Bufab AB (publ)

STO:BUFAB

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the presentation of the Q1 2020 results conference call. [Operator Instructions]I would like to advise you that your conference is being recorded today, Tuesday, the 21st of April 2020. I would now like to hand the conference over to your speaker today, Jörgen Rosengren, company CEO. Please go ahead, sir.

[Jörgen Rosengren, President & CEO]

Thank you. So my name is Jörgen Rosengren. I'm the Bufab CEO. Good morning, everybody, and welcome to this conference call on the first quarter result for 2020 for Bufab. Here with me today, we have also Marcus Andersson, Bufab CFO. And we will be referring throughout this call to our presentation available on the bufab.com under Investors about the first quarter results and by page number then. And I'd like to start out on Page #2, which is entitled Q1 2020 in brief. Throughout this call, we'll be talking a lot about the corona crisis. But first, let's start before it hit Europe and say that we had, overall, a strong quarter in the first quarter of 2020. Sales were up 21%. That was all of it due to the 2 large acquisitions we made last year in July and November. So 24% acquired growth, whereas organic growth was 5% negative, and then we had 2% positive currency effect. The order intake was, in fact, in line with net sales.We saw slightly lower underlying demand, especially towards the end of the quarter, but we kept our market share unchanged. And in total, as I said, going into this call, we had, in the quarter, all-time high records both for sales and for order intake and for operating profit. We also had a very strong cash flow in the quarter, which is also, of course, a good thing.So it is fair to say that the impact of the COVID-19 pandemic was rather low in the first quarter of 2020. We did have impact in the beginning of the quarter in Asia, predominantly in China, but also in our operations in Southeast Asia, but it was not until the very end of the quarter. In fact, most of it in the last week of March that we saw a large effect on our operations and our customers in Europe and in North America. However, when that impact came, it came in a big way, and we could see in the last week of March and especially in the beginning of April, that demand decreased quite dramatically. In fact, in April, so far, it's down approximately 30%. And that is caused by some customers closing operations due to part shortages or due to shortage of labor or due to other supply chain-related issues. But it's also, of course, due to the government restrictions that have been put in place in Europe especially in Central and Southern Europe, and in a very big way also in North America where Bufab now has rather sizable operations.We, of course, have, from the start, focused, first and foremost, on the health of our employees and our partners. And there, we took very strong measures in the beginning of -- I guess, in the beginning of the pandemic in the middle of the first quarter, to protect the health of everybody involved. And we were helped in that by getting a lot of -- acquiring a lot of knowledge and experience in our Asian subsidiaries in the beginning of the pandemic. We've also focused a lot on customer quality and delivery because in this phase, it has been a very turbulent period, both with regards to the customers and their order flow and manufacturing schedules. But also, of course, we have been influenced by many suppliers closing down or reducing capacity drastically first in Asia and then later in Southern Europe and now in large parts of Europe and also in North America. And all of this, we are rather happy to say that we have been able to keep our customers supplied with good quality throughout this very turbulent period, which is important, of course, for them, but it's also important for us in the longer-term because our customer relations is 1 of the key assets that we're striving to protect in this crisis.But we have also taken actions to protect Bufab, in particular, to meet the lower demand that we see happening now, at least in the second quarter. And that has involved much work on reducing the hours worked, employing the various schemes that governments around Europe and in the U.S. and Mexico have put in place to allow for furloughing or in Swedish, [Foreign Language], but also, unfortunately, some layoffs. And with these schemes in total, we have reduced the paid working time by 30% in April.We're, of course, also scrutinizing all other cost items and CapEx and reducing or postponing it whenever possible. And we are quite ready to take further measures if demand should fall further from this level. So in total, we have -- we feel a good action program in place, which enables us to keep operating during -- even if this period of lower demand should be more prolonged, we feel ready for that. But we're also careful to prioritize speed and flexibility because when the demand turns up again, which no doubt it will at 1 point, then it will be very, very important to be able to flexibly ramp up again both our own capacity and the capacity of our suppliers.So of course, rather a dramatic quarter for Bufab but also financially a strong quarter. And now, I would like to turn over to Marcus Andersson, who will start on Page 3, to explain to you what the numbers look like in the first quarter.

[Marcus Andersson, Chief Financial Officer]

Thank you very much, Jörgen. And as said, we will turn to Page 3 and look at the financial highlights for the group. And just as Jörgen said, you can see that net sales increased with about 21% in all driven by the acquisitions of HT BENDIX and American Bolt & Screw. The organic net sales decreased with minus 5%. If we look at the gross profit or the gross margin, we can see that it declined with just over 1%, which is explained mainly by the acquisition of HT BENDIX in segment North, together with core business mix within segment West.On the cost side, we can see that cost in comparison to net sales increased with about 0.3 percentage points. This is mainly due to -- it was mainly driven by a decrease in net sale or the negative organic growth. In all, the operating profit or EBITA increased with SEK 7 million to SEK 126 million in the quarter, corresponding to an operating margin of 9.5%. If you look at the bridge in the lower left corner, the EBITA bridge, you can see that currencies affected EBITA negatively by SEK 6 million. Volumes or negative growth with minus SEK 16 million, price/cost/mix/other added SEK 5 million and acquisition of HT BENDIX and American Bolt & Screw added about SEK 24 million, making the quarterly result of SEK 126 million. If we turn to Page 4, you first on the left, have growth of -- growth development in the last 4 quarters. And as you can see, the last quarter, we ended a very good historical trend with organic growth. We have seen negative organic growth since Q4 with minus 5%, and we have the same level of negative organic growth in the first quarter. But on the other hand, as you can see, the total growth was actually very good due to acquisitions of HT BENDIX and American Bolt & Screw. If you take a look on the right graph, you can see that we still have a really good trend when it comes to total growth. But on the other hand, driven -- on the other hand, the EBITA has -- the EBITA growth went down a bit compared to the good trend we saw during 2018 and '19, and that is, of course, driven mainly by the negative organic growth we have seen in the last 2 quarters.And then I think we turn to Page #5, and I will hand over the word to Jörgen Rosengren again.

[Jörgen Rosengren, President & CEO]

Yes. So despite these strong numbers, and in fact, the best numbers we have ever recorded in a single quarter, both in terms of sales and operating profit, as I mentioned, we have now had to, of course, focus quite a lot on the development in the society around us and particularly then on the corona crisis. We set out early in this process 3 priorities, and they are depicted on Page 5. They are: to protect the health of the team and families and society; protect our customers; and protect Bufab. And these projects also lead to our core values, as you can see on this picture.If we turn to next page, Page 6, you can see that in January and February and March in the first quarter itself, except at the very end, we focused quite a lot on the first 2 priorities to protect health and to protect delivery to customers. However, since the tail end of March and during April, we have had to focus on those things, but also on flexibly adapting our operations but also our cost base to changing market conditions. And we have done that in the way that I explained before that we have tried to make sure that the working hours in Bufab are aligned with the sales that we have in a flexible way week by week. Now there's good news and there's bad news. If we turn to Page 7, we can say now with certainty already, although we're only halfway through April, that there will be a significant negative impact on the sales -- on Bufab sales in the second quarter of 2020. We saw a very sharp decline in demand in China, in particular, and later in Southeast Asia during February directly after the Chinese New Year. But this demand, however, recovered in late part of March when the authorities there and the societies in Asia had gotten the pandemic better under control. Of course, as it spreads to new countries, we see, however, an impact in some of our smaller markets there, for instance, in some of the smaller countries in Southeast Asia and also in India. But from the last week of March and in April and onwards, we have seen very substantial customer closures of various industries throughout Europe and North America. First and hardest hit industries were, of course, the ones related to the automotive manufacturing, both of trucks and personal vehicles, but we also saw a very big effect of lockdowns in Europe and also in North America from the very end of March, where, for instance, the state of California issued more or less a complete curfew and a ban on most nonessential businesses from the last week of March, and we have a sizable operations in California. There is, of course, a difference between countries and industries. Some are harder hit, some less hard hits. And we see this as strength now in the current conditions that we have such a wide array of countries and such a wide array of customer industries that we serve. And this diversification is the strength we see in these circumstances. However, as I said before, sales in April started at least a minus 30% down, relative to normal levels. And it's quite unclear, of course, how long that effect will last. On the one hand, we're seeing some positive signs where we're seeing at least some automotive manufacturing operations restarting either in the last part of April or in the beginning of May and other customers too. But on the other hand, it's, of course, very, very hard, if not quite impossible to predict the development of the pandemic itself and also quite hard to predict how various governments and local regulations and also individual customers will react to that development, which means that we have a low degree of visibility to future revenue. Because that is so, we have launched a comprehensive and fast and also, we think, a strong action program while retaining flexibility. And firstly, and thankfully, we can say that we have had a very limited impact on health, delivery or quality and no red flags. We have, in fact, only 1 actually confirmed case of infection in Bufab, and that person is now fully recovered and back at work. And we have, of course, some suspected infection cases in various countries. But overall, we've had very, very limited impact on our operations and on the employees' health, thankfully from this epidemic so far.We have, however, intensified our action program, our efficiency program, which was launched last year. And it covers OpEx, of course, but also CapEx and margin. We have a good opportunity. We feel now to continue to working on improving our gross margin due to the lower raw material and freight and other prices that are expected to ensue as a result of this pandemic. And also net working capital, where, of course, we're working very hard to make sure that we don't build up excess capital in this very turbulent situation. We've taken, as I said before, significant action to reduce the hours worked. Those actions cover most subsidiaries, and they are flexible in the sense that we review them every week and set new levels every week in line with sales. And in April, we estimate that our paid hours worked will be at approximately minus 30% relative to normal levels. Here, we're very much helped by the strong actions taken by many governments in Europe and in North America to help businesses get through this crisis. And our focus is to protect our key people, of course, all our people, but not the least, the key people to make sure that we retain good customer relations, but also to make sure that we retain flexibility throughout this phase.This has happened -- turning now to Page 8, at the same time as we have implemented a new organization. I mentioned this also in our last call, so this is just a short reminder that Bufab now has a new organization where we've gone from 2 to 4 operating segments and from 6 regions to 10 business units. And again, we have this efficiency project going.Now I mentioned this thing with the operating segments because now I will turn over to Marcus Andersson, and he will take you through the results for each operating segment briefly, starting on Page 9. Go ahead, Marcus.

[Marcus Andersson, Chief Financial Officer]

Thank you, Jörgen. As said, starting on Page 9, taking a look at the segment North. We can see that segment North had a good growth of about 22%, mainly driven -- or in all driven by the acquisition of HT BENDIX, of course. The organic growth was negative with 5 percentage points. The gross margin was down with about 1.5 percentage points, and this is, of course, in fully explained by the acquisition of HT BENDIX.In general, the start of the quarter was good in the trading companies in January, February. But in the end of March, the demand went down on a quite lower pace.We also saw weak performance mainly in the Danish companies, mainly due to a lower demand in furniture and fittings business. Also, the producing units in Sweden, notably lower demand, mainly due to the lower demand from automotive customers. The operating expenses was actually lower in comparison to net sales than the comparison quarter. So all in all, the operating profit or the EBITA increased with SEK 6 million, corresponding to an EBITA margin of 10.1%. If we turn to Page #10 and take a look at segment West, we can see that segment West showed a negative organic growth of about 2%. And it -- also in segment West, we had a good start in the quarter, but the demand weakened throughout the quarter, just as in segment North. And the demand fell mainly in our German business, together with Netherlands and France due to the decrease in demand from automotive customers mainly. The gross margin was significantly lower comparison to the comparable quarter, which was mainly driven by poor business mix. The operating expenses was a bit higher than the corresponding quarter and was mainly driven by the negative organic growth. So all in all, the operating profit fell from SEK 34 million to SEK 23 million, which is, of course, a disappointing result.If we turn to Page #11 and have a look at segment East, we can see that segment East actually grew net sales with about 2 percentage points. And the reason for that was mainly due to that the segment were the first segment within Bufab was hit by the crisis in the beginning of the quarter, actually. The amount was weaker in the beginning of the quarter in China, but stronger in the end of the quarter in China. The businesses who added some positive organic growth are mainly the companies within the Eastern Europe area. Somewhat lower gross margin, but still good cost control offset that negative effect. So the operating profit came in unchanged compared to the comparable quarter last year, corresponding to an EBITA margin of 14.1%. If we turn to Page 12 and have a look at Segment U.K./North America, we can see that these segments grew quite a lot, 90%. All of the growth is corresponding to the acquisition of American Bolt & Screw. And also, this segment had a good start, but saw substantially lower demand towards the end of March when restrictions in each country started kicking in.Gross margin, just down slightly. Operating expenses, also down slightly, so a good operational leverage. That together with the acquisition of ABS, increased operating profit to SEK 29 million compared to SEK 15 million the corresponding quarter, giving an operating margin of 10.8%. If we turn to Page 13 and just have a look at the gross margin development over the last 4 quarters, and we start by looking at the growth for segment North. You can see that segment North, excluding HT BENDIX, who has a slightly different mix when it comes to gross margin and OpEx in comparison to net sales than the rest of the group, you can see that the organic development, the green line, the organic development of the GP margin has actually been quite stable over the last 4 quarters, and we are right now, since the last 2 quarters, in a positive trend, which is, of course, very nice to see.If we have a look on the group growth on the right side, you can also here see that we have had a pretty stable gross margin, even though it has gone down a couple of digits, you can say, which is, of course, mainly due to a poor business mix in segment West, together with the acquisition of HT BENDIX, so to say. But all in all, a rather stable gross margin development organically, you have to say.And by that, you can please turn to Page 14, I will hand over the word to Jörgen Rosengren again.

[Jörgen Rosengren, President & CEO]

Yes. And Page 14 is about acquisitions, and we have made 9 such acquisitions since 2015, about 2 every year. And we also made 2 last year, HT BENDIX and American Bolt & Screw, and they have turned out quite well for us. They had a very strong -- they had an okay second half of 2019, but a very strong first quarter of 2020. Unfortunately, however, both of them are now hard hit by the development in -- due to the corona crisis, but are both of them fundamentally very strong companies, which we expect to fully recover from that crisis once it passes. And from which we also expect very large growth synergies over time. We have very promising projects there.But then to wrap up the reporting on the first quarter, we have on Page 15 a bridge for the operating profit. Marcus already mentioned it. You can see that we had last year SEK 119 million of operating profit, and it was hit negatively by currencies and, of course, by the minus 5% organic growth that we had. But we had a good cost control, good margin control and acquisitions contributed quite strongly, meaning that we got to the SEK 126 million, which represents also an all-time high results. And on the right-hand side of this page, you can see how the development was per segment, and there you see that the acquisitions in North and in U.K. North America had a very positive effect, whereas we had a tough quarter in region West compared to the very excellent quarter in region -- or in segment West that we had last year. And so to summarize all of this, just some short points on Page 16. The first quarter showed strong growth. We had improved profit, and we had also a very good cash flow. There was -- there were effects of the coronavirus in the first quarter, but they were limited. But we did drop -- we did note, of course, a drop in demand towards the end of the quarter. The outlook is that the demand situation in Q2 will be quite challenging on the one hand, but on the other, that we have a comprehensive action program in place, which we think will enable us to get through this in 1 piece. And our priorities for 2020 are: number one, to get through this corona crisis in a good way by protecting the health of our employees and our team members and our partners; to protect delivery and quality to customers; and to protect Bufab and our results.And on top of that, we're also continuing to focus on new business generation, where there are also now good business opportunities we can see coming up. And we're also focusing on continuing to build our leadership platform according to our long-term strategy, which is unchanged. And with that, that concludes our presentation of the Q1 results. And operator, now if there are any questions from the participants, then we're ready to take them now.

[Operator]

[Operator Instructions] And the first question comes from [ Boris Miller ] from the Independent.

[Unknown Analyst]

Thank you for the new segment reporting. Could you please talk a little bit about worst-case scenarios, especially in combination with solvency and the higher-than-usual debt levels for Bufab? In terms of a worst-case scenario, what are you planning for, especially in case of a rolling shutdown that comes again in autumn and early next year? And if you talk about the structure and maturity of your facilities, your banks, when are major payments due? And any covenants that may make that callable, that would be very useful.

[Jörgen Rosengren, President & CEO]

Yes, one moment, please. Yes, thank you for the question. Regards with -- let me break that down a bit into the various component questions, please, okay? So with regards to the scenarios, it is, as you understand, very, very hard to predict how this will develop. And we also, to be quite honest, don't engage so much in that because we are now able we find to deal with the current drop in sales that we see in April in a good way, thanks to the cost tools and the working hour tools that are now provided by most governments in most countries where we are present. So we have, we feel, a good flexibility on the cost side to meet the varying demand scenarios that we're seeing. This minus 30% in April that we're seeing represents a very unusual situation at the least, where all of Europe's very large auto manufacturing industry is shut down and where the entire North American economy is also more or less in lockdown. And that is in a -- quite an unusual thing and 1 that we have not experienced for -- in a very long time, not even in 2009. And if we are able to deal with that, our ambition is to be able to continue to deal with anything that comes our way, both up and down. And therefore, we don't engage in worst-case scenario planning. It's simply so that we don't know what the worst-case is. We have seen, as I said before, some good signs now, with some customers opening up this week, the current week that we're now and some customers announcing opening up in the next week or the week after, the first week of May. And if nothing happens, then we believe that will happen, that there will be a recovery in demand. But we don't know that nothing will happen because we don't know how the pandemic will develop, and we don't know how the various governments around the world will react to that development.With regard to the covenants, I'll let Marcus answer that question.

[Marcus Andersson, Chief Financial Officer]

Yes. When it comes to credit facility as such, as you might have seen, we signed a new credit facility back in September 2019, which is a 3-year contract. So we have a 3-year contract when it comes to credit facilities. When it comes to covenants, we do not go into specific details when it comes to them, so to say, on what levels they are on, so to say.

[Jörgen Rosengren, President & CEO]

But we can say that we're not in a covenant breach currently. Also when it comes to credit facilities and liquidity, I think it's worthwhile to mention that as a trading company, we have our assets mostly tied up in working capital. And in times of negative organic growth, we have a long history of seeing that when that happens, then we also have a good cash flow. And that is also what you can see now in the first quarter or indeed, also in the last couple of quarters. That when we have negative organic growth, then we also have a good cash flow. And that, of course, helps immensely, both with the day-to-day liquidity and the room, the financial room to act, generally speaking. But it also helps immensely with regard to the financing issues that you might otherwise have expected. So we feel, in total, rather confident in our financial situation.

[Unknown Analyst]

So thank you for the detailed explanation. One follow-up, if I may. In this context, how do you think about acquisitions? I'm certain that opportunities will show up later this year, given the distress in the system. So what you're thinking on that front right now?

[Jörgen Rosengren, President & CEO]

It's true. We have an acquisition pipeline. And of course, as you can imagine, right now, it is very difficult to complete an acquisition because of the uncertainty on both sides and also the practical constraints that exist right now.It is also so, as you say, that many companies, unfortunately, will come into various distressed situations, and that can, of course, present opportunities, on the 1 hand, which is good for us, then even if it's bad for the people involved. But on the other hand, we're looking mainly to acquire very strong companies. We are not interested in weak or failing companies. And a strong company that gets into difficulty, typically, if it's a family-owned company, they don't want to sell when they're in difficulty. So it can work both ways. It can throw up some opportunities, but it can also delay the work on the existing opportunities.

[Operator]

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

[Robert Redin, Research Analyst]

Two questions, please. On that comment for demand being down 30% in April, what was the base, so to say? Was that a year-over-year comment or versus some level in Q1? Or what was the base? And also, what was the geography? Because when I read it, you talked about North America and Europe in the section above. Was that comment related to just North America or Europe? Or was it being the whole group, i.e. in Asia?

[Jörgen Rosengren, President & CEO]

I think, Robert, the number is a rough number. April is not finished. It reflects the whole geography to answer your question more directly, and it is an organic growth number. So that would mean year-on-year, but including the acquisitions. But of course, it's also quite a rough number because we have had the last couple of weeks, as you know, we've had Easter Week. Easter Week occurred later in April last year, so we had to compensate for that. So you have to see it more as a guideline of growth than a more precise number. Therefore, perhaps it also doesn't matter if it's year-on-year or relative to February or so because it comes up more or less the same. But it's intended to reflect our entire geography, the whole group as an organic growth number.

[Robert Redin, Research Analyst]

Okay. Perfect. Perfect. And then second question was on those gross margin comments, gross margins being down in segment East and West. And you talked about poor mix in 1 of the segments. Was that for mix? And is that sort of temporary or cyclical? Cyclically driven?

[Jörgen Rosengren, President & CEO]

Firstly, I can say, of course, that when we cut the group into smaller pieces, like we do now with these 4 segments, then smaller things become visible, right? So then we get to comment on things that otherwise would have been averaged out.Segment East, I don't think it's a very dramatic thing. Segment West maybe, Marcus, you want to comment on?

[Marcus Andersson, Chief Financial Officer]

Yes, segment West is actually mainly due to our business in Germany, who has seen a poor business mix in the last 2 quarters, actually, compared to the corresponding quarters last year. And that is something that we see from time to time, and it's all about mix, so to say, and how certain customers choose to take out orders and goods between quarters.

[Jörgen Rosengren, President & CEO]

We have customers there that have more of a project nature to their business than we do. We have more such customers or bigger such customers in that segment than we do in some other segments.

[Robert Redin, Research Analyst]

Okay. So hopefully, it can be a temporary thing, but it's not driven by demand being weaker and we've been forcing to...

[Jörgen Rosengren, President & CEO]

No, but it's primarily driven by the last year's first quarter being very good. I mean it's -- we had a spectacular quarter last year in that segment. Relative to that quarter, it's negative. But relative to, say, the fourth quarter of last year, it's actually rather good.

[Operator]

There are no further questions at the moment. [Operator Instructions] There don't seem to be further questions at this point. Please continue.

[Jörgen Rosengren, President & CEO]

Okay. In that case, ladies and gentlemen, I would like to thank you for attending this conference call with a presentation of Bufab's first quarter 2020 results, and I wish you a safe and healthy and otherwise, also a nice day going forward. Thank you, and goodbye.

[Operator]

Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may all disconnect.