Bufab AB (publ)

STO:BUFAB

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Bufab's Q1 earnings release conference call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jorgen Rosengren, CEO of Bufab. Please go ahead.

[Jorgen Rosengren, President & CEO]

Thank you, operator. Good morning, everybody, and welcome to this Q1 conference call for Bufab. My name is Jorgen Rosengren. I'm Bufab's CEO, and I'm joined in this conference by Marcus Soderberg, who is Bufab's CFO. And we'll be taking you through today's material and the information together. And like the operator said, towards the end, there will be an opportunity for everybody to ask a question if you have one. We'll be referring -- throughout this conference call, we'll be referring to a material, which is available on bufab.com. And I'll start off with the third page of that material, and it has a beautiful title. It's called continued strong growth and significantly improved profitability. And that is also a good summary of our first quarter in 2021.It was, to be sure, a very challenging quarter operationally. We've had lots of work to do with, generally speaking, quite strange supply chain situation, which exists today globally. And we're struggling also with increasing costs for components and increasing costs for freight. But nevertheless, we have had the pleasure to record an all-time high results in the quarter for sales, all-time high operating profits and all-time high operating -- all-time high earnings per share as well. And there are 2 reasons for this. The first one is that sales is up, it's up quite dramatically actually as reported only 8%, which is, of course, good in itself. But there is a negative currency effect of minus 6% due to the strong Swedish krona primarily, and a very, very strong underlying organic growth of 14%.And it should be noted in the context of that the first quarter of 2020 was relatively weak. Still we are quite proud of this organic growth. It is driven partially by good underlying growth in all segments actually, but also by us gaining market share also in all segments. And this is a trend, of course, as our long-term investors know that we've had for many years, but still it's very pleasant to see that even in the COVID situation, we managed to gain market share. On top of that, we've had, in the quarter, very low costs as we'll be seeing in a moment. And the combination of strong sales and low cost, that combination delivers up a very, very solid profit improvement, actually, operating profit improvement of 40% and also an improvement of the net sales -- of the net profit by 38%. If we have to single out -- actually, most of our subsidiaries did extremely well, but if we have to single out 1 or 2, we would like to mention our newest acquisitions acquired in the end of 2019, both of which contributed very well. In the beginning of this quarter, we've launched a new strategy for sustainable leadership, which is valid until 2025. And in connection with it, we also launched new financial targets for the next 4, 5 year. And as you can see in a moment, we've made a good start towards those financial targets for this quarter. And very importantly, in this quarter, we committed to the science-based targets initiative. It's an initiative that's backed by the United Nations. And our commitment to it constitutes a very, very dramatic and ambitious -- ambition improvement when this comes to sustainability, the topic that is very near and dear to us but also quite important for our customers, our staff and our owners. So an eventful quarter all in all. And now I would like to turn over the word to Marcus Soderberg, our CFO, who will be taking you through the financial highlights for the group.

[Marcus Soderberg, Chief Financial Officer]

Thank you very much, Jorgen. Let's turn to the page called financial highlights for the group, as Jorgen said. As you can see, and as Jorgen already mentioned, we had a really good month when -- quarter when it comes to net sales. Net sales increased with 8%, where 14% was actually organic and a negative impact of currency effects of about 6%. Net sales was good, as said, but the order intake was actually even stronger, as you can see, plus 12%. Gross profit margin increased with about just more than 1%, driven mainly by purchase savings during 2020 -- the end of 2020, but also due to increased volumes, of course.Operating expenses came in very low, 15.5% of net sales, driven by efficiency gains, of course, also higher volumes. But a good operational leverage made the operating profit increase with 40% to SEK 177 million. Not only the operating profit increased with about 40%, but also the earnings per share increased with about 38%. So a good development all the way down to the bottom row, you can say. If you look at the lower-left corner, we have the EBITA bridge. And as we can see, currencies had a negative impact of about SEK 11 million. Strong volume increase had a positive impact of about SEK 55 million. Cost, price mix and other added about SEK 13 million. And acquisitions, meaning namely the revaluation of additional consideration in connection with the acquisition of HT BENDIX, had a negative impact of about SEK 6 million, leaving us with an EBITA of SEK 177 million. If you turn page, you will see another page called financial development of the group. You have 2 graphs, one showing our quarterly net sales growth. And as you can see, we have been having growth for many quarters back in time, except for the very weak quarter of -- the second quarter of 2020. But as you can see, we have had both good organic growth and also good total growth meaning mainly also acquired growth, so to say, well above our target of 10%. And in the month, as said, good organic -- in the quarter, good organic growth of 14%, but a total growth of about 8%.If you look at the right graph, you also here see the rolling trend -- 12-month trend of net sales and EBITA. And as you can see, since the second quarter or actually the third quarter of 2020, we have been taking a big leap upwards when it comes to profitability. And explanations to that is, of course, increased volumes but also heavily increased efficiency gains and good result development from the cost savings program that we launched back in 2019 but increased in mid-2020. So really good development when it comes to the result and the EBITA.If you turn page to the page showing segment North, you can see that also segment North had a really good quarter growth -- total growth of about 8%. Organic growth was 10%. And as you can see, also a good order intake. The gross profit margin increased significantly, mainly driven by purchase savings but also due to higher volumes, especially in the producing companies or the manufacturing companies. Also here, you see that we have decreased the operating expenses in comparison to net sales. So good cost savings and efficiency gains, meaning good operational leverage also causing the EBITA in absolute figures to increase with about 30%, leaving us with an operating margin of 12.2%, more than 2 percentage points higher than the comparable quarter.If you just turn the page to segment West, you can see that also segment West had a good development net sales-wise. Total growth was about 4%, heavily impacted by negative currency effect. The organic growth rate was actually 11%. And also here, good order intake on the total. Gross profit margin also increased here with about a percentage point, also due to cost savings, but -- purchase savings, but also due to higher volumes, of course. Operating expenses also here going definitely in the right direction, significantly lower operating expenses in comparison to net sales, about 15%, meaning good operational leverage, also causing the operating profit to increase with more than 50% to SEK 35 million, leaving us with an operating margin of about 11.1%.If you just turn page to segment East. Also, East had a really good development net sales-wise, up total growth with 14%, but the organic growth was actually more than 28%, of course, driven by a weak comparison quarter should definitely be mentioned, especially in Asia. Gross profit increased slightly, also here purchase savings and rather higher volumes. Operating expenses, down not only in percentage of net sales, but also in absolute figures, leaving us with a really good development EBITA-wise of more than 44% and an outstanding operating margin of about 18.1%. So a fantastic development in segment East during the quarter. Finally, the last segment, segment UK/North America. As you can see, also, UK/North America had a good development net sales-wise, up about 8% in total and organic growth rate was actually 17%. Also here, the order intake was considerably stronger than net sales. Gross profit, quite stable, slightly up. We see purchase savings also in segment UK/North America and, of course, higher volume causing the gross profit margin to go up slightly. Operating expenses down, not only in percentage of net debt but also in absolute figures, meaning very good operational leverage also here, leaving us with an EBITA profit -- operating profit that increased with 41%, leaving us with an operating profit margin of about 14%, so considerably stronger than the comparison quarter.If we turn page to the one with the heading strong cash flow fuels active acquisition strategy. And if we look at the first graph on the left, you see it's actually showing our operating cash flow and cash conversion during the last quarters. And as you can see, we have been having really good cash conversion more or less during all of 2020, at least, since the second quarter. Went down slightly during this quarter, mainly due to the very high growth rate that we have seen, meaning that we have tied up more money into net working capital, at least in absolute figures, even though we are slightly more effective when it comes to net working capital compared to net sales, so to say. So -- but anyway, good cash conversion. And this is also the explanation to the next graph. If we look at the right, as we can see, it's showing our net debt versus EBITA, the multiple of that. And as we can see, we were up on a very high level back in the end of 2019 and the beginning of 2020. But due to very good cash flow reducing mainly net working capital, together with good measures taken when it comes to cost control, led us to a very good development in the net debt and EBITDA as the volumes came back during the end of 2020 and now in the beginning of 2021. So we are now a significantly stronger company financial-wise than we were 1 year ago. So very good development, which we are very proud of.

[Jorgen Rosengren, President & CEO]

Thanks, Marcus. So lots of numbers there, but actually all of them good, and that is one of the aspects of this quarterly result that we're especially proud of is that the improvement is so broad across all of our operating segments. In fact, all the operating segments improved their sales, all improved their profits and all improved their margin. On the next page, we -- which is entitled EBITDA bridge, you can see a bit of how the result this year's first quarter was built up. And if we talk about last year's EBITA in the first quarter, which was SEK 126 million and the result of which we were quite proud of at the time. We've had, unfortunately, negative currency effect, again tied to the strong Swedish SEK of about SEK 11 million negative. But a strong volume at SEK 55 million to the profit, very good cost control. So despite the strong volume, we are still SEK 13 million better on costs. And that totals [ SEK 68 million ], so a strong positive. There is a strong -- small negative this quarter from acquisitions, but that is actually also good news because it pertains to our revaluation of the earnout accruals that we had for some of our acquisitions. And we're making this revaluation upwards, which then results in a negative result effect because those acquisitions have developed much stronger than we thought before. So in total, SEK 126 million, minus SEK 11 million, plus SEK 55 million, plus SEK 13 million, minus SEK 6 million equals SEK 177 million, which has again been our best-ever quarterly result in Bufab by a flat margin. Now the second table on this chart -- or on this page shows quite clearly also that the improvement was spread evenly across our segments. So segment North, our largest segment, contributed SEK 16 million to profit improvement, whereas West, East and UK/North America all contributed slightly above SEK 10 million, resulting then again in about the SEK 50 million profit improvement. On the next page, we turn to something that I know investors are very interested in, and that's our acquisition strategy. We have made 9 acquisitions in the last -- since we were noted on the Stockholm Stock Exchange in 2014. And we have, over the years [indiscernible] investments, made about 50, 5-0 of acquisitions. In the last few years' time, we've added about 500 employees and about SEK 2 billion of sales. Now a year ago, there was not so much demand from investors for us to make new investments in acquisitions because at the time, our net debt-to-EBITDA was quite large, and there was uncertainty related to COVID. But now we feel we have a very good situation where it's quite possible for us to make acquisitions with a much stronger balance sheet and also as the effect of vaccines start to kick in, easier to go out and meet acquisition candidates. We like to actually meet and get to know the acquisition candidates that we have in our pipeline quite well before making acquisitions because part of our acquisition strategy is to only acquire very good companies. And we've been actually strengthened in that by the fact that the last 2 acquisitions we made have been super good. So we're a bit picky, but now at least we have the wherewithal to make more acquisitions, and we do also have acquisitions in our pipeline.On the next page called our new plan is a small picture of our new growth called sustainable leadership, which is valid until 2025, which we launched earlier this quarter. And for the interest of readers, you can go to our investors' website and there you can partake of the material, which we presented on our Capital Markets Day in March this year. And there, you will learn more about the plans that we have to grow, to improve our business, to keep investing in our business to generate a sustainable advantage relative to our competitors, so we can continue to take market share and also to continue with our acquisition strategy.In connection with this new strategy, we also launched new financial targets. And they are more ambitious than the ones we had before. We aim now to grow 10% a year every year until 2025, although it can vary a bit up and down. We have raised the ambition level with regard to profitability and said that we will reach a sustainable 12% EBITA margin by 2023, latest, as we will continue to show to our investors a strong dividend growth by continuing to give out profits in the range 30% to 60% of earnings per share.I mentioned sustainability, and that's also one of the keywords of our new strategy. And on the next page, you can see some of the important first steps that we've taken on a long journey because this is a long-term challenge that not only we but every company on the planet is faced with. But it's nevertheless good to see how, in 2020, we delivered good sustainability results also, not only very good financial results. So you can see on this page that our total emissions in Scope 1 and 2 of carbon dioxide equivalents decreased by 30% last year. And the emissions per sales -- per SEK sales also decreased by about 30%. We increased a portion of our sourced energy -- source electricity, which comes from renewable sources from 69% to 74%, so by 5 percentage points. And we also paid more tax, and that maybe is not something that is lifted up so often in these -- in this context, but it is important. It's an important part of our sustainability strategy to contribute to the societies where we are overactive. And part of that is, of course, paying tax. Good profits mean a possibility to pay tax and to contribute for the societies. Our tax contribution to society increased in fact by 26% last year, which is more or less also the profit increase we had. So to summarize, the situation we're in, in the first quarter, we had operationally quite challenging first quarter, but we also recorded all-time high sales and profits and also, in fact, a very, very strong margin. Our balance sheet is now much stronger. And the demand improvement that underpins this was solid across all segments and also coupled with increased market share in all segments. And the profit is also further driven by dramatically improved efficiency.On the other hand, we do see very strained supply chains, and we do see also increase in costs for components and freight. And that also influences the outlook because we see that we have to battle with that also going forward, and that means that we do have to increase the prices to our customers. But on the other hand, the outlook for demand remains favorable as we see it now at least. And the results are very, very low inventory levels throughout the industry, which, of course, is good for demand. And most important, though, we're in a much stronger position today than we were 1 year ago, and even more stronger than we were 2 years ago and so on. And in particular, we would like to highlight that we are a more efficient company now. We're a more flexible company now. And we have stronger customer relations now than we did 1 year ago, thanks to the long-term investments that we've made in our organization, in our systems, in digitization and in acquisitions also. For this year, the priorities are to continue to ensure, in a very tough situation, high-quality deliveries to our customers despite strained supply chain. We need to start recruiting and strengthening the organization to face this higher demand picture that we're seeing now and also to be able to continue to benefit from the sales opportunities we see. And we do need to move the cost increases that are now prevalent in our industry onwards to the customers and have them help pay for that.And that concludes our prepared comments. So operator, if you can hear me then now it's a good time to open up for questions from the audience here.

[Operator]

[Operator Instructions] And your first question comes from Robert Redin.

[Robert Redin, Research Analyst]

Rob Redin from Carnegie. Yes. A couple of questions, if I may. So one is on that organic growth. You're right in the report that the organic growth was particularly strong in March as comparisons then were impacted by COVID maybe. But could you say something about the daily or weekly sales development? Did it improve in March? Or was this just what the comparisons were easier in March? What's an improving trend throughout the quarter in demand is maybe the question?

[Jorgen Rosengren, President & CEO]

It was a slightly improving trend in the quarter, but not extremely noticeable. So we had a solid sales development throughout the quarter, I guess you could say. March was influenced partly because it was 1 working day more. But also as you say, because the comparison was weaker in March because we started to see last year and towards the tail end of March, especially the last week, 7 days, something like that, the first effect of the COVID pandemic especially in Asia, which then influenced our operations in China in particular. So we saw a solid trend, but March was especially good due to those effects. What is, however, encouraging, I think, is also the order intake, which continued strong throughout the quarter and maybe even accelerated a bit. So we're -- I have to say we're unusually bullish on the demand trend.

[Robert Redin, Research Analyst]

Sounds great. Yes. And then another maybe tied to interest, the cost inflation, the raw materials and the freight cost and so on moving higher, so you have to raise prices. Is there any contribution from prices in Q1? Or is the 14% just volume? And on prices, when do you expect to see a contribution to organic growth and price hikes to the second half of the year or...

[Jorgen Rosengren, President & CEO]

Yes. Let me just add something that I should have mentioned with regard to your earlier question, Robert. The -- what is also encouraging for demand, I think, is the low demand and the low inventory levels we see throughout the supply chain. It's quite clear that most of our customers have no inventory at all of any components. And we have no inventory, or we have at least a much lower inventory than we usually do. And our suppliers have no inventory. And apart from some ships being stuck in the Suez Canal, there is also now inventory in the freight chain. So that, of course, underpins our belief in the strong demand going forward. With regard to price, I think, Marcus, we can say that there were not any contributions from prices. Is that not correct in the first quarter to growth?

[Marcus Soderberg, Chief Financial Officer]

Yes, I would say so, definitely.

[Jorgen Rosengren, President & CEO]

But we did improve, of course, our operating margin -- sorry, our gross margin as you can see in the quarter, partly because of leverage, but also partly because of the cost savings that we did last year, which now are filtering through our P&L. So the challenge now is to meet the cost increases, which we see now with price increases in the same timing during the rest of the year.

[Robert Redin, Research Analyst]

Right. And you wrote something about the large price increases, but maybe is there any indication on what that range could be in terms of numbers?

[Jorgen Rosengren, President & CEO]

Yes, there's plenty of indication on that. So that's a very hot discussion that we're having now with our customers exactly what is a good level there. So I'm not going to go out here and give you a percentage because we're negotiating with ourselves. But it's quite clear that we're going to have to ask for and get significant price increases from each of our customers.

[Robert Redin, Research Analyst]

All right. Perfect. And then a final question on M&A or maybe in the management, the net debt to EBITDA. So on net growth, it's the lowest it's been since Q1 2015, the relationship. So I guess how do you see the M&A pipeline? Is it improving? Or is the market picking up so strong that valuations have pushed higher? How do you see the M&A pipeline developing?

[Jorgen Rosengren, President & CEO]

I guess we can answer what we usually do answer and that is we don't make such a high number of small acquisitions as some of our peers in the industry, and therefore, it's hard to make statistics out of our M&A pipeline. We have, we think, a good M&A pipeline. But it's hard for us to tell whether it's influenced by this or that short-term trend. And most of the acquisitions we made -- we have made in the past and/or intend to make in the future are preceded by long discussions with the previous owners. With the management teams have more to do with that than with the short-term trends. So I really don't know the answer to your question is my answer.

[Robert Redin, Research Analyst]

All right. But it's still...

[Jorgen Rosengren, President & CEO]

And we can certainly afford it. I mean when we had that situation in 2015, then that's when we restarted our acquisition strategy. Since then, we've made 10 acquisitions. And of course, we intend to make acquisitions also going forward.

[Operator]

Thank you. We have no further questions at this time. [Operator Instructions] And there still seem to be no further questions. I would now like to hand you back to Mr. Rosengren. Please go ahead, sir.

[Jorgen Rosengren, President & CEO]

Thank you. So then I would like to thank everybody who attended for your continued interest in Bufab and wish you a very pleasant day. And thank you and goodbye.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.