Bufab AB (publ)

STO:BUFAB

Earnings Call Transcript 2022-Q2

[Operator]

Welcome to the Q2 earnings call for Bufab. Today's conference is being recorded. There will be a question-and-answer session at the end of the presentation. At this time, I would like to turn the conference over to Johan Lindqvist. Please go ahead, sir.

[Johan Lindqvist, executive]

Good morning, everybody, and welcome to the Q2 report for Bufab. We look at the presentation on Page 1. So once again, a strong quarter in a continued challenging market. Bufab once again reported highest sales, highest operating profit and earnings per share for -- ever for a single quarter. We see continued strong demand in the second quarter across all segments.

Organic growth, up 16% driven by price increases, underlying demand and improved market share. And also the order intake remained stable. Improved gross margin, driven primarily by segment North and East. There is also increased share of operating expenses due to remeasured additional purchase considerations.

Adjusted for this, strong improvement in EBITA plus 66%, corresponding to an operating margin of 14% compared to 13.4%. Weak cash flow this quarter due to high lead times and inventory buildup. However, that's a good sign, turning point expected soon to be reached.

Acquisition of CDA Polska in Poland adding an annual turnover of approximately SEK 90 million, strengthening our offering, especially in the construction industry.

So over to Marcus on Page 2.

[Marcus Andersson, executive]

Thank you very much, Johan. So Page 2, where we have the financial highlights for the group. And as Johan just mentioned, you can see if we start top line or with order intake. You can see that we had an order intake that was more or less in line with net sales, which kind of indicates a stable development, at least short term going forward.

Net sales growth was strong, 57%. Organic growth, 16%. And those 16% comes mainly from somewhat higher underlying demand compared to the previous quarter as well as from price increases and that will continue to take market shares. The gross profit, as you can see, was stronger than the comparable quarter.

The high gross margin is mainly driven by strong performance in primarily segment North and segment East, driven by a combination of positive business mix and that price increases were passed on to customer, et cetera, and also higher volumes in the manufacturing companies as well.

Operating expenses, like Johan said, we have one-off, you can say, in this period, which has to do with remeasured additional purchase consideration of approximately SEK 80 million. That has a negative impact of the operating expenses. Adjusted for this, the operating expenses was slightly up compared to previous year, which is mainly due to that we continue to invest in our business and that traveling, et cetera, has come back more to somewhat of a normal level, you can say.

So all in all, this summarizes down on operating profit of SEK 223 million, adjusted for the remeasured additional purchase consideration, the operating profit was SEK 313 million, meaning an increase of approximately 64% to 65% compared to the comparable quarter.

And if you look at the right, on Page 2, you can see the bridge showing which segments that are generating mainly of the increased results compared to previous years, strong development in North, driven by both organic growth and through acquisition, mainly Pajo-Bolte and Tilka, who is a contributor.

Segment West also solid organic growth, but also contributions from the acquisition of Jenny Waltle. We'll comment more on segment East in a couple of pages. Segment U.K./North America, as you can see, has a negative impact, but mainly due to that -- those remeasured additional purchase consideration is in that segment. We'll talk more about that as well.

We'll turn to Page #3, and we'll see more of a long-term development. First, on the graph on the left side, we have the growth trajectory of Bufab. And as you can see, 57% growth, and over the last 7 or actually 8 quarters, we have seen organic growth in the -- during the last 5 quarters, you can say, a very strong one as well, driven by both volumes and price increases.

If you look on the right graph, you can see that the strong trend when it comes to overall profit level and also net sales development is still in a very strong trend, which is, of course, driven by continued strong underlying demand, price increases, slightly increased gross margin and cost under control, you can say.

If we turn to Page #4, and have a look at segment North. As you can see, segment North had an order intake that was in line with net sales. Organic growth, up about 9% and I said earlier, this was mainly supported by price increases and higher volumes in the manufacturing companies, which are operating in this segment, you can say.

Higher gross margin, mainly due to favorable business mix and price increases, slightly lower cost in percentage of net sales, mainly due to good cost control and operational leverage on the increased sales. So all in all, this summarizes down on an EBITA of SEK 104 million, meaning an increase of 58% and a corresponding EBITDA margin of 13.8%.

If we turn to Page #5 and have a look at segment West. You can see that segment West had a slightly stronger order intake than net sales. Net sales in total grew with 39% and organically by 10%. And also the segment saw a healthy underlying demand both now and also going forward.

Gross margin, as you can see, is lower than previous year. And the main reason for this is actually a combination of many things. But one of them is that, Jenny Waltle, the company that we acquired 2 -- almost 2 quarters ago or almost 3 quarters ago had a slightly lower gross margin than the rest of the segments. So it's kind of waters it out downwards, you can say.

But on top of this, also price increases have not yet fully been offsetted by price increases to customers. And there is also a slight negative business mix in the quarter as well. However, when it comes to price increases, the work with this is going in the right direction. So we have a good faith going forward when it comes to the gross margin of segment West.

Operating expenses, as you can see, lower than previous year in percentage of net sales, also a kind of an effect of the acquisition of Jenny Waltle. In general, you can say that they have a lower gross margin than the segment in general, but also a lower cost in percentage of net sales, meaning that they have kind of a comparable EBITDA margin like the rest of the segment. So there is an offset between gross margin and operating expenses.

All in all, this fall down in EBITA of SEK 46 million, meaning an increase of 44% compared to previous year and also the operating margin increased slightly.

If we turn to segment East. You can see that segment East also had an order intake that was more or less in line with net sales, slightly below, net sales increased with 22% organic growth up approximately 9%. And the growth was higher in East than in Asia, mainly due to that Asia was negatively impacted by COVID lockdowns, et cetera, at least in the beginning of the quarter. Gross margin increased compared to previous year, mainly due to price increases and a slightly positive also here in customer mix.

Operating expenses, as you can see, increased in percentage of net sales compared to previous year. The main reason for that is that as written in the last -- in the comparable quarter's report, the segment made some adjustments when it comes to accruals that pushed down the cost in comparable net sales in the comparable quarter. So all in all, this leaves us with an EBITA of SEK 44 million, meaning an increase of 4% and a corresponding EBITDA margin of 16.4%.

So finally, we'll turn to Page #7 and have a look at segment U.K./North America. And in U.K./North America you can see that they had an order intake, which was exactly the same as net sales.

Net sales increased with super strong, I guess, you can say, 165% were of 43% were organic and the organic growth is driven by both price increases, but also due to strong demand in mainly American Bolt & Screw grew in the U.S. and APEX in the U.K. market. Gross margin remained unchanged compared to previous year.

Operating expenses in comparable to net sales increased significantly. And the reason for this is, of course, the remeasured additional purchase consideration of SEK 8 million, which are isolated in this segment. And it has to do with recent years' acquisitions that has been on an overall level, had a significantly better development than expected in the first place.

All in all, due to this negative impact of additional purchase consideration, the operating profit or EBITA declined with approximately 9%, leaving us with an operating profit of approximately 5.6% (sic) [ 5.9% ]. But if we adjust for those SEK 80 million, actually the operating margin increased by sorry, the operating profit increased with approximately 142% to SEK 131 million and the margin then amounted to 16%, it deserves to be mentioned.

So if we turn to Page #8, and we'll just have a quick look of the cash flow development and the indebtedness level of Bufab. As you have seen in the report, we have had a slight negative trend cash flow-wise during the last couple of quarters. There are several reasons for this. One of them is that we are growing, as you can see, at quite a pace organically, meaning that we need to build up both accounts receivable and inventory value in the balance sheet.

On top of this, as you know, in the waters from quite strange supply chain during the last year. Lead times, et cetera, from suppliers has increased quite a bit, which is also something that needs to be reflected in our balance sheet in terms of safety stock, et cetera, et cetera. So what we have seen during the last couple of quarters, it's kind of a normalization effect to our balance sheet being normalized to handle the general market situation, I guess, you can say.

If you look on the right graph, it's a development of the net debt to EBITDA. And as you can see, we have increased it quite a bit during the last couple of quarters, and that is, of course, driven by acquisitions. We have made quite a few, namely 6 of them during the last 3 quarters, and are up on a slightly higher level now like we were in end of 2019, but also in the end of 2015.

So now going forward, the focus from our perspective will be to make sure that we integrate those companies and that will land them good in the group in a smart way, using the full integration principle that we have for acquisition and that we leverage on potential synergies like we have done historically and that we focus on getting back to a good cash flow profile of the group and pay off debt just like we did during 2016 and 2020.

With that said, I leave the word over to you, Johan, to talk about acquisitions on Page 9.

[Johan Lindqvist, executive]

Maybe also mentioning about the inventory level, I think also we have been really happy to have that level during the last year due to we have served our customers really well, I think, we've had a lot of positive feedback regarding that, and that's also I think one part of our growth organically that the customer trust us in the situation. But now as Marcus said, we need to focus to get it down to the good level again.

So [indiscernible] we continue to do acquisitions. This quarter was CDA a company -- our first company in Eastern Europe. We acquired a company SEK 90 million in turnover and working or around the company in the business of building on construction, you can say. That will be a complement I think, to both TIMCO and also in some part Pajo-Bolte. So we work from them to the group, of course, and see what we can do together with them.

Then if you go to Page 10 then, the summary and outlook. And yes, it was a challenging quarter in terms of operational, you can say, with the supply chain and so on. But we have a strong growth, good gross margin and also a robust result, I think.

If we look forward, everybody knows about the geopolitical situation, of course, with the war and so on. We have really a tough situation regarding inflation, I think, going forward. We will see what ends up. But that will create, I mean, a lot of jobs for us also, of course, take care of that situation.

There is still some issues in the supply chain, but the situation is definitely stabilized, that also we see good signs that the -- that we get less and less issues, so to say there. So I'm quite hopeful in that area, to be honest.

Priorities going forward. Of course, we continue to work with development of our operations, mainly digitalization, sustainability, not least and also our team, of course. We continue to handle the supply chain issues even if to get less, as I said, and also take care of the increase in inflation pressure, I think.

We touch again this improving cash flow, it is important for us, of course. And I'll say we will see the peak here and, I think, regarding our inventory. We continue to work and investing in our sustainability program. It's a big thing for us, and it's more and more important, both for us and also our customers that we can help them in this area.

And always -- and as always, we also invest in our people and team because that's everything you can say if we will have this still continue with the success, I would say. That was the last page, I think. So now over to if there is any questions.

[Operator]

[Operator Instructions] And we'll take our first question.

[Unknown Analyst]

So congrats [indiscernible] independent analyst. Congrats on the quarter that's operationally excellent. Two big questions on it. Margins seem to be very, very strong. I was wondering how sustainable that is for the coming quarters and next year, the performance is above your long-term goal. So are margins driven by value-added services, you quote favorable mix, but is that your sales team doing a great job of passing on cost?

Or is it more value-added services that we can hope to see go over at similar rates in the future. So any color on your margin outlook and growth for the coming quarters and years would be amazing?

And the second question on the additional purchase considerations, based on the covenants of the agreement, do you expect additional acceleration in the coming quarters? Or is that mostly factored in by this stage?

[Johan Lindqvist, executive]

Maybe I can start with the margin a little bit there. It is a combination of what you said there is, of course, that we have -- our sales team have worked very hard to put sort of say, the cost or price increases from our suppliers and so on to our customer side, that's one thing. It also mix between different areas, you can say, segments from our part. But also, I think that we had our service, as I said before, when we have this inventory level for our service, we can also take some benefit out of that in terms of margin. Maybe Marcus, can continue with..

[Marcus Andersson, executive]

With the additional purchase consideration...

[Johan Lindqvist, executive]

Yes, of course.

[Marcus Andersson, executive]

It's a good question. I mean the reason for the upward revaluation in the quarter is like in the last couple of quarters actually due to that the acquired companies has had a stronger development than we estimated in the first place and in some cases, also significantly stronger development than estimated in the first place.

And I mean, given how the market looks and that everything can go both upwards and downwards, so to say, we can see changes in those reservations going forward, both upwards and downwards, so to say, but hopefully not as big as we have seen now, so to say. But there is a reality, given the fact that we are acquiring companies with not an insignificant proportion of additional purchase considerations that we can have these effects also in the future.

But I mean the revaluations we did now in the quarter reflects our best guess of what's supposed to be paid out in the future, given the run rate of the company, so to say. But I mean, it's 3 quarters until the next quarter report. So things might change upwards or downwards. But the changes in this quarter is based on our best judgment based on what we know now.

[Unknown Analyst]

Yes. Thank you for that. Coming back to the -- if I may, just one follow-up. If we go back to the margins, you're way above your long-term goal, which is 12% for EBITDA. Is this something that you'll be looking to reconsider in terms of growth or not at this stage?

[Marcus Andersson, executive]

That is, of course, a good question, and we get that every now and then -- and we don't really want to speculate in that. I mean we have communicated 12% operating margin and that we should have that and keep that on a sustainable level. Latest at the end of 2023. And now we're a bit ahead of that schedule, so to say.

And whether we should increase operating margin goal or if we should try to accelerate growth even further, that's typically a Board question, and I do not want to forego such a decision. But anyway, I mean, just like you say, very nice development of this and we were very happy with the results.

[Operator]

[Operator Instructions] And we will now move to the next question. This is Robert from Carnegie.

[Robert Redin, analyst]

I had a question about order intake. Your comment was that order intake was stable, but it was up a lot year-over-year and up a fair amount Q-over-Q. So was that a comment on sort of organic order intake growth or day rates like-for-like Q-over-Q? Or what was that?

[Marcus Andersson, executive]

I guess you can say that. I mean, if you look at the run rate of the organic growth -- just to understand the question, Robert, can you please elaborate a bit again just so I answer the right question, so to say?

[Robert Redin, analyst]

I think I read that you had a comment about order intake being stable somewhere? And yes, on the first slide.

[Marcus Andersson, executive]

Okay. I understand what you mean. Yes, it's stable in comparison to net sales that's what we mean with that comment. Maybe it wasn't clear enough, so to say, but that's what we are saying basically, that order intake was in line with net sales. And therefore, we can expect kind of a stable development at least short term. That's how you should read it.

[Robert Redin, analyst]

Okay. Got it. Good. And could you say something about sort of the lead time of all that order intake because I mean in the past, maybe order intake in one quarter, has been sales in the next quarter, what is the sort of average lead time of the order longer?

[Marcus Andersson, executive]

I would say that at least from a historical perspective, when looking at the order intake of Bufab that reflects kind of what to expect during the coming 3 months or the nearest quarter, so to say. After that, it becomes more uncertain. So I will say that it indicates the development of the coming quarter.

[Robert Redin, analyst]

All right. But that sounds like a good Q3 to them. And another question on the leverage. The leverage has come up after these acquisitions that you've made. Could you say something about sort of covenant headroom and also maturity of your debt profile?

[Marcus Andersson, executive]

Yes. It's a good question, of course. And in terms of covenant headroom, we have a headroom, which is enough for us under the current circumstances in terms of leverage. So we are not worried about that. And in terms of cash, we also -- we signed a new credit agreement almost a year ago, where we increased the credit facility, we also increased debts at the same time as we acquired TIMCO during earlier this year, so to say.

So we believe that we have unused spread facilities together with cash in the group, which is more than enough to operate also going forward. But anyway, when looking at cash flow, it's quite obvious that we are not happy with the run rate as for now.

I mean Bufab is a trading company, which historically has shown very nice cash flow figures. And we want to get back to that, but -- there is a reality out there, which our balance sheet needs to reflect and we have been normalizing it to reflect that during the couple of -- last couple of quarters. But like Johan mentioned earlier, the focus now is to get back to the nice cash profile, payoff debt, generate new headroom for future acquisitions and continue doing what we have been doing during the last 4 years.

[Unknown Analyst]

All right. Perfect. Final question. I mean that order intake, I mean, in Q2 was very good in my view. So did you see any trends during the quarter this year slowing down towards the end of the quarter, but at the start or similar across the quarter.

[Marcus Andersson, executive]

No, I can't say that really. I mean, of course, there's always some deviations between different customers or industries, but no big such that serves to comment on specifically. I mean the order intake, I mean, if you look at the per segment, it was also quite even among the different segments, so to say, most segments had an order intake in line with net sales. So there are no real worries, I guess. But I mean like we write in the MD comment what the future brings, we don't know. But so far, it looks promising for the coming quarter.

[Operator]

[Operator Instructions] And we will now take our next question.

[Rasmus Engberg, analyst]

This is Rasmus with Handelsbanken. I had a couple of questions. If I just wanted to start on the organic growth side. Can you sort of elaborate a little bit on roughly how much you think was price in the growth in this quarter?

[Marcus Andersson, executive]

Yes, it's a good question. And it's actually so -- and this kind of goes with the same comment that we had in the last quarterly call. And that is that we were not able to give you a percentage of how big -- how much of those 16% inorganic growth that comes from price, so to say, because it's super complex to calculate, right? We are selling 150,000 items to the same customers, right? So it's a makeup a super complex thing.

But like we said also in the first quarter, as 2022 goes, we expect price increases to become a bigger and bigger portion of the overall organic growth, and that was also the trend we saw Q2 over Q1. So -- the majority of those 16% is from price, but there is still also still a strong and stable underlying demand, and we continue to take market shares.

[Rasmus Engberg, analyst]

And looking forward, I think this might be a question that lots of people have. Like if raw material costs roll over, can inflationary pressure is definitely there now. But is there a risk that, say, 2 quarters from now that prices start to decline because steel prices and oil has rolled over -- or is the inflationary pressure is so high that you don't see anything of that now?

[Johan Lindqvist, executive]

Yes, that's also a good question, you can say, as I said, the price is a combination of all these things that you set there with inflation, is energy, is oil, transports and everything like that. And now we see, I mean, quite a lot of these raw materials like aluminum and copper and so on going down that will, of course, be some effect of that.

But I think in general, we're still lower in a really high level. And we don't see right now that it's going down heavily. And it's also a delay in these kinds of actions, I mean, if the raw material is going down, it must be through all the chains, so to say, the supply chain to reach us and also the customers in the end. So I don't see it right now at least.

[Marcus Andersson, executive]

And I mean even if lead times are flattening out like going -- and also going down at certain geographies, so to say, there is still high lead times or long lead times, so to say, which makes it take longer time before we see those effects being worked through just like you said...

[Johan Lindqvist, executive]

Yes, I think so.

[Rasmus Engberg, analyst]

And would -- if prices go down and you have a lot of inventory, would you still be protected sort of being able to sell that inventory at the prices you acquired it? Or how has that worked historically if there has been.

[Johan Lindqvist, executive]

Yes, it is a mix that you can say in -- but in many cases, we have contracts and agreements with the customers, and we have bought these parts from, I mean, with a forecast in our mind so to say, and they need to take that part for that price, even if it's going down.

But even if it is going down, I mean, if you buy a part now for a lower price, you'll don't see that part for -- I don't know, for maybe 6 months away or something like that. So it's also -- that's the way to washing it out, so to say, if you can say so.

[Rasmus Engberg, analyst]

Yes. And then just a final question. This inventory buildup that you have, is it possible to sort of analyze where geographically that is? Is it broad-based? Or is it specifically in certain regions? Or how would you sort of describe it?

[Johan Lindqvist, executive]

No, I would say it is all over the place, so to say, because -- I mean it is our business model to have an inventory for our customers to feed them, so to say, mainly down to daily shipments. So I would say it's all over the line. It's nothing sticks out there.

[Rasmus Engberg, analyst]

And just a final question. Given the -- I mean the only reason for asking is, of course, these higher costs for the acquisitions. How -- what are those kind of earnouts based on? Are they based on EBITDA? Or is it a combination of EBITDA and cash flow that you sort of...

[Marcus Andersson, executive]

Yes. It's, of course, a good question. They are in the vast majority based on EBITDA increase -- EBITDA increase or EBITDA increase and that's significant such.

[Rasmus Engberg, analyst]

Okay. Right. So technically, it could mean that you pay more despite not getting the cash flow now at least? Or is that -- Is that fair to say?

[Marcus Andersson, executive]

Yes. It could be -- it's a question of timing, right? I mean, eventually, the cash flow comes. I mean as the company grows in general stronger results, they also pay out more cash, so to say, but that's also a normalization effect that we are aware of.

[Operator]

We don't have any further questions over the phone at the moment. [Operator Instructions] There are no further questions for today's call. So I would like to turn the conference back to our host for any additional or closing remarks -- to may be have any additional or the closing remarks?

[Johan Lindqvist, executive]

So thank you very much. There's no further questions for this conference call. And I wish you a nice summer. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you for your participation, and you may now disconnect.