Bufab AB (publ)

STO:BUFAB

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Bufab's Q2 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, Jörgen Rosengren, the CEO. Please go ahead, sir.

[Jorgen Rosengren, President & CEO]

Thank you, operator. And good morning, ladies and gentlemen, and welcome to this earnings call for Bufab for the second quarter of 2021. Pleasure to have you with us.With me here today is Bufab's CFO, Marcus Söderberg, and he will shortly take over and take you through some of the financials for the quarter. But just some preliminary comments from my side. And indeed, throughout the call, we'll be referring to a PowerPoint presentation, which is available on our Investor Relations tab on bufab.com. And we start in page entitled All-time high results in challenging environment, and that's because we're going to talk about an all-time high result despite a challenging environment.Bufab recorded, again, I am [ pleased ] to say, the best-ever sales and operating profit in a single quarter and the second quarter of 2021. And why is that? Well, an important factor is that we continued to see very good demand throughout the quarter. And in fact, we saw a slight acceleration of the demand over the quarter. Demand was spread over all segments and markets, and in fact, it's a sign of really strong development of the entire manufacturing industry worldwide, as most of you will have been able to see in other media over the past months.And as for [ benefit ], it meant that all of our segments, in fact, all businesses, in fact, most companies and most single customers showed very high demand. And as I just said, we don't see any signs of slowdown yet. There can be a slowdown further out because we don't have a very long visibility, but the visibility we do have does not show any signs of slowdown. As a matter of fact, instead, the order intake increased during the quarter and exceeded the sales in the quarter, which means, of course, that we both -- that we expand our order book. And that is unusual for the second quarter where the order intake usually is not up to the sales level.But as I also said, we are facing some operational challenges. The manufacturing industry is facing challenges, and therefore, Bufab is facing some challenges, and those are 2 kinds. Firstly, most of our customers are finding it really difficult to get a hold of the components that they need for their manufacturing operations. Everybody has read now about shortages of semiconductors, but the problem is much, much further than that. In fact, our shortage is in almost every commodity area that the manufacturer needs to produce any kind of finished manufactured good. And those shortages also create bottleneck for -- or caused by and create further bottlenecks upstream in both manufacturing but also in freight. And that leads to supply issues, which in turn the demand from us that we and our customers that we change our plans, that we change our forecast, change the production schedules, which in turn leads to yet more work and yet more shortages. As one model is shifted out for another model on the production line, then everybody upstream has to change everything.It also leads to cost increases. And as you've seen on the raw material indices, the makers and sellers of raw materials are experiencing good times now. But also the prices of components have soared, and the prices of freight have soared, especially, of course, when it comes to container sea freight from Asia to Europe or from Asia to North America, extremely tight there. And our challenge then, of course, becomes to move those cost increases over to our customers, which we'll speak more about in a moment.It also means operationally for us that our staff, who work mainly with supply, with sourcing, with quality insurance and so on, that they are quite strained also because they are having to deal with all these changes and all this uncertainty regarding the supply situation and offers to be in constant contact with our customers and with our suppliers to make [indiscernible], so to speak. But so far, we've managed that very well.And that is why Bufab, in this challenging environment, manages still to, number one, and most importantly, keep our customers supplied and content. Most of our customers have experienced supply issues but in very, very few cases is that due to Bufab. But also, from a financial point of view, we've been able to generate a 40% growth relative to, admittedly, a weak quarter in second quarter of 2020. But it's also strong growth sequentially. It's also strong growth relative to 2019, and it's also an all-time high sales number. And that's plus a stable gross margin, plus very low -- very tight cost control has led to an all-time high operating result, which is just north of double last year's operating results and also on operating margin for the first half of 2021, which we have not seen in at least a decade. Finally, we have significantly strengthened our balance sheet.Now I talked before about the supply challenges that our customers are facing and the fact that we have caused very few supply problems for our customers. And that is something that we believe strengthens the case for business model as a whole. So for the case for, what we call, the supply chain partnership to take over the C-Parts sourcing, logistics and quality assurance from our customers, and we also believe that it specifically strengthens Bufab's customer relations significantly. And that will -- that bodes well for growth also in the future.Finally, on a more organizational point, this is my last quarterly report, as I have accepted a similar job in a different industry, where I will start on the 1st of October. The recruitment for a replacement for myself is ongoing. It's going well, and it's now in final stages. So hopefully, this will be concluded quite soon. But the new CEO -- incoming CEO is unlikely to be available on October 1, and therefore, the Board has now appointed the head of Bufab's segment North, a gentleman called Johan Lindqvist. He will be acting CEO from September 1 and on, and he will hold that position until a permanent CEO has taken office. And that process is designed to and will also lead to a smooth handover and the focus on operations, North organization and the whole different team. So that's going to continue to serve our customers well when I think about that administrative aspect of things.So those are my preliminary remarks on the quarter. Before we go further, maybe we'll take a look at the numbers. And I'm turning the word over to Bufab's excellent CFO, Marcus Söderberg, and the second page, which is called Financial highlights, Group. Go ahead, Marcus.

[Marcus Soderberg, Chief Financial Officer]

Thank you very much, Jörgen. So taking a look at the financial highlights for the group. Let me start with the order intake. As you can see, the order intake came in considerably higher than net sales. So strong order intake. Net servicing sales rose by 40% in total. Out of those 40%, about minus 4% came from negative currency impact, and 44% came from organic growth. The underlying demand was significantly higher in all of the segments in comparison with a weak demand in the comparative quarter in the wake of the pandemic. But it was not only higher compared to the comparable quarter, but also given then higher than the same quarter in 2019 and also higher than the first quarter of 2021.Gross margin, as you can see, increased to 27.4%. The higher gross margin was -- mainly comes from significantly higher volumes in more or less all of the reporting units throughout the group but also due to the fact that we have been able to push price increases when it comes to raw materials and transport costs over to customers in a successful way. Compared to the first quarter of 2021, the gross margin declined just somewhat.If you look at the operating expenses, the proportion of operating expenses declined to a very low level of 14.5% of net sales. And the reason for this is mainly due to a positive operational leverage on increased volumes and good cost control despite the major operational challenges that Jörgen just talked about that has affected us in the quarter. The cost-savings program that was completed at year-end continued to deliver strong results. And we're also seeing positive effects from the long-term productivity work that has been ongoing for a while, for example, digitalization initiatives, et cetera. But as the societies in most markets starts to open up now, the group has once again accelerated the pace of recruiting people for the purpose of securing a long-term growth going forward.When it comes to costs, there's just 2 things to kind of mention. One is that U.K., North America recognized the government support in form of a forgiven loan in the quarter, lowering the cost of about SEK 10 million. And also, we have a negative impact in segment North of SEK 7 million due to revaluation of additional consideration due to the announced acquisition of HT BENDIX has developed stronger than thought in the first place.All in all, this leaves us with a considerably higher operating profit that amounts to SEK 185 million, up approximately 100% compared to previous year, also corresponding to an operating margin of 12.9%. Much of the results also falls down all the way down to earnings per share, which increased with an impressive 156% to SEK 3.18.If you take a look on the lower-left graph -- lower-left part of the slide, you can see the EBITDA bridge. You can see that currencies had a negative impact of about SEK 6 million on EBITDA. Volumes, due to really strong growth, had a strong contribution of SEK 142 million. Cost decreases plus price mix and other had a negative impact of total SEK 36 million. And acquisitions, due to revaluation of those additional consideration just mentioned, had a negative impact of SEK 7 million.By that, we turn to the next page showing 2 graphs, one showing quarterly net sales growth; one, net sales and EBITA development. And as you can see in the left graph, we have now seen growth for about 4 consecutive quarters, and of course, a very strong organic growth I've just mentioned. If you look at the right part of the slide, you can see that we're continuing the blue dotted line, which shows net sales continues to go in the right direction, and it's bumping up due to a very strong quarter. Even more importantly is the result development, as said, due to increased operating margins during the last couple of quarters, driven by increased volumes and good operational leverage, which climbed up considerably higher than the blue dotted line, meaning an increased margin, so which, of course, were nice to see.If we turn to the next page that shows the segment North. I will just comment shortly on each of the segments. Segment North saw a strong demand in the quarter coming from all companies but especially from Denmark. Strong organic growth, about 38%. Somewhat improved or strong improvement in gross margin, mainly driven by higher volumes and price increases. And when it comes to higher volumes, of course, that is reflected in all of the companies but especially the manufacturing units. Higher costs due to exceptionally low cost in 2020, together with those additional SEK 7 million in revaluated additional consideration, as I said. All in all, much of the increased volumes fall down to EBITA which increased about 66% to SEK 66 million, which corresponds to an EBITA margin of 10.8%.If we turn to the next page which shows segment West. We can say that segment West also saw a strong demand in the quarter, also here in all of the companies, but especially strong growth in the operations in the Netherlands. Also here, improved gross margin due to high volumes and successful work with price increases to customers. Very low cost level also here due to high volumes but also through productivity gains and contributions from the cost-savings program. All in all, the segment nearly doubled the EBITA or the operating profit to SEK 32 million, which corresponds to an operating margin of 10.5%.Segment East also had -- saw a strong demand in the quarter, comes from all countries and most customers. Lower gross margin mainly due to some price pressure and higher commodity and freight costs. They are realizing price increases as well but haven't been able to offset the negative impact in this individual quarter. Substantially lower costs due to productivity increases and high volumes. Strong improvement also then on operating profit and margin. Going forward, focus will be on sales and to handle the strained supply chain and to focus on price adjustments to customers.And at last, segment UK/North America, if you turn page. In U.K., North America, they also saw a strong demand in the quarter, especially in the RV segment, recreational vehicles in North America and in the U.K. market in general. Improved gross margin due to very high volumes compared to 2020 and also due to successful price increases to customers. Considerably lower cost, as you can see, but driven by good cost control but, also, as I said earlier, a substantial impact on the -- due to the forgiven governmental loan that I mentioned in the beginning. All in all, due to good operational leverage, et cetera, this leads to a very strong increase in EBITA, as you can see, 180% (sic) [ 184% ] up to SEK 54 million or so, corresponding to a very strong operating margin of 18%. Going forward, focus will be on continue taking market shares and to handle the challenges with the very strained supply chain.With that said, I leave the word over to you, Jörgen, to talk a bit about the cash flow and our balance sheet.

[Jorgen Rosengren, President & CEO]

Yes. So our balance sheet, of course, it's important for various reasons, not the least strategically because it helps us -- it is what helps us realize our acquisition strategy.Now if every number in the quarterly report was good, except one, I guess, the cash flow is the one number that sticks out as has been slightly lower than last year. But we're actually relatively content with that also. Bufab, as you know, has a strong balance sheet, but most of the assets on the balance sheet, most of the net assets are, in fact, net working capital. And the net working capital, of course, [ breeds ] with the sales. And now we've enjoyed a period of sequentially strong organic growth. And therefore, we're now also building up working capital, which added into our cash flow a bit during the second quarter. So the cash flow was lower by some tens of million than the corresponding number in 2020.Accumulated, though, we have good cash flow over the past 4 quarters. And if truth be told, we would probably like to have a little bit more inventory than we actually have in our hands right now. So it's a good sign that we are now able to build up our inventory again because that makes it easier to continue to serve our customers with even more efficiency going forward.Then if we turn our eyes to the balance sheet though, the situation looks very [ low ], indeed. Our main KPI in that respect is the KPI net debt divided by EBITDA, while the net debt is the end-of-period reported net debt, and the EBITDA is the last 12 quarters' growth number. And there, a little over a year ago, when we had just completed 2 acquisitions and we're also seeing the corona pandemic first effects rolling in, we had a situation with high leverage, which approached -- which, in fact, approached 4, as you can see on this graph on the page called Relatively low cash flow caused by strong organic growth. But since then, we've enjoyed a very steep improvement in on leverage. So we've gone in 1, 2, 3, 4, 5, 6 quarters from positive 4 to well below 2 as a result of a strong cash flow and also as a result, of course, of our very strong profit improvement in the same period.And that means that our balance sheet now can support, of course, further acquisitions, which is also our strategy. And it's also good then to see that we've had in the past couple of months a market increase in the acquisition activity in our pipeline, which is needed because, as you know, we're quite picky when it comes to acquisitions. And let me then turn to that subject.So if we go to the -- sorry, I forgot that we also need to speak about the EBITDA bridge. I'll get back to acquisitions in a moment. But to summarize then the quarterly results first before we speak about the future. As you can see in this bridge, our EBITA was SEK 92 million last year and is SEK 185 million this year. And most of the difference there is made up of volume, of course, because we had a very strong volume increase relative to last year's second quarter. But as you can see, we have managed to absorb that volume without adding anywhere near the same amount to the cost line. And that means that is what accounts for the profit increase.The second quarter being a bit unusual, I guess, it's also worthwhile to speak about the first half of the year. But that, too, as you can see, we've gone from SEK 92 million to SEK 185 million, a little over twice there, too. No, no, now I'm talking about this. I apologize. You can also see on this page the bridge between last year's second quarter results and this year's second quarter results by region. And there, you can see very clearly that the contribution to our profit increase has come from all regions, from all our segments, in fact, from all our business units and, like I said before, from [ all ] companies, which is very gratifying in itself.Now let's turn back to acquisitions on the next page called Consolidator in a fragmented market. You can see the 9 acquisitions that we have made in the past 6, 7 years. And those have been quite fortunate. They've added quite a bit to ourselves about SEK 2 billion, and they contributed also close to 600 of the 1,300 solutions that are currently employed by Bufab. But they've also contributed very strongly to profit. And even more importantly, they've contributed strongly to making Bufab a better company and a better partner for our customers and a better partner of our suppliers and also made it easier to recruit really talented people by having this acquisition strategy in place.So it's something we're going to continue with. We have a pipeline. We always have a pipeline. Right now, the pipeline is, if anything, in fact, stronger than it usually is. And like I just said, we also have a high activity level in many of the cases in the pipeline. And therefore, it's really good to see that we now also have the balance sheet to execute on those things. If we decide to do so, and we will decide to do it so every time when -- but only when we feel that the company in question is a strong initiative which is well managed, has growth synergies with the -- and that we can conclude the deal with, which is a win-win for both parties, right, for us and for the sellers. We've been very picky in the past with making acquisitions, and we feel that, that has paid off in the quality of the acquisitions we have made and their contribution to our development.And I guess, it's time for a summary. So the second quarter was operationally challenging. It's true due to the picture of operational challenges that prevails in the manufacturing industry worldwide. That puts pressure on supply, and it's put pressure on component costs. But we managed to navigate those things in a good way, keeping our customers supplied, keeping our gross margin stable, keeping our costs exceptionally low. And thereby, we have managed to deliver an all-time high sales and ultimately operating profit and a good momentum going forward.The outlook is clouded somewhat by the cost issue with the component and transport cost going up so much and continue to go up -- going or during the quarter. So there, our challenge, of course, becomes to move those costs over to our customers, and work is ongoing to that effect. But it's -- the outlook is rosier when you look at the demand picture because that we have a very strong order intake and no signs of slowing down. Of course, there is always uncertainty and they are rising, but so far, it looks quite promising.Most importantly, we're in a significantly stronger position today than we were 1 year ago, and that goes to efficiency but also to the fact that we've been able to navigate these rather rocky last 4 quarters up and down very flexibly both with regard to supplying our customers and with regard to managing our internal cost base, and sales have fluctuated. Now we believe, as I said before, that we have significantly strengthened our customer relations.Going forward, our priorities are #1 and always customer first to make sure that we deliver to our customers despite the challenges we are facing. We need to start recruiting again and strengthening our team to meet the stronger demand picture and also to capitalize on the sales opportunities we see. We do need to increase prices, and we will increase prices to all of our customers to meet higher cost level we're facing. And we're aiming to, where we can, accelerate our acquisition agenda, but again, only what we can do so without compromising quality of the acquisitions.And that will conclude the prepared comments we have. So operator, if you could now instruct the call participants on how to place a question if they have one, that would be nice.

[Operator]

[Operator Instructions] There are no further questions at this time. Please continue.

[Jorgen Rosengren, President & CEO]

Okay. Thank you, operator. Then I conclude that everything was super clear. And as there are no questions, we have nothing to add, then I would like to just thank everybody for participating in this call today. Thank you very much, and wish all of you a nice summer. And stay tuned for further updates in the third quarter. Thank you so much, and goodbye.

[Operator]

This concludes our conference for today. Thank you for participating. You may now disconnect.