and good sales increase from that.

Another area which was up was other sales with a total revenue of 11% of our turnover this year, which is up 6% compared to last year. And the bulk of that is contracting services, which is a form of sales where we actually deliver and charge for a cubic meter to the customer, and we own the machines ourselves and we have our own operators which are our employees, with our own site management. And that has taken off well and we increased 159% last year compared to 2018.

2019 also saw the first expansion outside of Russia for us. We became the dealer for Volvo CE and Mecalac in Kazakhstan. We started out in the first quarter last year and we started basically from scratch. We have expanded throughout the year; in the end of the year we had seven workshops and 36 employees. Overall, I would say that the business in Kazakhstan has performed better than we expected and we have good hopes for continued growth of our business in Kazakhstan.

In the end of 2019 we announced that we are expanding into Germany. We are now distributor and dealer for Volvo Trucks and Renault Trucks in parts of Germany. The area covers approximately 20% of Germany, stretches from big metropolitan areas like Frankfurt and Hannover and then towards east to quickly growing cities like Dresden and Leipzig. We have currently 11 workshops operating in Germany and our task is to expand our aftermarket business, to make investments to expand the network, to improve the standards in the network, and thereby being able to take market shares for trucks and improve customer satisfaction and brand image for Volvo and Renault in Germany.

During the year we also continued our expansion in the aftermarket business for Volvo and Renault Trucks, and we are now operating from 11 locations. And during the year our aftermarket business for Volvo and Renault Trucks in Russia grew by 43%. We also started the business of used trucks for Volvo and Renault, and we're then buying, restoring, and selling used trucks from our facilities throughout Russia for Volvo and Renault Trucks.

Towards the end of the year, ahead of time, our component rebuild center in Yekaterinburg was finalized. Yekaterinburg is in the Ural Mountains of Russia. At the center we will rebuild old worn-out engines and gearboxes and give new life to them. The center will also use rebuilt components to make rebuilt machines, basically recycling of components and machines. Components will be sold under a Ferronordic warranty, whereas rebuilt machines will be sold under the program Volvo Certified Rebuilt with a warranty from Volvo CE. And we're very excited about this opportunity to make use of resources and recycle components and machines, and thereby also being able to reach a new segment of customers that would normally not buy a fully new machine.

Other areas of business development in 2019: focus was that we assumed responsibility as importer for Volvo CE machines and parts. Previously Volvo CE imported themselves and we bought here in Moscow. We see that as a very good step in terms of further integration with our main partner and also an ability to be able to get control over the whole logistical chain of spare parts and hopefully even further improve parts availability.

During the year, the sales of Tarex A300 dump trucks was discontinued and going forward we will now sell the Volvo A100 hundred-tonne dump truck. And I hope you can see on the picture that they are quite sizable.

Other aspects of business development I'm very proud of is we delivered 57,000 training hours to our staff throughout the country, and we are now having 90 locations from where we operate, and that is up from 79 locations in 2018. We're very proud of the recognition from our main partner Volvo CE to become the Dealer of the Year for 2019, and it's particularly nice to see that the recognition of our efforts in digitalization, testing new business models, and driving the business forward is recognized. So we're very proud and happy about that.

During the year we of course increased further our efforts when it comes to sustainability and ESG, as it's being an integral part of everything we do. We have a very strong anti-corruption program; we have absolutely zero tolerance to bribes. We focus a lot on health and safety issues for our employees and our customers' employees, and we invested more than 6,800 training hours into health and safety during the year. And we also saw an increase of female representation in management positions during the year from 13% to 17%.

So all in all, I believe that 2019 was a very successful year for us. We showed again that we can perform, as is shown in this slide here. We have a strong resilience when times get bad, and still the market is very low compared to what it has been before. If you take this slide and you see back to 2011, we have indexed everything to 2011. And when the crisis came here in Russia in 2014-15, the market dropped by 83%, but as you can see our turnover, sure it dropped, it dropped by 40%, but our operating profit hardly moved at all. And that is very much thanks to our focus on the aftermarket and of course efforts taken to optimize our operations at that time. But then also when you see market coming back slightly as it did in 2016-17, we get a good leverage both on our revenue but mainly on our operating profit. So in the end of 2019 we had an operating profit that was 281% higher than it was back in 2011 and 2012, and the market is still only 60% of what it was in 2012-2013. So there is still a tremendous pent-up demand in the market.

Machines going forward, and now a few words about our results in Q1 2020. In Q1 we saw good growth in Russia and CIS, and we started operations in Germany. Both revenue and operating profit increased in Russia and CIS. Revenue increased with 17%. We had strong cash flow from operations. Our German business was negative but that was much in line with our expectations. Towards the end of the quarter in March we saw an effect from COVID-19 on our operations, mainly in Germany, and of course we're taking measures to protect our business during this period of time. If we talk about April, we saw the trends we noticed in Q1, they continued both for Russia and for Germany.

Some more details on Q1: our total revenue increased with 55% to some 1.1 billion SEK. The increased 17% was organic growth in Russia and CIS areas, and then 38% from the consolidation of our operations in Germany. And the sales in Germany was 275 million. The portion of aftermarket was 25%. We had a reduced operating profit, much thanks to a minus 10 million contribution from Germany, again in line with our expectations. So operating profit was 51 million kronor or 4.6%, despite the start of operations and the takeover of Germany. Working capital and net debt decreased as a precaution, to make sure that Ferronordic is resilient and strong in the situation we are in now.

The board has decided to withdraw its proposal for dividend for 2019. And when it comes to COVID-19 and the response that we have taken to delimit the effects, obviously it's a lot of health and safety, it's customer care, it's cash and costs. When it comes to health and safety, we make sure that we provide the necessary equipment and necessary protective measurements. We work from home wherever possible and we ensure that we keep the strictest safety precautions for our employees and also for our customers. When it comes to costs and cash, we have reduced headcount, we have made reduction in working hours, we have cost savings initiatives including voluntary temporary salary cuts for executive management. We are reducing capex and we're making sure that we have flexibility and liquidity financially.

Moving over to our financial objectives, which are that we want to triple the revenue in Russia and CIS from 2016 to 2021. We want to do that with an operating margin of 6 to 8% and with a net debt to EBITDA of 0 to 2 times. Basically we want to grow our business with good profitability and fairly low leverage. And where we stand now on those targets is that in terms of revenue we're at 2.3 times 2016 revenue. Our operating profit margin in the end of Q1 was 8.5% LTM, so we were above the target actually. And the net debt to EBITDA we were at 1 times.

When it comes to dividend policy, that has also not changed. The ambition is to pay 25% of the net income, but this year due to the circumstances the board has decided to propose a cancellation of the dividend for 2019.

As you can see on the curves to the left, both in Germany and Russia just a couple of months ago expectations were that the economies would grow quite nicely. This has now been revised down quite dramatically in just a couple of months. And during the remainder of 2020 we are likely to see various degrees of disruption, demand potentially in supply, but also in our ability to actually reach out to customers, to actually physically go to customer sites and service their machines. So we're taking every measure, strict measures, to protect our business, to protect our employees, and making sure that we are a strong company also going out of this crisis.

We are confident that the business model that we have is resilient. Our focus on the aftermarket will help us through these situations that we see or potentially see going forward as well in Russia, Kazakhstan, and Germany. In the longer term, we are confident about the business. The fundamentals in our markets are strong, the pent-up demand for new machines is strong, and we're very positive about our business over a long period of time. Short period of time, more difficult to estimate.

This takes us to lastly, I would like to take the opportunity to congratulate Ferronordic. On 1st of June we had our tenth year birthday and we've come a long way during these 10 years, from six outlets in 2010, 160 employees, to more than 100 outlets and more than 1,400 employees. From one brand partner in the Volvo Group to several, from one country, Russia, to three: Russia, Kazakhstan, and Germany. And I would like to take the opportunity and thank everybody that has contributed to the growth and success of Ferronordic. And I'm sure there will be plenty of many, many years, exciting and good years out of us. So thank you very much.