Bufab AB (publ)

STO:BUFAB

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the presentation of the Q2 2020 results. [Operator Instructions] And I must also advise you, the conference is being recorded. I would now like to hand to your speaker today, Jörgen Rosengren, CEO of the company. Please go ahead.

[Jörgen Rosengren, President & CEO]

Good morning, ladies and gentlemen. My name is Jörgen Rosengren. I'm the President and CEO of Bufab. And today, we are presenting our second quarter results for 2020. Thanks for joining this call. We'll be referring throughout this presentation to our PowerPoint presentation, which is available on our bufab.com website. And it has page numbers, and we'll be referring to those page numbers throughout the presentation. .I'm here today together with our CFO, Marcus Andersson, who will be presenting the financial results in a minute, but I would just like to make some initial comments to start things off. These certainly are very drastic times that we're living in. As you will recall, we had a very strong quarter in the beginning of the year. Our first quarter was, in fact, our best-ever sales and operating profit results. However, we, as most of the people in the world, have been hit by the effects of the COVID-19 pandemic. In this quarter, we saw a negative effect of sales. Sales were down by 6% in total, and that was made up of a rather dramatic drop in organic sales by 25%, which, to some extent, was offset by our recent acquisitions, plus 20%. So net negative minus 6%. The impact of the pandemic hit all of our companies and all of our segments, but the impact was the strongest in our 2 segments, North and West, which we'll be referring to later. While, in fact, segment East had a strong result development despite also being hit by the pandemic demand effects. Now these effects that I'm referring to continuously primarily had the character that many of our customers either significantly reduced or entirely shut down their operations during -- especially at the beginning of the quarter, April and May. And of course, with no manufacturing taking place, then no C-Parts are needed. We reacted -- we saw this coming and we reacted, in our own opinion, at least, quickly and flexibly to address it, primarily by, already from the first week of April, significantly reducing the number of hours worked by very large cost savings throughout the organization. And then general cost savings in all cost categories by making sure that we are -- we've been very, very careful with CapEx. We've taken these actions, though, with an eye to being able to scale back up again when demand is there. Because as you all know, the development of the industrial demand has been not only very dramatically up and down, but also very, very hard to predict. And therefore, our action program has prioritized speed and flexibility. The actions that we've taken have resulted in large cost savings and they, in turn, have then made it possible to deliver what we regard as a stable result and operating profit, a bit down from last year, but nowhere near as much as the organic reduction in sales, a relatively stable operating margin and also an improved cash flow and general financial situation relative to last quarter and also to the end of last year. Also encouraging is that during the quarter, we saw a gradual recovery of demand, albeit from very, very low levels. In April, we had a minus 30% organic growth. There's a small misprint here on the page, but minus 30%, of course, in April. Whereas in May, we had minus 25% and in June, minus 15%. And all these numbers month-by-month are adjusted for the number of working days. However, the uncertainty, of course, remains quite significant and to combat that and make sure that we're able to sustain a good operating profit in all market scenarios, we have extended our cost-savings program, which was announced last year from the then target of SEK 40 million to SEK 100 million with the full year effect from January of next year, 2021. Naturally, in such a situation as we've been in, there is a tendency for an inward focus and a focus on actions that will protect our customers, protect the health of our employees and so on, but also, of course, protect our financial results. But we have decided now in the group management to make sure that from the beginning of the fall, there will be a strong focus outward and toward our customers to make sure that we focus on growing our market share, something that Bufab has been doing in the past many years and intend to do also going forward. So from the fall, our focus is on sales and on growing market share, while, of course, at the same time, we have to reach these extended cost-savings targets.With that, I would like to hand over to Marcus Andersson, our CFO, who will now take you through the financial results for the second quarter of 2020. Marcus, please.

[Marcus Andersson, Chief Financial Officer]

Thank you very much, Jörgen, and please have a look at Page #3 regarding the financial highlights for the group. If we start with the development of net sales, you can see that net sales decline was about 6% in total to SEK 1.022 billion versus prior year. The market share was deemed to be unchanged. The organic growth was, in total, minus 25% in the quarter, mainly driven by the weak demand that we have seen the last quarter. However, it improved succeedingly during the quarter with some minus 30% in April, minus 25% in May, minus 15% in June, adjusted for the number of workdays compared to prior year. The gross margin, as you can see, declined to 25.2% and approximately 3/4 of the decline is attributable to segment North, mainly driven by lower volumes in the manufacturing companies, but also driven by the acquisition of HT BENDIX that has a lower gross margin than the group as a whole. The remaining decline was mainly due to poor business mix and significantly lower volumes in segment West as well as, in general, lower cost coverage due to the low demand or decreased volumes. If we have a look at operating expenses, we can see that the share of operating expenses has declined to 16.2%, which is due to the expanded cost-savings programs from 2019 and also due to short-time work schemes that was initiated early in the quarter. It should be noted also that governmental support granted to the group was recognized as other operating income. And accordingly, operating expenses declined also due to that. Although some of those costs that support was intended to meet, we recognize that in the gross margin. During the quarter, also the group expanded its existing cost-saving program, as said, to SEK 100 million relative to 2019's full year's cost base adjusted for the recent 2 acquisitions. The program, as such, should reach full effect from January 2021, and the program is expected to generate restructuring costs of approximately SEK 15 million, of which we have recorded SEK 5 million in the second quarter. The cost savings will mainly be achieved through increased efficiency, continued general cost savings and natural staff attritions and will extend across all of the group segments. Redundancies may be required as well in some subsidiaries, but the cost program will, however, not affect the group's ambition on future growth going forward. So all in all, you can say that the operating profit declined to SEK 92 million from SEK 103 million in the comparable quarter, equal to a margin of 9.1%, which we consider to be a solid result given the market development. If you have a look at the EBITA bridge, you can see that currencies had a net debt effect of SEK 0 million. Volumes, due to the big growth, affected negatively by SEK 100 million. Cost reduction plus price/cost/mix and other had a positive effect of SEK 70 million, and acquisitions contributed strongly as well with plus SEK 19 million. And it should also be mentioned that of those SEK 70 million in cost reduction and price/mix and other, about SEK 40 million is general cost reductions, SEK 25 million comes from governmental subsidies. We also have a positive effect of SEK 10 million due to revaluation of earn-outs or additional consideration connected to American Bolt & Screw and HT BENDIX, but we also had a negative impact of about SEK 5 million regarding restructuring costs in the second quarter. If we turn to Page #4, you can start by saying that we, before this quarter, actually have seen growth for about 25 -- sorry, 27 consecutive quarters. But due to the huge market drop in the second quarter, we recognized a net decrease of net sales of about 6% and organic growth, minus 25%, as earlier said. If you have a look on the right graph, you can see that the positive trend net sales-wise has been going on for quite a while, but took a slightly step down in the last quarter. If you look at the EBITA growth, you can say that those have had a really good development historically. And we have to say that we are happy to see that we have been able to defend a solid EBITA figure, even though we have seen a huge drop in the organic growth in the last quarter. If you turn to Page #5, we can start by talking about segment North, and I will not go through those figures in detail. But in general, segment North was one of the segments that was most dramatically hit, so to say, by the COVID-19 pandemic, mainly through the negative effect on the manufacturing companies. However, we also, in this segment, saw gradual recovery during the last couple of months. Of course, gross margin significantly down, mainly due to fixed cost absorption, et cetera, in a manufacturing company and also due to HT BENDIX as earlier said. But we were able to reduce the cost base as well through general cost savings and short-time work schemes to at least slightly defend the EBITA development. If we turn to Page #6 and have a look at segment West. As you can see also in West, actually, West was the segment that was most hit by the COVID-19 pandemic development on the market. Strong drop in demand, especially in Germany, Netherlands and France, mainly related to customers within the automotive industry. But also here, gradual recovery throughout the quarter, but from very low levels. Gross margin, also here much lower, so to say, driven by the volume drop together with poor business mix in one of the segments company, mainly. However, also here, the lower gross margin and the lower net sales were at least a bit mitigated by lower share of operating expenses, so to say. But overall, a disappointing result. Segment East, on the other hand, actually also saw a drop net sales-wise, driven by the weak market, so to say. But due to a really nice development in mainly our Chinese company and the business in Southeast Asia, in general, they developed strongly, while Eastern Europe struggled a bit during the quarter due to lower demand. But due to strong contributions mainly from the Asian companies and from purchase savings and very good cost control, you have to say, we were actually able to, during the quarter, increase the EBITA figure and report a record EBITA margin, which is very nice to see. If we continue to the last segment, segment U.K., North America on Page #8, as you can see also here, this segment, of course, is affected quite dramatically by the acquisition of ABS. Net sales increase was 57%. But nevertheless, we saw a negative organic growth, so to say, in the other businesses, driven by also here the weaker market. But also from May, we saw a good recovery, especially in North America. In the beginning of the quarter, actually a lot of customers closed down their businesses, but they opened up in May. And also in June, we had a good development, especially on North American market. But also here, we recorded lower gross margin, but on the other hand, a good cost control. In total, strong EBITA improvement, mainly due to acquisition of American Bolt & Screw in November 2019. That was the segment. If we just turn to Page #9 and have a look at that picture. You can see, first of all, on the top, we have just a picture of the organic growth development during the last 6 quarters, together with the EBITA development on the lower graph, for the last 6 quarters. And as you can see, we have been coming from organic growth, as I said, for many quarters in a row historically. But during the last 3 quarters, we have recognized a negative organic growth. But nevertheless, we have been able, mainly due to being flexible when it comes to initiate cost savings, mainly during Q2, been able to defend a solid EBITA margin during those quarters as well. And to make sure that we defend it going forward as well, we have also [ had ] initiated this midterm cost-savings program and increased it from earlier communicated SEK 40 million to SEK 100 million. If we turn to Page #10, you can also see that we, despite the development market-wise we saw in the quarter, we have been able to strengthen our financial position, which we, of course, also are -- we are happy to report. If you look at the left graph, you can see the development of our operating cash flow. And here, we can see, normally, of course, when we go into quarters where we see negative growth, we normally have a really good cash flow. We see it historically, and we also see it now in this, not crisis, but in this weak market development, so to say. And we see it not only in 2019 but also during the first half of 2019 and also during the first half of 2020. So nice to see that we reduced cash, and that cash can, of course, be used to reduce down our net debt and to achieve a strengthened financial position in general. If you have a look at the right graph, it shows the development -- historical development of the net debt-to-EBITA. And that graph actually tells you something about what normally happens after a couple of acquisitions, so to say, where we normally increase our indebtedness, so to say. You can go back to 2015 and see that when we acquired ABS, we bumped up quite a bit net debt-to-EBITA wise. But due to good cash flow and a good result development, we were able to take the net debt versus EBITA down to a lower level, so to say. More or less, during 2016 and 2019, we have made smaller to midsized acquisition and been able to remain on the same level net debt-to-EBITA wise, and the same goes now after the acquisition of HT BENDIX. And ABS, we bump up a bit to a slightly higher level, but we already now, during the second quarter of 2020, saw a rather big decrease in the multiple, so to say, which is also very nice to see. And by that, I will leave the word over to Jörgen Rosengren again to talk about acquisitions on Page 11.

[Jörgen Rosengren, President & CEO]

Yes. Thank you, Marcus. To continue then on the theme of acquisitions, you can see on Page 11 the logos of the acquisitions we've been making in the past couple of years. And it's exactly as you said before, Marcus, that Bufab has a strategy of growth. And then the growth is supposed to be both organic and through acquisitions, but we can vary a bit between these different themes. And now either by skill or by luck, we've been able to make 2 very good and very strong acquisitions, but also rather large acquisitions in the past 12 months. And these large acquisitions have been timed to coincide with the relatively weak organic growth due to a very weak market. And that is, of course, good, in fact, because it makes it possible to invest some of the cash flow that is freed up from the weak organic growth into these high-yielding assets that the acquisitions represent. However, we don't make these acquisitions for financial reasons. We make them to make Bufab a stronger company. And the acquisitions that we have made in the past 12 months have also made Bufab a stronger company, and as such, are actively contributing to our leadership strategy. To wrap up the results walk-through, you can turn please to Page 12, where you see a bridge between the last -- the operating profit that we made last year and this year's operating profit in 2 ways. The first one is the one that Marcus already took you through, where you see last year's operating profit of approximately SEK 100 million being affected negatively by its entire value, SEK 100 million, by a negative volume. So in fact, the negative organic growth completely wiped out our operating profit. However, by fast and well-timed cost savings of SEK 70 million and by the contribution from our most recent acquisitions of SEK 20 million, we recovered to what we feel at least is a decent level of SEK 90 million of EBITA. And then the lower half of the bridge, you can see the contributions from the various segments that we have already talked you through. Turning then to Page 13, I would like to repeat my comments from the beginning of this presentation, where you can see that we have, in the first half of the year, have been forced to react to the external circumstances as most other companies have as well, I would imagine. And our focus in this first half year has been to protect the health of our employees and of their families and of our partners, both upstream and downstream in the supply chain. We have also focused a lot on protecting our customers primarily by ensuring that they have supply of components in these very turbulent times and have been successful in that. But we have also focused quite a lot on protecting Bufab, notably our profitability, to make sure that we retain our flexibility of action and our ability to grow also going forward. We feel that these actions have been successful. In order to not get stuck in an inward-looking mode, we have now decided to look out again, and in particular, to focus on our customers. So during the second half of the year, we intend to restart a strong focus on growth, in particular, a strong focus on taking market share. And in order to be able to do so profitably, we will also, during the same period, quickly, but also rather strongly, reduce our cost base so as to make sure that we can have profitable growth. And by these actions, we intend in the beginning of next year to be in a position to continue to invest in our leadership strategy as before. These 3 steps are very well-known inside Bufab and the entire organization is now focusing on restarting profitable growth. On Page 14, some comments in summary. The second quarter was a tough one, particularly with a significant drop in sales, but we achieved what we regard as a stable result and a good cash flow. The outlook is for gradual recovery. We expect this trend that we saw during the second quarter to continue during the second half of 2020, although, of course, there is considerable uncertainty. And it is just because of that uncertainty that we've decided to extend our previously announced cost-saving program to SEK 100 million, full effect of which to be seen from January of next year. And the part is, as I said, so far, we focused on protecting health, protecting our customers and protecting Bufab, now we will focus on restarting profitable growth. And from January of next year, we intend to continue the investments in our leadership strategy and move on forward. And that, operator, concludes our presentation. And if there are no questions from the audience, it is a good time to ask them. Thank you.

[Operator]

[Operator Instructions] We've received no questions at the moment. [Operator Instructions] And there's still no question request coming through.

[Jörgen Rosengren, President & CEO]

Okay, operator. Then we conclude that the presentation must have been a clear one.

[Operator]

Excuse me, you've just received one question and it comes from [ Verislav Milov ].

[Unknown Analyst]

First of all, congrats on managing costs and maintaining EBITA in these challenging times. I have 2 questions, if I may. One is on growth. So you've obviously had negative organic growth this year. This is a given in this environment, but also in the last quarter of last year. Can you please split that a bit, if possible, between market share and demand? So is the negative organic growth entirely due to the drop in demand? Or is there also any change in market share that you're observing either growing market share or losing a bit? And the second question is on growth, so more long term. Obviously, in 2021, you have quite a bit of catch-up growth. So the recovery to what was lost this year. But beyond that, beyond your recovery, so there was obviously negative growth in the last quarter of 2019. So how do you see organic growth restarting? And on the acquisition side, since you have somewhat elevated debt levels, it doesn't seem very likely that you have the balance sheet to support major acquisitions. I don't know whether you agree with that assessment or not, but I would appreciate your comments on that side as well.

[Jörgen Rosengren, President & CEO]

Thank you for these good questions. Let me talk with your first question then about the market -- about the growth historically and the market share. Bufab has had the practice to increase our market share almost every year in the past many years. And we've done that because it's possible to do it, firstly, because our market share, even though we are a leading company in at least the European market, one of the -- at least the top 3, still, our market share is very low because the market share is extremely fragmented. So that's one reason. And the other reason for us being able to increase our market share is that most of our customers have a strong need to consolidate their supplier bases and to simplify their supply of C-Parts, which is exactly what Bufab can do and does do. And therefore, there is an underlying macroscopic trend towards the kinds of services that we offer. Now taking advantage of these 2 facts, we have worked hard over the past many years to increase our market share, and we have also done so. We can measure that quite -- in a quite a detailed way, in fact, and that's also why we can say for sure that also during 2019, despite a very modest total growth and total organic growth also in 2019, we did, in fact, increase our market share, meaning the market was down more than our organic growth. That was the case also in the first quarter of this year. But in the second quarter, it is extremely hard to say because such a measurement breaks down on the existing circumstances because both new and old business and everything is a bit all over the place. So therefore, we don't comment on the market share for the second quarter, except to say that we expect that we estimate them to be unchanged. Regarding the growth outlook for '21, it is as you say, but we hope, of course, that there is some recovery from at least the levels we've seen in the second quarter. But most of all, our focus is not so much on finding out what will be the industrial demand in the next year, but rather to ensure that we will continue to take market share. So our outlook is that we will, in fact, continue to make market share in the next year and that is certainly also our ambition. Regarding the underlying growth where we are at the mercy of the development of the market itself, it is, in fact, entirely impossible to make predictions. We have no clue. So you will have to turn to other sources of information there. But as you will see when you look into them, which no doubt you have, they vary and are also a bit all over the place. And it is exactly because of this uncertainty that we are so focused on making sure that we have the financial flexibility to do the things that we need. And it is in that context that you should see the cost-savings program that we have now announced in this quarterly report of SEK 100 million. Regarding capacity for acquisitions, we are, in fact, working on new acquisitions, but it is extremely hard to predict when such may take place. Our financial capacity -- our financial leverage was rather high as markets commented, especially in the Q4 in the full year report. But as we have also commented in this report, and especially in times like these, we tend to have a good cash flow because of the capital profile of Bufab mainly being made up of working capital and that released cash can then be used to bring our leverage down, which again then creates capacity for further acquisitions. So we have not changed our acquisition strategy. And we are, in that sense, opportunistic. When we have the opportunity for a good acquisition, we intend to make it. And we also believe that we will have the capacity to do so. I hope that answers your question.

[Operator]

And we have no further questions at the moment.

[Jörgen Rosengren, President & CEO]

In that case, ladies and gentlemen, I would like to take you -- thank you very much for taking the time to attend this results presentation for the second quarter of 2020, and wish you all a happy and prosperous summer and health to yourself and to your families. Thank you so much. Goodbye.

[Operator]

Thank you. That does conclude our call. Thank you all for joining. You may now disconnect.