Bufab AB (publ)

STO:BUFAB

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's presentation of the Q1 result call conference call. [Operator Instructions] And I must advise you that this conference is being recorded today, the 26th of April 2018. I will now like to hand the conference over to your first speaker today, Mr. Jörgen Rosengren. Please go ahead, sir.

[Jörgen Rosengren, Chief Executive Officer]

Thank you. So good morning, everybody, and thanks for joining us for this conference call. And my name is Jörgen Rosengren, and I'm the CEO of the Bufab Group, and I will be presenting Bufab's first quarter results here today, together with Bufab's CFO, Marcus Andersson, who's here with me as well.I guess, the mechanics of this call. First, some housekeeping issues. We will be taking questions at the end of the call and then the operator will give you instructions at that time on how to ask a question, and until then, your lines will be placed on mute. And throughout this call, we'll be referring to a PowerPoint presentation, which is available on our website under the Investors tab -- bufab.com, then the Investors tab, and then there's a tab called Presentations and Audio, where you can locate this presentation. And throughout, we'll also be referring to the page numbers of that presentation, so you know where to look. Now turning down to Page 2, and getting into the meat of this call, we're happy today to be able to announce what we think is very good and successful quarter, and the first quarter of 2018. And the highlights of that quarter are outlined on Page 2. And it starts with what we think is good growth, strong growth, in fact, and the growth was both organic and acquired, and it was spread across both of our operating segments of International, the largest segment, and Sweden. It was underpinned by strong organic growth, and the organic growth was all the more pleasant since it was -- since it took place in spite of some negative calendar effects due to the location of Easter this year relative to last year.And growth of our order intake, which was in line with net sales, which is, I guess, not a bad sign, at least. We had higher underlying demand in both segments. We took market shares in both segments and the fewer working days, which appear to have a bigger effect in our operating segment Sweden. We're not able to then clinch the organic growth. So all in all, a good growth quarter. Our margins in the quarter were stable. If we look at year-on-year, but it has to be remembered that the first quarter of last year of 2017 was a very good quarter for us, was the big uptick in -- on all lines of the P&L. But compared with that margin -- with that quarter, our margins on most lines are stable. But the margins are significantly higher than the margins recorded under the latter end of 2017 second half, I guess, is a good way to put it. And these improvements then over the tail end of 2017 are due, when it comes to the gross margin, to the price increases that we have implemented since the end of last year, and also to some extent, to positive currency effect, which we'll get into more detail later. The EBIT margin has improved over the tail end of last year due to the growth, naturally, also due to the improved gross margins, but it is also burdened, to some extent, by increased costs -- in absolute numbers, increased costs. And those, to some extent, are due to the investments that we are making in what we call Leadership, that is to say our strategic objective to be the best in our industry, 2020. Looking across the segments, I guess, profit-wise, International shows a really solid development and Sweden shows a good development. But then it has to be remembered that Sweden had a record year and a very good year at least in the first quarter of last year. It's also good to see that our acquisitions continued to contribute well. That is true both for the acquisitions that have now been a few years in Bufab, but also actually for the most recent acquisitions that we made, for instance, the newly acquired company, Kian Soon, in Singapore. And looking to our customer side, those of you who follow industrial companies across Europe know that there is a lot of talk about bottlenecks in the industry right now because of the generally high demand that we're experiencing. And that was particularly gratifying that we are able in quarter 1. There is such high pressure and demand to show good operating performance and then good delivery performance and good quality performance, and thus solving our customers' headache rather than adding to them. That's good. Looking ahead, price increases remain a big important thing for 2018 because we are still taking raw material revenue cost increases, which we have not yet been able to truly offset by price increases to customers. So that remains a priority. That's the quarter in outline. I will turn over to Marcus Andersson, our CFO, who will take you through the financial numbers for the group and for our 2 operating segments. Please, Marcus.

[Marcus Andersson, Chief Financial Officer]

Thank you very, Jörgen. If you turn to Page 3, we will start by going through the financial highlights of the group. As we can see, total group had a strong order intake in the period. We were up about 16% compared to last year. Net sales was also up 16% to SEK 945 million. And as Jörgen said, the organic growth was good, 9% for the group as total. The gross margin was slightly strengthened compared to Q1 2017, but it significantly outperformed the final quarter of 2017, which is explained by the implemented price increases to customers, and as Jörgen said, also by a favorable euro versus the other currencies. Our operating expenses were slightly increased due to investment in strategic initiatives for Leadership 2020, but despite this, our EBITA grew with 16%, from SEK 91 million to SEK 106 million, corresponding to an EBITA margin of 11.2%. If we take a look at the bridge down in the right corner, you can see that currencies contribute with SEK 4 million when it comes to EBITA. SEK 16 million was because of high volumes and minus SEK 13 million was due to price, cost, mix and other. And as Jörgen mentioned, the acquisitions made last year contributed well. Thunderbolts and Kian Soon added about SEK 8 million to the EBITA. If you turn to Page 4, and we can see out the financial development for the group. You can see that we now have had growth actually for impressively 19 consecutive quarters, not only growth, but also organic growth, even if it was at low levels during Q3 2015. If we take a look at the graph at the right, we can see that the positive trend of EBITA versus net sales is continuing and that the relation between EBITA and net sales is growing in the right direction. If we turn to Page #5 and a look at segment International, we can see that the order intake was in line with net sales. It was strong, but in line with net sales. The net sales grew impressively 21% and came in at about SEK 648 million and 9% was -- of the increase was organic. And the organic growth, you can say in general, was driven by higher underlying demand and by increased market shares. As Jörgen mentioned, also, we're glad to say that the gross margin percentage was higher than last year. Actually, the highest we have seen in segment International for a very long time. And this was accomplished mainly due to implemented price increases versus customers during 2017 and also during 2018 and also due to a favorable euro. In total, a good growth and a good leverage that we built, and strong margin and EBITA improvement. And as mentioned earlier, the acquisition of Thunderbolts and Kian Soon contributed well, contributing about 50% of the total EBITA increase in the quarter. If we look at the EBITA bridge, down in the right corner, we can see that: SEK 4 million comes from positive currency effects; SEK 13 million comes from higher volumes; SEK 9 million -- minus SEK 9 million is related to higher price, cost, mix and other; and as I said, SEK 8 million comes from acquisitions. If we turn to Page 6, we can see that segment International has now actually shown a growth for 20 consecutive quarters, and also both organic and through acquisitions. If we take a look at the right graph, we can see that both of the dotted lines are going in the right direction, especially the ones showing EBITA, which is -- which, during the last 2 quarters, have taken a rather big jump, you can say, upwards, driven by higher net sales, increased gross margin percentage and a good leverage. If we turn to Page 7 and look -- take a look at segment Sweden, we can see that segment Sweden had an order intake that was in line with net sales, up 6%. Net sales grew with approximately 7%, which was all organic, driven by a higher underlying demand and by increased market shares. The gross margin was negatively affected, mainly due to higher purchasing prices during 2017, but also during 2018. And we have also seen effects by the weak Swedish krona versus mainly the U.S. dollar, which is hitting the gross margin as well. The decreased share in operating expenses was not -- was -- we were not fully able to offset the negative impact of the decreased gross margin, resulting in an EBITA margin that was not really in level with last year. But in absolute terms, the EBITA grew from SEK 41 million to SEK 42 million. If we take a look at the EBITA bridge down in the right corner, we can also see that the increased EBITA corresponds to SEK 3 million-plus relating increased volumes and also minus SEK 2 million relating to higher price, cost, mix and other. And if you turn to Page 8, we can see that we now in segment Sweden have seen growth for 8 consecutive quarters, really nice to see. If we look at the right graph, we can see that the EBITA has been a bit up and down during recent years due to various reasons, but we now can see that we once again see a trend shift upwards for the second quarter in a row, driven by good growth and good leverage.

[Jörgen Rosengren, Chief Executive Officer]

Okay. So that's something about financial development. On the next page, Page 9, you can see some logos of acquisitions that we've made in the past 3 years, I guess, we should say now. We made 6 acquisitions in those years. And I think it's correct to say that all 6 of them are performing well and are adapting well to their administration within Bufab and are appreciated now as what we call sister companies in Bufab.Looking ahead, of course, we have, as many of you know, a strategy to continue to make what we call win-win acquisitions. That's definitely part of our strategy as we go forward. We are working on it in a systematic way we feel. And when we find companies that are well-managed and that bring growth synergies to Bufab and where we can make value-creating deals for both them and us, we will continue to make acquisitions. That's definitely our ambition also going forward. On the next page, Page 10, we can see in percentage the development of the net working capital profile of Bufab. We have 2 lines there and the more solid one, the darker one, excludes the acquisition Apex, which has a different business model and different capital profile than the rest of the group for comparability. And as you can see, we made some good improvement last year on the net working capital and also the year before that, but now our net working capital development goes a bit in the wrong direction. It's driven naturally by growth and by our -- not the least, by customer receivables, but also inventory. And of course, this is a number that we need to continue to watch so that we can continue to drive a good development also on this metric. Wrapping up all the numbers, we have, on Page 11, made an EBITA bridge, which bridges last year's results to this year's results for the first quarter. And as you can see, for the group, we had last year SEK 91 million in EBITA and this year we've now added to that SEK 4 million in currency and SEK 16 million by volume. But we have also had price, cost, mix effect primarily due to raw material price increases relative to last year's first quarter of minus SEK 13 million. So the net of all of this so far then is SEK 20 million minus SEK 13 million, that's SEK 7 million-plus. And on the SEK 7 million-plus, we then add SEK 8 million more of increased EBITA, which comes from acquisitions, bringing the total profit improvement up to SEK 15 million, and thus bridging from SEK 91 million to SEK 106 million. And you can see in there the columns how that is split over our operating segments and over the group other parts. So to wrap it all up, I think, we can look at Page 12, and I will not repeat the summary because it's the same summary that was on the first page of this presentation, other than to say that Q1 was what we like to think of as quite a successful quarter and it came -- it showed a good improvement over last year's first quarter, which was also quite a successful quarter. And in total, the net of all the business that we posted, our best quarterly sales, our best quarterly EBIT, EBITA and also our best quarterly earnings per share ever, which is, of course, nice. If we look ahead, we see that we've had strong demand now in the beginning of the year, and that order intake in the beginning of the year, again, was in line with net sales. We don't know what the demand is going to be ahead, but we have not seen yet signals of weakening demand. And naturally, being optimistic people, we're going to hope that this will continue. On the order intake, maybe you can see that the signals this quarter were slightly less positive than the signals the 2 quarters preceding this quarter. So -- but at least, signaling, I guess. The continued raw material price [Audio Gap] that we saw in the end of 2017, we have not yet been able to completely offset, and therefore we need to focus on further price increases also in 2018. And we're focusing on our strategic targets, which is to be the strongest player in our industry in 2020 under the heading "Leadership 2020", and that remains, of course, a priority, also, for the remainder of this year. And with that, operator, I would like to turn over to Q&A. So if you could please instruct the participants how to ask a question.

[Operator]

[Operator Instructions] So your first question comes from the line of [ Allan Meyer ].

[Unknown Analyst]

Two questions, if I could. The first is, could you give us sort of a sense of how you're managing to offset the bottlenecks and sort of the extended lead times you're seeing in your own supply chain and how, obviously, a danger that would, at some point, impact your own service to your own customers. So it'd be good just to hear about how you're managing to offset that. And the second one, if I could is, could you remind us the kinds of things you're investing in for your Leadership 2020 initiatives?

[Jörgen Rosengren, Chief Executive Officer]

Those are good questions. Regarding the bottlenecks, I guess, that's what you can call our core business. We are -- we take all the responsibility for the sourcing and quality assurance from our customers for the C-Parts that they have. But we also take over the responsibility for the logistics. And logistics in that case does not only mean trucks and moving things, but it very much means also managing the forecasts from our customers, our own assessment of those forecasts and projecting or propagating them to our suppliers and then matching that whole thing. And when there is a lot of demand from the customers, which is the case now, then the customers also tend to face bottlenecks and that tends to lead to replanning and changing of the production schedules and so on, and that actually creates a strain on our supply chain. But that is where our experience and our tools and our processes and the Bufab best practice come in. We have been doing this for 4 years. It's what we do all day long, and therefore, we believe that we are doing it well -- very well. And anyway, it's a fact that we have not experienced big bottleneck issues ourselves in the delivery to our customers in this last quarter. And that's, I think, a sign of strength, which we're happy about. Regarding the investments for Leadership, the -- I guess, the 3 main areas that we're looking up there is: a, to continue to invest in our partnerships with our customers to become more relevant to the customers, and thereby, driving more growth. And that, for instance, means developing the offering, the services and product, the range and so that we offer to our customers, so that we are a more relevant partner firm going forward. That's area 1. Area 2 is that we're putting a lot of effort into further improving our supplier base. We have said that in 3 years' time, in 2020, it should be the world's best supplier base in this niche. And the third area is that we're investing in what we call the Bufab best practice, that is to say the work methods, the processes, the tools, the IT, and also the teams and the education of the teams around the world, so that we can perform our -- things like the ones your first question referred to at the very high level of professionalism and precision. So those are the 3 main areas that we're investing when it comes to Bufab best practice.

[Operator]

And your next question comes from the line of Robert Redin.

[Robert Redin, Research Analyst]

Three questions, if I may. So I read about these Easter effects, 3% on top line. Would you say that -- so what would the gross margin on that lost sales? Would you say -- would it be similar to your group gross margin? And a second question on -- around whether -- if these effects have any impact on order intake as well.

[Jörgen Rosengren, Chief Executive Officer]

So your first question is, is the gross margin on the 3% "lost sales" is that similar or different from the group gross margin?

[Robert Redin, Research Analyst]

Yes, something like that. What do you think the net impact is on gross profit?

[Marcus Andersson, Chief Financial Officer]

I would say that the impact on the gross profit is just as you say, the same level as the gross margin would have on the other sales that we have reported in the quarter, so to say. So I wouldn't say it's the difference between the calendar effect of net sales compared to the reported net sales effect when it comes to gross margins.

[Jörgen Rosengren, Chief Executive Officer]

And Robert, say your second question, again, please.

[Robert Redin, Research Analyst]

Yes. If the order intake in the quarter -- because I mean, order intake and book-to-bill has a bit of seasonality in it and that sort of impact the order intake as well.

[Jörgen Rosengren, Chief Executive Officer]

Yes. I don't know that we have an opinion about that. I mean, that's really hard to say if that's in a fraction higher or a fraction lower or whatever. I mean, that's such small numbers, Robert, that I don't think we have an opinion about that. All in all, we're expected to move more or less the same as sales, I guess.

[Robert Redin, Research Analyst]

Okay. Very good. And then on these price hikes, I mean, you mentioned that you still have to list prices to compensate, and of course, you have that negative SEK 13 million in the EBIT bridge from price, cost, mix and other. So maybe it's sensitive to talk about what -- how far do you think you've come in terms of the price hikes. How -- are you halfway? Or given that everything stays the same from here -- or could you say something about the process around listing prices?

[Jörgen Rosengren, Chief Executive Officer]

Well, I mean, I can say it's painful. We can say it's a painful process for everyone involved. But I think that we can only go to customers and talk about things that have already happened. We cannot talk about things that are going to happen. So all through 2017, we did implement price increases and also got good effect from those price increases. And our own feeling is that we compensated, give or take, for the price hikes as we were forced to take it from our suppliers in the beginning of 2017, during 2017. However, for obvious reasons, we did nothing on those price hikes, compensates for the price hikes, which we were accept -- forced to accept during the second half of 2017. And that work remains to be done now, right. So we feel that we're caught up until, I guess, after summer or something like that last year with our incoming goods. But now we're faced, of course, with effects of the continued raw material rally, which took place during the tail end of 2017, right. So it's more a question of a lag than of a question that we're not able to do it. It's just that, for natural reasons, we have to do after the fact not before the fact.

[Robert Redin, Research Analyst]

All right. Also on that, I mean, I noticed in the bridge that the price, cost, mix, others line was significantly negative in International, right, where you did see cost margins improving and not so negative in Sweden. Gross margin was still down year-over-year. Or was that -- or am I wrong? How is that?

[Jörgen Rosengren, Chief Executive Officer]

Well, the -- put it like this. In Sweden, we don't have a positive currency effect. We're able to, more or less, stay afloat relative to the tail end of 2017, but of course, we were quite negatively influenced to the beginning of 2017. In International, actually, we're relatively happy with the gross margin development. I think the gross margin now is the best it has been for a very long time, maybe the best ever. And that is partly because of the euro effect that Marcus was speaking about before, but also because we have implemented price increases. So I think, you can say that, in both segments, we have implemented price increases and both segments had to accept cost increases as well. But in Sweden, the situation is worsened by a strong dollar; and in the International, it's eased by a strong euro, right. So that is what is the biggest difference between the gross margin developments in those 2 segments.

[Robert Redin, Research Analyst]

Okay, yes. I mean, because I -- based on segment International, gross margin setup, 50 bps year-over-year, but the price, cost, mix, other effect is SEK 9 million, so it's negative. So it's 1.5 percentage points or something negative year-over-year. So whereas in Sweden, it's different. But okay -- sorry, the last one...

[Jörgen Rosengren, Chief Executive Officer]

That currently goes to say in International, the EBITA margin is up. So I mean, it actually is true that there is a negative price, cost, mix in International and it's driven, of course, among other things, by the expansion that we're doing there, right. So...

[Robert Redin, Research Analyst]

Okay, yes. All right. Sorry, last question from me. Your acquisitions, I mean, the pipeline there, do you feel that it has strengthened or weakened? Or is it the same compared to, say, a quarter or 2 quarters ago? And are there any developments there and market becoming harder to -- or is it the same still?

[Jörgen Rosengren, Chief Executive Officer]

No, we were happy about it a few quarters ago and we're happy about it now, too.

[Marcus Andersson, Chief Financial Officer]

It has weakened in the sense that we made an acquisition in December and that was there last time we spoke, I guess, but not there now anymore, right. But we're, of course, trying to fill it up with other things, put it online. So we're happy about it then, we're happy about it now.

[Robert Redin, Research Analyst]

And you must be happy about the acquisitions as well because if I'm -- if I have the numbers right, they must have reported 20% or something EBIT margin in the quarter.

[Jörgen Rosengren, Chief Executive Officer]

Well, but then you're reading numbers that I'm not reading. So I mean, it's just -- we have good contribution from acquisitions. Yes, we're happy about that.

[Operator]

[Operator Instructions] Sir, there are no further questions at this time. Sir, please continue.

[Jörgen Rosengren, Chief Executive Officer]

Okay. But then, I would like to thank everybody who participated for your time and your interest in Bufab, and wish you a good day. Goodbye.

[Operator]

And that concludes your conference call today. Thank you all for participating. You may all disconnect it.