Bufab AB (publ)

STO:BUFAB

Earnings Call Transcript 2023-Q1

[Operator]

Hello, and welcome to the Bufab Quarter 1, 2023 earnings call. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Mr. Erik Lunden, the CEO, to begin today's conference. Thank you.

[Erik Lunden, executive]

Good morning and good afternoon, everyone, and a warm welcome to Bufab's Q1, 2023 Earnings Call. My name is Erik Lunden, President and CEO of Bufab Group. And together with me here today, I have Marcus Soderberg, Group CFO.

I will start this call with a short summary of the quarter and then leave the word over to Marcus for group highlights, and then I will take you through the different segments and a short summary at the end, and then we'll have time for Q&A.

So if we start with the summary of the quarter on Page 3. We have a strong start of the year, and we're actually delivering our best quarter ever in terms of sales, operating margin and earnings per share. We saw a strong growth in the quarter, up 20%, mainly driven by the latest year's acquisitions. If you look at the organic growth, it's 0%, impacted negatively by comparative figures last year but also weak demand in segments East and UK/North America. We can see a very strong momentum in West with organic growth of 13%. And looking at order intake, it's slightly lower than our net sales for the quarter.

If you look at profitability, starting with the EBITA -- sorry, starting with the gross margin, it's somewhat higher explained by a positive business mix. I'm pleased with the cost control we have in the group and also see that we have good contribution from recent acquisitions. Looking at the EBITA level, it is strong, improvement of 33%, ending up on an operating margin of 13.5%. And if you adjust for items affecting comparability in -- compared to Q1 last year, our margin was 13.6%. I was also pleased to see the improvement in terms of cash flow, and we expect this to continue. If you look at operating cash flow in the quarter was SEK 336 million, and that corresponded to a cash conversion ratio of 99%. It's good to see that we have a strong momentum that comes to the cash flow.

I will now leave the word over to Marcus for some highlights for the group. Please, Marcus.

[Marcus Andersson, executive]

Thank you very much, Erik. So if you please turn to Page #5, you'll see the table of financial highlights for the group, like Erik said. We start from the top. Order intake increased with approximately 14% year-over-year or quarter-over-quarter, but it was slightly lower in net sales in the period. Net sales increased with almost 20%, where 14% came from acquisitions that we made during the last year. We also saw a favorable currency effects of approximately 5%, and organic growth came in around 0%. And organic growth in the quarter was actually positively impacted by a very healthy performance in segment West and North, which Erik will be talking about more in a moment, but it was offset by strong comparable figures in mainly segment East and UK/North America.

On the gross margin side, on the other hand, it came in strong, a couple of -- 0.3% above previous year. So stable gross profit. Very nice to see. It's mainly driven -- the increase is mainly driven by slightly stronger business mix versus previous year. Operating expenses, as you can see in percentage of net sales came in considerably lower versus previous year. But if you adjust for one-offs or comparable figures last year, which summarized to approximately SEK 38 million, the operating expenses in percentage of net sales increased slightly. And the one-offs in previous year's quarter, it was SEK 15 million impacted by the divestment of our Russian entity that was divested in the first quarter. It's also due to remeasured additional purchase consideration, approximately SEK 15 million as well, as well as we had acquisition cost of SEK 8 million in that quarter as well in connection with last year's acquisitions. So still solid and good cost control despite the increased pressure from the inflation worldwide.

So all in all, solid top line, stable margins. summarized in a very nice development in terms of EBITA. EBITA increased with 33% to SEK 323 million, corresponding to a operating margin of 13.5%. And if you adjust for those one-offs in the comparable quarter, I said, we delivered 13.6% in this quarter and 14.0% in the comparative quarter. And as you can see, most of this profit increase actually also falls down to earnings per share, which increased with 21%. Of course, there are some increased financial net in terms of interest rates that cuts in between some additional costs, so to say. But it's nice to see that the development -- much of the development in terms of decreased profit falls down to the earnings per share.

If we turn page to Page #6, we have 2 graphs, one showing the growth development of Bufab for the last 30 consecutive quarters. And as you can see now, we have been showing healthy growth in 11 consecutive quarters. And if you exclude the second quarter of 2020, we actually have been seeing total growth for more than 40 consecutive quarters and in most of them, really helps the organic growth as well, except for the first 2 quarters in 2020 and as well in this quarter of 2023. If we look on the right graph, you can see that we're still seeing a very strong momentum in terms of profit delivery as well as in growth. It's really nice to see.

We had a couple of quarters previous year where, for example, UK/North America really contributed well. They are struggling a bit now, as I said, with more stronger comparable figures as I said. But instead, we're seeing that segment North and especially segment West has really picked up speed and delivered really solid results during the quarter. So really nice to see and it's also quite a good example of the nice diversity in terms of businesses in Bufab, that when certain industries are having a weaker demand, others are picking up speed, and that's also what you can see in terms of the development in the East segment of Bufab.

We turn to Page #7, and we have a look at the development of our operating cash flow and our cash conversion. The blue bars in the left graph shows the EBITA of Bufab and the blue line shows the operational cash flow. And as you can see, we were struggling a bit during late 2021 and during 2022, basically with quite low cash flow. And main reason for that was due to that we grew a lot organically and paid up some money in the balance sheet due to that; and as well, lead times were basically doubled during that period of time, which also forced us to use our balance sheet a bit extra, making sure that we could deliver items to customers.

But since a couple of quarters now, that fact has changed. Lead times are basically down to the same level as before the pandemic period. And we are now, as you can see, starting to renormalize our net working capital and mainly talking about the inventory, and that's also the explanation for the solid cash flow in the period. So strong underlying result development as well as inventory decreases explains the very strong cash flow development in the last quarter. And as Erik said, we expect this to continue also going forward.

If we look on the right graph, that shows the debt net level of Bufab or our net debt versus EBITDA adjusted in terms of multiples. And as you can see, we took quite a big leap downwards with approximately 0.5 multiples in this particular quarter, which is very strong. And of course, that's a direct result of continuously profit increases, together with strong cash flows, which made it possible to pay off debt. And we're looking forward to continue this development also going forward. So really nice to see now that cash flow is picking up speed and that we can use it to deleverage so that we can come back to a situation where we can continue making acquisitions.

With that said, we turn page to Page #8. And this is just a quick bridge showing the contributors in the profit increase quarter-by-quarter '22 versus '23. And as you can see, segment North, given that this is the biggest segment, contributed with a profit increase of 26%, of course, partly fueled by the acquisition of Pajo-Bolte. West had a very strong quarter driven mainly by increasing demand and also increased margins, very solid development there as well. East, UK/North America struggling a bit more from a demand perspective but contributed also well, you have to say, mainly given last year's acquisitions.

We turn to Page #9. We'll just have a couple of words regarding acquisitions. As you know, we, during the last 2 years, have been quite active in terms of acquisitions. We have performed 6 of them during the last 18 months and approximately 3 of them during the last 12 months. And we are now working with landing those acquisitions of those companies and those organizations within the Bufab organization. making sure that we make it possible then to continue to grow and hopefully also grow a bit faster. And that work is going according to plan, and we are starting to see positive synergies that were here and there, but that takes time.

But it's going in accordance to plan and the companies have had a good development since they went into the Bufab Group, so to say. And we are now working on a daily basis basically to continue making sure that we have an organic pipeline of potential new acquisition candidates, and that work is ongoing and strategy has not changed at all. And if we can just make sure to continue releasing cash flow, we will also be able to come back to our acquisition agenda in hopefully not a too long time.

With that said, I leave the word over to you, Erik, again, to talk a bit about the individual segments.

[Erik Lunden, executive]

Yes. Thanks, Marcus. And we jump over to Page 11 and start with segment North. It was a quite good quarter for segment North. We had a total growth of 18%, mainly driven by the acquisition of Pajo-Bolte last year, but also if you look at organic growth was up 4% mainly driven by the Swedish operation. Looking at the margins, flat gross margin. We had good cost control in the segment during the quarter. So both operating margin and profit increased in the quarter.

Let's jump over to segment West Page 12. It was really a strong quarter for segment West. Total growth was up 20%, 13% organic, and was driven by underlying demand and increased market shares in the segment. You can see that France, Netherlands and also Czech Republic was really strong in the quarter. Somewhat higher gross margin, good business mix in the segment and also a lower share of expenses. So same here with the good cost control and good operational leverage in the segment for the quarter. And of course, because of this, both operating margin and profit increased in the quarter.

If you then turn to Page 13 and segment East. Here, we had a total growth of 5% driven fully by acquisitions and positive currency effects. Looking at organic growth, was minus 6%. Here we're up against strong comparative figures compared to Q1 last year but also weak development in mainly Poland and in Asia and in Singapore. Gross margin, in line with last year's number and somewhat higher expenses compared to last year when adjusted cost for the discontinuation of the -- our operation in Russia. Operating profit and margin declined but still on a high level, I would say, for the segment.

Similar picture when it comes to UK/North America, Page 14. The segment reported strong growth of 28%, but this is driven by acquisitions and currency. If you look at organic growth, it was 13%. Same thing here, up against strong comparative figures but also lower demand. And here, we have the stainless streel business in U.K., but also RV industry in North America. That's the main driver behind that. Lower gross margin due to TIMCO but higher share of expenses due to lower volumes in the segment. Overall, operating margin increased with the margin decline versus last year's Q1.

If we then sum up the quarter and go to Page 16. Overall, strong growth in the quarter, but of course, driven to a big extent by the acquisitions. We saw that organic growth was hampered by weaker demand in some segments and strong comparative figures, but really good development in West mainly but also strong numbers in North. The acquisition helped us to deliver the strong results also with a little bit higher gross margin, and we've been good in taking care of the cost and managing the inflation pressure that we had during the quarter. I'm pleased with the EBITA of 13.5% and, of course, also with the operating cash flow, and we expect the strong cash flow to continue in the coming second quarter.

If you look at the market and outlook, there's still a lot of uncertainty out there. We can see that in certain Industrial segments, especially the ones that had a strong momentum in the pandemic. They still struggle with low underlying demand. But on the other hand, we have other industries that are doing very well right now, for example, energy, defense and automotive. And I think that's the beauty with Bufab, that we have a well-diversified customer and article portfolio that helps us in times like this.

Looking at the short-term priorities, they remain the same that we've had now for a few quarters. So that is to continue to be aggressive in the market and take market share. And a little bit lower -- tougher times like this is a golden opportunity for us to be aggressive and take market share when the cost pressure is high on our customers, and they often start to look at the consolidation of the C-parts suppliers, continue to work on the margins and, of course, secure cash flow and reduce our debt level. And then, of course, we have work ongoing all the time with efficient improvements and managing the inflation pressure that we see and also of course also integrate our recently joined companies into Bufab Group. But all in all, a good quarter.

Now I will leave the word over for Q&A session.

[Operator]

[Operator Instructions] We will take the first question. Kindly introduce your name and company name please.

[Karl Norén, analyst]

It's Karl Norén here from SEB. Just firstly, congrats on a strong quarter here. I must say I'm very impressed by the margin and the good cost control there. So I have a question related to that on the number of employees and the cost base, basically. I mean, what should we expect going forward? Because I know that the number of employees was, I think, flat from Q4 to Q1 and down a bit from Q3. Have you stopped hiring? And should we maybe expect that you will even maybe decrease number of employees going forward? Or you say that you will work with efficiencies. But can you give some more color on that would be helpful.

[Erik Lunden, executive]

Okay. Karl, thanks for your question. Yes, when it comes to FTEs, how it works, as you know, in Bufab is that we have more than 50 companies with our own P&L, and all of them are in different phases right now. So some of them are in a phase where they need to adapt to a new tougher market. And here, we see a clear decline in terms of number of FTEs. And in others where we have strong demand and we see very healthy future, we're actually increasing the number of FTEs. So it's a mixed bag. What we try to do is to, you can say, adapt depending on the local market situations. And on the all in all level, I mean, I would say that we expect if these to remain on a similar level as we have today, if nothing specific CapEx in the market that we act on. But in general, we're following the plans that we have in place for each of the entities.

[Karl Norén, analyst]

Okay. That's great. And then a question on the price contribution to organic growth, and specifically maybe to the West segment because if I remember it correctly, West were a bit late with the price increases. So I was wondering if they are still having a large maybe price component than the other division. So is it also that volumes are really strong in segment West?

[Marcus Andersson, executive]

Yes, of course, it's a good question. And just like you say, very strong development in segment West over the last couple of quarters. And it's basically like this, that the strong organic growth is built by, I would say, mainly 3 components. And the biggest portion, I will say, is -- or the 2 biggest portions is a strong underlying demand in the industries that they are more weighted towards, so to say, as well as they have really brought in new businesses. So they have been taking market share, and that also explains the strong organic growth. There is, of course, a slight price effect as well but not as big as you might have expected. They were a bit more late when it comes to pushing price increase through, but they did a good work during the second half of last year but also during the second quarter of 2021. So there is a price effect, but not that big. So it's not what's driving the strong organic growth. It's not price. It's mainly strong underlying demand and new businesses brought in. But there is a certain level of price increases as well. But we're talking about single percentages.

[Karl Norén, analyst]

Okay. That's great. And then just the last question on [indiscernible] outlook or if you can say anything. Because if I remember it correctly, you mentioned in Q4 that January started relatively strong after a weak December. Is it possible to say anything regarding how the trends were during the quarter? Did it end strongly? Or what did you say, was it relatively stable, so to say?

[Marcus Andersson, executive]

Yes, it's right that January started off a bit stronger than the weak December. That's right. The development throughout the quarter was quite solid, you have to say. But at the same time, I mean, if you look at the order intake in the quarter, it was slightly lower than net sales. And as we have said, historically, that kind of gives you a guidance of what to expect at least for the coming quarters. So based on the order intake in the quarter, we expect the second quarter to continue to be a solid quarter in terms of demand. But we don't really guide more than that other than what Erik has said that there are certain industries that are going stronger than others, so to say, as we speak. And that tend to -- it can change between 1 quarter and the second quarter, and that's why it's hard to guide when it comes to what the future brings, so to say, but [indiscernible].

[Operator]

We'll take the next question. Kindly introduce your name and the company name.

[Johan Skoglund, analyst]

This is Johan from DNB Markets. I have a detailed question on your earnouts, [indiscernible] has now labeled current liabilities. Are you able to specify a bit more about the timing of these payments, if it's Q2 or later?

[Marcus Andersson, executive]

We -- regarding the short-term payments, you mean?

[Johan Skoglund, analyst]

Yes, exactly.

[Marcus Andersson, executive]

Okay. Yes. So most of that is supposed to be paid out during the second quarter, but it can also, due to that -- there is always a certain level of negotiations, and there is a timing and you need to get figures approved from the other party and stuff like that. So it might be pushed for another quarter. But we expect or forecast it to be paid out during the second quarter, the majority of the portion.

[Johan Skoglund, analyst]

Okay. And then for my last question. So with the decreasing leverage ratio, you mentioned the M&A agenda could restart in the near term. Could we expect this to be all ready in '23?

[Marcus Andersson, executive]

I don't think I said near term, but I said that we, hopefully, quite soon would be able to come back to a situation where we can start doing acquisitions again. And I stand behind that. And if you put it like this, I mean, everything -- it's basically like this, that making acquisitions, that's something that you should deserve, right? And we have been having a slightly better cash flow over a couple of quarters during 2022 due to certain reasons that we have talked about earlier. So it's no strange thing behind that, so to say. But I mean, we want to come down to a leverage level, which we, in the first place, have guided the market to, somewhere between 2% to 3% and have it there solidly and then continue doing acquisitions. And I mean, so far, we have never had to say no basically to an acquisition due to that we didn't have the balance sheet or money supporting it, so to say. If we would bump into something that would generate very much shareholder value, so to say, then we will try to find a solution for that.

But our strategy is to make sure that we grow organically, that we keep steady profit levels, that we have a solid cash flow and that we use that excess money to finance our own acquisition journey. That's exactly how we have done it historically and that's exactly how we want to do it also going forward. So -- and also on top of that, we never guide really whether we are supposed to make this or this amount of acquisition in a certain year. Acquisitions happen when we have a very good case up on the table that we really want to do, that we think will generate long-term value, and that's what we'll do also going forward. And if that happens in the fourth quarter or in the first half of 2024 or the second half of 2024, that's secondary for us. But if it pops up on the table, we will act accordingly. But we never guide when it comes to numbers of acquisitions or the timing of it, I'm sorry.

[Operator]

Thank you. There's no further questions at this time.

[Erik Lunden, executive]

Okay. Then thanks a lot for joining, and have a good day ahead.

[Operator]

Thank you for joining today's call. You may now disconnect.