Bufab AB (publ)

STO:BUFAB

Earnings Call Analysis

Bufab Shows Stability and Strong Cash Flow

In Q2 2023, Bufab maintained solid performance with a 2% increase in net sales thanks to favorable currency tailwinds, offset by a 5% organic decline against a robust comparable quarter. Operating expenses stayed consistent, and EBITA improved by 37%, marking a 14.0% operating margin, or an adjusted 13.5% when considering items affecting comparability. The firm delivered a significant operating cash flow of SEK 488 million, resulting in an impressive cash conversion rate of 147%. Management expressed confidence in the continued robust cash flow for subsequent quarters.

A Stable Quarter with Solid Operating Results Amidst Mixed Market Signals

Bufab Group reports a stable development in the second quarter of 2023, marked by robust operating results and a vigorous cash flow. The company saw its top-line net sales increase by 2%, largely buoyed by positive currency fluctuations. However, the overall picture is nuanced: while net sales benefitted from the currency effect, organic growth faced a decline of 5% compared to a particularly strong quarter the previous year.

Challenges and Triumphs Across Geographical Segments

The quarter's dynamics varied significantly across regions, with segments East and North America experiencing continued weak demand due to shifts in industry fortunes post-pandemic. Conversely, the West segment showed marked resilience and strong development, maintaining order intake in line with net sales for the period. Despite these mixed signals, Bufab managed to secure a substantial 37% improvement in EBITA, translating into a commendable operating margin of 13.5% when adjusted for comparable items.

Efficiency Drives Improved Margins and Impressive Cash Flow

Bufab's gross margin was slightly down from the previous quarter, attributed to a less favorable business mix, while operating expenses aligned closely with those of the comparative quarter. This disciplined management underlines a strong quarter, with a notable increase in EBITA delivering a margin performance of 14.0%. The concerted efforts to streamline cash flow are reflected in an impressive operating cash flow of SEK 488 million, boasting a cash conversion rate of 147%, which the company anticipates sustaining in future quarters.

Strategic Mergers and Acquisitions Fuel Growth Ambitions

As part of Bufab's expansive growth strategy, the company continues to seek out acquisition targets to consolidate its presence in a fragmented market. Recent integrations, such as Bufab Denmark into Pajo-Bolte, have shown promising developments, suggesting that Bufab's strategy to find synergies post-acquisition is bearing fruit. This approach is anticipated to accelerate growth, building on the successes achieved with prior integration endeavors like the FLOS acquisition in the Netherlands.

Financial Resilience Despite a Challenging Comparison Quarter

Although the company navigated a challenging comparison with the exceptional performance of the second quarter in 2022, its financial highlights reveal resilience. Operating expenses remained consistent even when adjusted for earn-out revaluations, contributing to strong EBITA levels. Such financial steadiness, coupled with the robust cash flow used for reducing debts, positions Bufab to weather variable market demands while maintaining a position of strength.

Earnings Call Transcript 2023-Q2

[Operator]

Hello, and welcome to the Bufab Quarter 2 2023 Earnings Call. My name is Caroline, and I'll be your coordinator for today's event. Please note this call is being recorded. However, you'll have the opportunity to ask questions at the end of the call. [Operator Instructions] I will now hand over the call to your host, Mr. Erik Lunden, to begin today's conference. Thank you.

[Erik Lunden, executive]

Thank you. Good morning and good afternoon, everyone. My name is Erik Lunden, and I'm President and CEO of Bufab Group. And together with me here today, I have Frederick Neely, acting CFO. So a warm welcome to this Q2 2023 earnings call.

And I will start with a short summary of the quarter, and then I will leave the word to Frederick for some financial highlights. And then at the end, I will take over, go through the segments, a short summary. And then at the end, we'll have time for Q&A.

So if we start on Page 3 and a short summary of the quarter. We had a good and stable development in the quarter, and we delivered a strong operating result and strong cash flow. And looking at the top line, it was up 2%, driven by currency. Looking at organic growth was down 5%. And here, we should have in mind that we're up against a very strong comparative quarter. And what we also see is that the continued weak demand in 2 segments, mainly East and North America, and this is driven by a few industries that were favorable during the pandemic is now struggling with lower demand.

Looking at the segment West, they continue to have a very strong development in the quarter. Order intake was in line with the net sales for the quarter. If we then go down to look at the EBITA, we had a strong improvement in EBITA, and we are pleased with the margin that we performed in the quarter.

Our gross margin was somewhat lower than the previous quarter, but due to less favorable business mix, operating expenses in line with the comparison quarter. And looking then at the improvement in EBITA, it was 37%, and this is corresponding to a margin of 14.0%.

If we adjust for items affecting comparability, the operating margin was 13.5% in the quarter. If I look at the cash flow, as previously informed, we have been working hard to get our cash flow moving, and it worked out very well this quarter as well. Strong operating cash flow amounted to SEK 488 million, and that is corresponding to a cash conversion of 147%. And we expect the strong cash flow to continue in the coming quarters as well.

That was a short summary, and I will now leave the word over to Frederick for some financial highlights. Please, Frederick?

[Frederick Neely, executive]

Thank you, Erik. As Erik mentioned, we'll look at the financial highlights in a slightly more detailed fashion. If we start with net sales, as Erik already mentioned there previously, it was up 2%. This is driven totally by currency.

As we're all aware, our functional currency is Swedish krona, which has taken a beating in the last month. And of course, this gives an effect during the quarter. Our organic growth was lower, as Erik also has mentioned. And I want to bring up again that we have a very strong comparison quarter to compare, which makes it tougher to perform against that good quarter that we had in Q2 2022.

Operating expenses, as Erik already said, is within line, adjusted for our earn-out revaluation. And they had a switch effect during the quarters, meaning that for this quarter, we had a positive impact when we revalue them. And in the last quarter, in Q2, we had a negative impact. So positive and the negative gives quite a large movement there.

But adjusted for these, the operating expenses were 14.9% versus 14.8%, so almost perfectly in line. Operating results is, of course, affected by this as it drops down in the same manner when we revalue those earn-out considerations. And adjusting for those, we had 13.5% for the quarter compared to the very strong quarter last year at 14%. A decrease, of course, on the face value, but of course, very, very strong EBITA considering the market situation.

If we continue on to Slide #6, which should be some graph. The first graph there on the left shows our net sales growth in terms of total growth, which is the gray portion of the columns, and our organic growth, which would be the blue portion of those columns. And as you can see in quarter 2 for 2023, the final column there all the way to the right, we had a total growth, which has grown. And as you see the blue, we have a negative organic growth.

But as I previously mentioned, and it bears to be mentioned again, our quarter 2 in 2022, if you look at that column, it was off the charts fantastically good. So as I've said previously, a very tough quarter comparison.

The graph on the right there shows our net sales, which would be the blue trend line in our EBITA, which is the gray trend line and of course, in terms of a 12-month rolling trend. In this trend, we are -- in this graph, we are more mindful of the trend in the way -- in the direction these lines are moving. And as you can see, the gray line is as we want. It's diverging from the blue line, which would, of course, imply that we're conducting our business better in terms of productivity and efficiency.

If we go on to Slide 7, cash flow and net debt to EBITA graph, where the graph on the left shows the relation of our EBITA. They are adjusted, which is the blue columns in relation to our operating cash flow, which will be the great trend line. And then the parity between them signifies the cash -- our cash conversion.

As you may know that in a perfect world, the operational cash flow line there would intersect at the top of each column, which would indicate that we have a perfect 100% cash conversion cycle. But of course, we don't live in a perfect world. And therefore, you have variances that, that line is not super straight.

But as you can see, we've had tremendous development in our cash flow, very strong. And we're above -- way above the perfect 100%, actually, it's above 140%. And this, of course, is following our focus on renormalizing and optimization of our net working capital and in particular for us, Bufab's inventory. And we should see this going forward that we will have a further strengthening of the cash flow in the coming quarters.

The graph on the right is a ratio that -- shows the ratio that messengers leverage. And as you can see in our quarter 2 '23, our leverage is slightly up due to payout of earn-outs during the quarter. However, we still had quite a good cash flow in the quarter that we were able to amortize a sizable portion on loans.

And then on Slide 8, we have a very summarized and condensed bridge showing EBITA from our starting point in Q2 '22 and then ending up in Q2 2023, based on our segments, showing the segment's movement during this quarter. North, West and East, they're up and down. But the big star here, of course, is U.K., North America, which have continued, as they shown that they know how to conduct business over there and doing a very good job in a slightly demanding market, both in the U.K. and North America.

And then I turn the word back over to you, Erik.

[Erik Lunden, executive]

Thank you. A few words then about M&A on Slide 9. As you know, part of our growth strategy is to continue to acquire companies and be a consolidator in a very fragmented market. And of course, also the big focus right now for us to ensure that we take care of the companies that we acquired in the recent years.

And I would like to mention a few words about that work that's ongoing in terms of integration. As we speak right now, we have been integrating Bufab Denmark into Pajo-Bolte. Pajo-Bolte was a company we acquired in 2022. And that work is ongoing and going very well. And we have seen also good development in Pajo and actually in the whole region after the acquisition of Pajo. And this is a part of our strategy to ensure that we find synergies between the companies when we acquire them. We did a similar thing back in 2015 and a few years later after that, when we acquired FLOS in Netherlands and integrated our Benelux business into FLOS, and now that is also continued performing very well, including in this quarter.

So the work is ongoing to ensure that the companies in the Bufab Group continue growing, hopefully, quicker than -- higher speed than in the past within the Bufab Group. And looking at the pipeline ahead, we are continually looking at the acquisition targets for the future and also try to prepare ourselves from a balance sheet point of view to be able to continue to acquire companies in the near future.

If we then turn to the segment highlights and start with Page 11, segment North, and a few words about each segment. And starting then with segment North. Here, the total growth amounted to 1%. Organic growth was declining by 3%, and this is driven by the furniture kitchen industry that are slowing down after really strong momentum in 2021 and 2022.

A slight decrease in gross margin due to the business mix. Operating expenses held stable in the quarter. And our operating profit and margin decreased, driven by the same reasons I mentioned before, the furniture and kitchen industry that is holding back the improvements in the numbers there.

West continued to have a very strong development. Total growth amounted to 14% in the quarter, 4% organic and still a strong underlying demand in the segment. And we're also taking market share in West and do a good job. Netherlands, FLOS is doing very well and keep improving and your engine for the for the segment. And also, France has performed well in the quarter. So overall, good momentum in segment West.

Gross margin stable in the segment, and the operating profit and margin increased and we have lower share of expenses. And we continue to have good cost control and operational leverage in the segment.

Go over to East. Total growth of 3%, driven by acquisitions to a certain extent and then also currency. But organic growth down 6%. As already pointed out, we're up against strong -- very strong all-time high comparative figures for the group Q2 2022. But we also see a few industries in segment East that are struggling. And those are the ones, once again, that had a favorable development throughout the pandemic, both in Eastern Europe, but also in Asia. Saw a decrease in gross margin, and then the operating profit and operating margin also decreased a little bit driven by the outdoor and health care industry.

And then finally, if you look at the different segments, U.K., North America. Decline in total growth, 4%. Organic growth also declined 11%. And once again, very strong comparative figures. Those companies here boomed during the pandemic and then have a lower demand. And these are accomplished in U.K., stainless, and then also the RV industry in the U.S.

But looking at the gross margin, it's positive. It was higher than previous quarter and also lower operating expenses. And if looking at the overall result, operating result margin improved in the quarter. And the companies in this part of the company are doing extremely well to managing the cost level and keeping up the margin despite very much lower demand. So really good to see that.

And then I add 1 slide here to share a little bit about the value creation that we give our customers in this hub and as always are developing every day and how we actually give the peace of mind to our customers. And I will start with 1 award that we got in the quarter. There's a receipt that we're doing things right for our customers, and that was our Quality Award that we got from Schneider Electric.

And among 13,000 suppliers in Europe, we were selected for the one that had the best quality delivered to Schneider Electric Europe over the last 2 years. And I think it's a good example of the diversity that we bring, not only consolidation and giving a total cost of -- lower total cost of ownership for the companies that we provide our services, but also quality is a big part of the service that we provide.

Another area that's increasing in interest of our customers is our sustainability offering that we provide. As you all know, we are continuing to integrate stability throughout our operations, and it's a very important area for us also going forward and, of course, for our customers. And what we see now is that more and more customers are playing higher demands on sustainability and has much more questions how we can support them on their sustainability improvement journey.

And we are, I would say, industry leader when in comes to sustainability. And we foresee and also experienced now an increased business opportunities for us when it comes to take market share because of our strong offering in sustainability.

And what we do is that we strengthen our customer supply chain through our sustainable supply engagement program that we have that can help our customers to -- with their carbon footprint and also reduction of the greenhouse gases and how the suppliers are actually performing. So this is something that we will continue supporting our customers with also in the coming quarters.

If we then go to a summary of the quarter, a few words about that. So as I said, I'm pleased with the quarter, a solid development. Very pleased with the strong operating profit that we delivered in the quarter and, of course, also the cash flow.

Sales growth, 2% up, but driven by currency effects, organically down. But we're up against a very strong comparative quarter. And as previously mentioned, there is a mixed bag. Here, we see lower demand in some favorable business during the pandemic and others are keeping up extremely well. So it's a mixed bag in terms of demand right now.

Strong EBITA margins, as already mentioned, of 14.3%, and really good cash flow in the quarter. Given the outlook, it's a similar situation as we've seen now for -- in Q1 as well. There are still uncertainty in the market. It is caution note among customers in certain industrial segments. As I mentioned already, we talked about the ones that have been very favorable in pandemic and others are keeping up very well. But all in all, we have a very large and well-diversified customer and ticket portfolio and good diversification in risk to various industries and markets. So I'm optimistic for the future.

And if we then look at the short-term priorities, they remain the same. We set those in Q3 last year, and those still are very valid, and we continue to deliver on those priorities. That is now to take advantage of the market situation and continuing to take market shares, acting in the market. Our offering suits very well when customers have cost pressure and want to reduce their number of seaport suppliers. But also, as I mentioned before, take care of other issues like, for example, sustainability and other things that are reflecting right now in their reality is a big challenge.

Continued protecting margins. I'm pleased in how we will manage the inflation in the quarter and offsetting the cost pressure, and we'll continue doing so also in the future, that's the plan. And of course, continue improving our cash flow and to gradually reducing our debt level.

And then finally, before I leave over the word here for a Q&A session, I have on Slide 16 2 other updates. The first 1 I already announced in the press release, and that is that we will have a new CFO joining in mid-August, Pär Ihrskog, that have experience from SKF and as CIO from Embellence Group, who will join in mid-August. And of course, thanks a lot to Frederick for being acting in the meantime until Pär joins us in mid-August.

And then secondly, yes, for your information, we will have a Capital Markets Day that will take place in Q4 2023. Some more information about our Capital Markets Day will come in August, including date, venue and agenda details will be shared then in August after the European summer holiday.

That was it for today. Now I will leave over the word now for a Q&A session. So please.

[Operator]

[Operator Instructions]

[Johan Skoglund, analyst]

This is Johan from DNB. So you mentioned some segments are performing well and pandemic winners are performing worse. Are there any segments in between that are kind of flattish or slightly declining? And which are these would you say?

[Erik Lunden, executive]

Yes. You can say that there are also some in between. If you take, for example, construction. You can say in all in all, if you look at that segment, it's in between. We have a few segments in construction that are doing tougher right now, new buildings and so on, but others are keeping up well. So all in all, construction is, I can say, flattish in development. So that is one industry I can mention, for example.

So of course, we have industries that are in between. And also electric in the industrial engineering is also, you can say, something in between the ones that are performing extremely well and the ones that are struggling right now. So we have a few in between, of course.

[Johan Skoglund, analyst]

Okay. That's interesting. And just a quick follow-up. You mentioned that TI Midwood saw construction recovery. Is this a gradual improvement in the U.K. during Q2?

[Erik Lunden, executive]

Yes, it is a gradually improvement in the quarter. So they have had a better demand in the quarter, we had a better demand and also been managing internally well when it comes to the margin and also the cash flow. So a good development in the quarter for TI Midwood.

And then, of course, in that segment, there's still uncertainty in the construction segment. So there's still a certain market, but good development in the quarter.

[Johan Skoglund, analyst]

Okay. Very good. And then a final question. I'm glad to see the cash flow is continuing in a strong manner. So is it possible in broad terms to estimate like how long you would have left before you would be back or when you aim to be back at normal inventory levels?

[Erik Lunden, executive]

Yes. And then it's a good question what you mean with normal inventory levels as well, actually, because how we look at it from a cash flow point of view and also inventory point of view, we take this in 2 steps. One is to -- that we are doing right now is we're taking down our inventory from the high level that we had to had during the pandemic and when the supply chain was -- had been constraints. So we're doing that, I can say, journey right now, and that is progressing very well.

And then we have the second part, that is to actually gradually improve the way we're working with the inventory and how we manage our capital. And that will be ongoing for many quarters, so to say, and to gradually improve that because we don't see the level that we had before pandemic as to the level we want to be. I think we can do more than that. So we see this in 2 stages.

And then exactly how -- what level that will be, that the market to [indiscernible] will decide depending on the demand and also, of course, how we can improve internally how we work with our efficiency and work internally between listed companies to be efficient when it comes to the inventory. So I would say that is the answer on that question.

[Operator]

[Operator Instructions]

[Robert Redin, analyst]

This is Robert from Carnegie. Can I ask firstly on, I mean, this negative organic growth of 5% in the quarter for sales. Was there a trend throughout Q2? Were April, May, June different or whether not really the same?

[Erik Lunden, executive]

You asked about the trend here in the quarter. No, we can't say there was any specific trend in the quarter. It's more linked to the different, yes, industrial segments and how they are performing. So no specific trend in the quarter.

[Robert Redin, analyst]

Okay. Good. And on [indiscernible] and on pricing, raw materials and freight costs are down, I guess, salaries are up a little bit, but do you still have [indiscernible] contribute to organic growth with volumes dropping more than the 5%?

[Erik Lunden, executive]

Yes, the price is still a contributor, but it's getting less every day. As you know, we had a major price increases in, yes, 2021 and even more 2022, but those are becoming less impacted than on our numbers every day. That's how it looks like.

[Robert Redin, analyst]

All right. And on those cash flows, I mean, I guess, yes, to this question, it pertains a bit that this working capital is, I mean, year-to-date, you've decreased inventories by, say, SEK 400 million and for 2022, you built SEK 800 million of inventories. So some recently, you can't release those or could you release more or...

[Erik Lunden, executive]

I heard you now, but you're asking about if you get even better cash flow. What's that you said?

[Robert Redin, analyst]

Yes. I mean the inventory sort of decreased year-to-date, is about SEK 400 million. And in 2022, it was SEK 800 million of added inventory. So can you release those SEK 800 million or more? How should we think about that?

[Erik Lunden, executive]

Yes. And that's -- my answer to that is a little bit back to what I said to Johan in his question as well. We still have work to do with -- to still continue improving the inventory situation. So the answer is yes to that.

And then how much that will be, that depends now also on the demand in the market in the coming quarters, but also how well actually we can manage to do this as well. So far, we are doing good. We're doing better than our plan that we set up in Q3 around this. So we are on the right track or better than expected. And our aim is then to continue on this improvement also in the coming quarter.

[Operator]

It appears no further questions at this time. I will hand it now over to your host for closing remarks. Thank you.

[Erik Lunden, executive]

Okay. Then thanks a lot, everyone, for joining, and I wish you a nice day ahead. Thank you.

[Operator]

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