Bufab AB (publ)

STO:BUFAB

Earnings Call Analysis

Strong Margins Despite Revenue Decline

The company reported Q2 net sales of SEK 2.142 billion, down 6% year-over-year, but showed improvement in gross margin, reaching an all-time high of 29.8%. Despite weak demand in several sectors, energy and defense performed well. Operating margin stood at 12.2%, supported by stable cash flow. Strategic cost-saving measures are counterbalanced by investments in market share growth. The company divested Bufab Lann and Hallborn, expecting to impact future profitability positively. Management indicated potential revenue recovery later in the year, attributed to strategic execution and market opportunities.

Navigating a Challenging Quarter

In the recent earnings call, Bufab reported a 6% decline in net sales for Q2, amounting to SEK 2.142 billion. This reflects a slight recovery in organic growth, which improved from a previous quarter's decline of 10.6%. Despite the overall decline, the company is seeing some positive trends in certain sectors, particularly in the energy and defense industries, while portions of the construction sector remain weak.

Improvement in Profitability Metrics

Gross margin achieved an impressive 29.8%, up 1.3 percentage points compared to last year, marking an all-time high for the company. This improvement is attributed to better customer and product mix strategies, alongside effective sourcing savings. However, adjusted EBITA fell to SEK 261 million, representing a 16% decrease, largely due to lower market demand and increased operational expenses (OpEx).

Operational Efficiency and Challenges

Operational efficiency remains a focus, with OpEx increasing to 17.6% of net sales, up three points year-over-year. This rise is due to both reduced sales volumes and ongoing inflationary pressures. Bufab is implementing cost-reduction programs while simultaneously investing in market growth. The company expects some reduction in absolute OpEx levels over the next two quarters as these initiatives take effect, although the pace of improvement may slow down.

Solid Cash Flow and Financial Strength

Despite the challenges, Bufab reported robust cash flow of SEK 427 million, benefiting from effective net working capital management, where they released SEK 212 million. Notably, net debt was reduced by SEK 750 million from the same quarter last year, resulting in a leverage of 2.8%, which is a slight improvement compared to the previous year. This strong cash flow supports the company’s ongoing investments and operational stability.

Regional Performance Insights

Regionally, Bufab noted diverse performance outcomes. Europe North and East saw a total growth decline of 3.7%, while Europe West faced a 6.4% decline. Conversely, the Americas registered an 11.8% drop in total growth, pressured by weak demand in mobile homes and trailers. In the U.K. and Ireland, total growth also declined by 6.2%, although there were positive notes in market share gains for certain companies like TIMCO.

Future Outlook and Strategic Initiatives

Looking ahead, Bufab acknowledges a challenging outlook but believes indications of a market turnaround may emerge in the second half of the year. The company will continue focusing on securing new business, enhancing its market share, and strengthening its gross margin. Notably, they are evaluating potential M&A opportunities and aim to announce developments in this area in upcoming quarters. This proactive stance reflects a commitment to positioning Bufab strongly for future growth.

Divestiture of Non-Core Assets

Recently, Bufab completed the divestiture of its subsidiaries Bufab Lann and Hallborn Metall, which contributed about 5% of total net sales. This strategic decision is anticipated to optimize their portfolio, allowing for a sharper focus on their core trading and niche markets. The transaction generated SEK 230 million and played a role in strengthening Bufab’s balance sheet, further aligning the company with its strategic growth objectives.

Earnings Call Transcript 2024-Q2

[Erik Lunden, executive]

Good morning and good afternoon, everyone, and a warm welcome to Bufab's Q2 report. My name is Erik Lunden, and I am President and the CEO of Bufab Group. And together with me here today, I have Par Ihrskog, our CFO. This presentation will be recorded and by attending to the meeting, you agree to the recording.

So before we start, a few words about the new layout that we have. You will see that we have some new layout in the presentation. And on the pictures, you will see a few of our 180,000 items that we have in our offering in Bufab. On top of that, you'll see some of the solutions that we have that everyday add more and more value to our customers on some pictures as well.

I will start to sum up the quarter. Then after that, I will leave the word over to Par for some financial highlights. I will go through the situation in each of our regions. And then at the end, I will sum up before we have time for Q&A.

But before we go into the second quarter, we have some news to share and that is that we have decided to divest Bufab Lann and Hallborn Metall. This was announced a few weeks back, and the divestment is a result of the strategic review previously communicated and aims to maximize the value for both of shareholders and the conclusion of our strategy was that we see our trading business and complementary niche business, our core -- as our core business going forward.

Lann and Hallborn are 2 companies that are manufacturing components through turning and milling and with automotive as the biggest customer segment. The company stands for 5% of the group's total net sales. And looking back on historical EBITA, the margin has been in the range between 5 and 10 and also stands for a significant part of the group's CapEx.

Now I'm very pleased that we've been able to close this deal and get a new good home for Lann and Hallborn in Arbona Industri. And the transaction was closed in the beginning of July of SEK 230 million on cash and debt basis and will be reported in our Q3 numbers. And of course, it also helps our balance sheet.

And as we previously communicated, we are on our journey to also add more companies into Bufab portfolio within our trading and niche business. I then go to the Q2 highlights and I'd like to start to sum up the quarter. Starting from a growth point of view, we were down 6% and organic growth was down 6.6%. It is a right step versus previous quarter and we should also have in mind that we are up against strong comparative numbers.

From a demand point of view, we see a similar trend as in previous quarters, favorable development in energy and defense while we in construction, both room, kitchen outdoor. General industry is still weak, but we see indication that the turnaround is in sight, which, of course, is positive.

I'm very pleased with our gross margin that continues to improve and is now on an all-time high. We actually reached 29.8% in the quarter and that's up 1.3 points versus last year. And this is due to hard work with improving our value creation for our customers, of course, but also working in a structural way with our customer and product mix and also we see some sourcing savings coming in, in the quarter.

We have a higher share of OpEx due to the lower volumes that we have right now and also inflationary effects and we also invest in market growth. We are in a situation right now where we both have big reduction programs in many of our sister companies where we reduce cost. At the same time, we want to take the opportunity to actually invest in market share growth.

In a market with lower demand and softer situation in the market is a perfect opportunity for us to grab market share when our customers are open for -- consolidate the seaport suppliers. So we do both activities for cost savings but also investments in the market share growth.

Looking at operating margin, adjusted, we end up on 12.2% and the cash flow was stable, and we also continue doing a good job with our networking capital. I will now leave the word over to Par for some financial highlights. Please, Par?

[Par Ihrskog, executive]

Hello. Good morning, good afternoon. Some more details on the financial and starting with sales -- net sales. We ended up at SEK 2.142 billion in the quarter, which is compared to quarter 2 last year, minus 6%, which is a slight improvement when it comes to organic growth.

We had a minus 10.6% organic growth last quarter and minus 9% the quarter before. The split of the 6% then comes from 6.6% organic growth, a positive currency effect of 0.6 and no acquisitions made.

Moving to the next slide. As Erik said, we have very strong operating margin in the quarter at 29.8, 1.3 points better than Q2 last year and 0.7 points better than last quarter. The improvement comes from our continuous focus effort to improve our customer and product mix, but also from our sourcing savings.

Our EBITA ended -- adjusted EBITA SEK 261 million compared to SEK 307 million, which is a reduction of 16%. The lower margin comes from lower market demand, but also higher OpEx, which I will explain on the next slide.

Next slide, please. So as you can see, our OpEx in share of -- OpEx share in percent of net sales ended up at 17.6, slight increase from previous quarter and also 3 points higher than quarter 2 last year. We see 3 different things affecting it. First of all, of course, lower sales, which have an impact on this.

We have high inflation impact on the numbers. We are working hard to mitigate that by focused cost measures with cost reduction programs in specific companies in our group. But as a third element, we also invest in our market growth in our frontline sales force and also improvement in our warehouse and e-commerce solutions.

Next slide, please. So looking at the cash flow, strong -- solid cash flow in the quarter, SEK 427 million. The main part comes from continuous improvement in our net working capital. SEK 212 million we released in the net working capital in the quarter. And if you look at quarter-by-quarter, we now show 5 strong quarters in a row, which is helping us a lot.

Next slide, please. Going on to net debt. We have -- compared to quarter 2 last year, we have reduced our net debt by SEK 750 million coming from the strong cash flow the last 5 quarters. Compared to last quarter, we have not reduced the net debt.

In the quarter, we had a dividend of SEK 189 million and also a payout of an earn-out of SEK 145 million. So that's the reason why we have not reduced our net debt further in the quarter. This ends up in a leverage of 2.8%, which is an improvement compared to last year of 0.1 point. Thank you.

[Erik Lunden, executive]

Thanks a lot, Par. We will then jump into the different regions and see and start with Europe, North and East. The total growth amounted to minus 3.7% with an organic growth of minus 4.2%. In the region, we see weak demand in Bufab Poland and Finland, but really strong demand in Tilka that is big within the defense industry.

Strong improvement in the gross margin, 2.0 percentage points up year-on-year, reaching 28.4% and here's a consequence of good work with adding more value to customers throughout the offering and also sourcing savings. We see higher share OpEx in the region due to cost for staff that is inflation, provision made for bad debt loss as well happen in the quarter.

And then also, we continue to invest in sales force in the region. Adjusted operating margin ended up on 11.7 and would have been on a stable level like previous year if it wouldn't be for those debt that we had in the quarter.

If we then go to Europe West, total growth amounted to minus 6.4%, organic growth of minus 5.1%. Weak demand in Bufab Germany, Jenny I Waltle in Austria, Bufab Flos in Netherlands. While really strong performance continues in Turkey, Czech Republic and in Bufab France.

In the region, we see weak demand in the construction and also automotive, while defense, aerospace and energy developed very strongly. Also, improvement in gross margin in Europe West, ending up on 25.3%. And once again, it's due to working with our value to our customers and our offering and also sourcing savings.

Higher share of OpEx due to higher costs due to inflation and also we continue to do investments in some of the sister companies in the region where we see big opportunities for market share growth. And also, we have some warehouse investments in Czech Republic, and I will actually come back to that.

Adjusted operating margin was stable at 12.4% like previous year. And then we have Region Americas. Total growth amounted to minus 11.8%, with an organic growth of 13.3% (sic) [ minus 13.3% ]. Here, we see really weak demand in the mobile home and trailer segment. That is ABS. But also a decline in automotive segment in terms of demand. And here is our sister company, CSG.

Gross morning was in line with last year, 36.1%. And here, we see a higher share of OpEx, and this is due to -- mainly due to revaluation of additional purchase considerations in a comparative quarter, but also impacting of the inflation that we are facing in Americas. And due to that, the operating margin declined to 11.6%.

If we then go to Region U.K., Ireland, total growth, minus 6.2%, organic growth of minus 8.6%. And here, we can see a big impact for Apex with lower market prices on stainless, but was offset by strong development for TIMCO with market share gains. Improved gross margin of 33.2% versus 31.5% last year.

Here, we have been working well with our customer product mix and also sourcing savings. Also for U.K., Ireland, we have a higher share of OpEx impacted by revaluation of additional purchase considerations. Inflation impact and also investments with our investments in e-commerce, IT and also warehouse in the region, building a stronger region for the future.

The adjusted operating margin ended up on the same level as previous year, 12.7%. If we then go to Asia Pacific, the last region, total growth amounted to minus 6.5%, with organic growth of minus 5.7%. Here, we see -- continue to see strong performance for China. But this positive impact has not been offset by the weaker performance in the rest of the region.

Gross margin on the same level -- or more or less same levels of previous year, 30.2%. And higher share OpEx also in Asia Pacific, mainly due to inflationary effects and also here investments in customer offering and in sales activities. Our operating margin declined to 12.6% for Asia Pacific.

We will also then share some news in the coming quarter's reports. And at this time, we will start with Bufab Czech. As both me and Par mentioned, now we are in a situation where we have cost focus very high up on the agenda for Bufab, and that goes across the whole group. But we also want to take the opportunity to invest in a softer market, where we see a big chance for market share growth.

And one example where we continue to invest is in Bufab Czech that have shown good progress for many years. Bufab Czech have been part of the group since 2006, and it is a trading company only operating within Czech Republic. And they have a broad offering and services and a very diverse customer base.

Looking back, they have very strong growth in EBITDA, and they are well above our group target of 14% on EBITDA level. And therefore, we have decided to continue to invest in [ Bufab Czech ] and have now a new premises on -- that we opened up another -- opening ceremony in the quarter.

And when I talked about good progress in this graph, you can see the development since we got listed back in 2014 for Bufab Czech. The net sales CAGR of 15% and an EBITA CAGR of 24%. And as we see, this is just the beginning of our growth journey in Bufab Czech and an example where we have put us a good foundation for the future.

And now with a new warehouse, we will have capabilities to take on more customers and adding more value to new and old customers in Bufab Czech. If we then go to sum up the quarter, look ahead on the outlook and also our key priorities going forward. Starting with a short summary then of the quarter.

As mentioned, we see continued negative growth, while some improvement versus Q1. Very strong gross margin, an all-time high, coupled with stable profitability and the cash flow. The outlook remains challenging. However, we see indications that the turnaround is in sight in the second half of the year.

And our priorities remain the same. We have a quite new strategy in place that we will continue to execute on. And here, we have 3 areas that is very important for us now going forward. First of all, continue to secure new business and taking market share. We have, as I said, a big potential to further increase our position in many of our sister companies, and that opportunity we want to take.

A softening market open up opportunities when our customers have cost pressure and are open for consolidation. So that is what we're doing right now. Of course, also, we're working on our margin. We want to continue to strengthen our gross margin. As we see, this is just a step in the right direction, and we continue working on our gross margin and further improve that.

And of course, also continuing having full focus on cost savings activities to ensure that we offset the lower demand that we have seen in several sister companies. And we believe if we continue on this journey, it will put us in a very strong position for the future, especially when the market rebounds.

And thirdly, we have said also that we need to improve our net working capital and that work, especially on our inventory will continue and ensure that we secure a strong cash flow. And then, of course, as previously mentioned as well, we will continue also on our M&A agenda. We are now looking for interesting targets. And hopefully, we'll have something to announce within the coming 2 quarters. That was it for me and Par today. We will now leave the room open for Q&A.

[Unknown Executive]

So welcome to this Q&A session. [Operator Instructions] We start with the first question from Karl Noren. Welcome to ask a question.

[Karl Norén, analyst]

Yes. Some questions from my side. If we start on the cost side, maybe. On the OpEx side, I think, especially the North region and Americas stood out with quite high OpEx here. So if you just could elaborate a little bit the drivers behind that? And you talked about it on the call, but when should we see that OpEx is starting to come down a little bit? Because I think that was what you guided for in conjunction with the Q1 results.

[Erik Lunden, executive]

Yes. When it comes to the OpEx, as I said, we have since a couple of months now launched cost-saving programs, and they are kicking in more and more. At the same time, we have quite high inflation effects in our various regions. We expect our OpEx level in absolute terms to be slightly reduced the next 2 quarters.

When it comes to your specific question about the Americas, it's -- we -- it looks high compared to quarter 2 last year and that is a lot of different reasons. Quarter 2 last year was rather low. We also had a revaluation of earn-out that had a positive effect last quarter -- quarter 2 last year. But also quarter 2 this year on top of the high inflation we are facing in Americas, we also have some nonrecurring costs such as recruitment costs, IT investments and so on.

So last quarter -- or last year's quarter was very low and quarter 2 this year is a bit higher than normal.

[Karl Norén, analyst]

Okay. That's clear. And then just on clarification on the OpEx. So when I said it's coming down in the coming quarters, is it from Q2's levels? Or do you mean on a year-over-year basis?

[Erik Lunden, executive]

From Q2's level.

[Karl Norén, analyst]

Okay. That's good. And then I just had a question regarding the provision for the credit loss in the segment North. Is it possible to quantify approximately how big it was?

[Erik Lunden, executive]

Yes, SEK 3.3 million.

[Karl Norén, analyst]

Great. And then one question also on the cash flow. I mean, it continues to be very strong. And I think I asked this question almost every quarter, but how much more is there to do on the, let's say, inventory optimization and to continue to have this very strong cash flow?

[Par Ihrskog, executive]

Yes. No, I believe we can do more. Of course, the low-hanging fruit is gone, but we have to climb a little bit higher, but there are still things to do there, but at a lower improvement speed, so to say.

[Erik Lunden, executive]

And I think I can also add on that, Karl, that as we also communicated before, we think that we have our unit make to get a new way of working into our DNA when it comes to our net working capital, especially with inventory. So hopefully, if we do a good job, we can gradually see some improvement coming. But as Par pointed out, the big impact that you've seen in the numbers that was due to the extra inventory built up during the pandemic and after. Of course, that was an extreme case. But hopefully, we'll be able to see continuous improvement due to the new way of working that we gradually put in place in different sister companies.

[Karl Norén, analyst]

Yes. That's good. And then just a final one for me on the earnout that you paid during the quarter. Is that related to the TIMCO acquisition?

[Par Ihrskog, executive]

Yes.

[Unknown Executive]

Johan Skoglund. You're welcome to ask your question.

[Johan Skoglund, analyst]

Johan Skoglund from DNB here. The first question is on the improving gross margin. So it's just below 30% on group level, which you had now in Q2. Is this where you're aiming? Or do you see more improvement still to come?

[Erik Lunden, executive]

We want more improvements to come. I think that the value that we bring to our customer becomes more and more relevant every day and also looking ahead, I don't see any reason why we should not be able to continue on this gross margin journey. So more to come. That is the plan.

[Johan Skoglund, analyst]

Very good. It sounds like a confident answer. So the next question relates to the general industry turnaround that you see, you see the beginning of it. Could you please elaborate whether any subsegments are performing better? Are you seeing any end markets well or worse or just a few? If you could speak really about that.

[Erik Lunden, executive]

Yes. First of all, I think that -- as I also mentioned here in the presentation, we continue to see a similar trend where we see a few segments doing extremely well, and that is like defense and energy, for example, also oil and gas. And then we have others that are still running at a very low level, outdoor kitchen and so on. And then we have a big segment in the middle, we can call it general industry. And here, we see indications that of improvement, still uncertainty in the market, obviously, but listening to our sister companies and to the market, we see overall some light in the tunnel. So that is the situation. And there is no specific industries I can mention, more or less the overall situation in general industry.

[Johan Skoglund, analyst]

Okay. Good. And then just to clarify -- clarifying question on the turnaround. That appears to be showing in all segments now, but Americas. You mentioned automotive, RVs and trailers, for example, the general turnaround comment on general industry. Does that apply to America as well? Or do you see any other trends in that region ahead?

[Erik Lunden, executive]

In Americas, we have a little bit different exposure. We are more exposed to RV industry and a little bit more in automotive compared to other regions. So from that point of view, it will be a little bit of situation for Americas due to the current exposure that we have in the Americas.

[Johan Skoglund, analyst]

Okay. Good. That was all for now and good luck with Q3.

[Erik Lunden, executive]

Thank you, Johan. Okay. If no more..

.

[Johan Skoglund, analyst]

Can I have a question again?

[Erik Lunden, executive]

Yes.

[Johan Skoglund, analyst]

Good. I'm just wondering a little bit on this divestment here of Bufab Lann and Hallborn. You said it it's now closed. So I'm just wondering, is all of these businesses that -- all of them, their reporting is in the segment North, right?

[Erik Lunden, executive]

Correct.

[Johan Skoglund, analyst]

Yes. And can you maybe give us some kind of guidance on how we should think on how this will impact the numbers in the coming quarters or so? Because I guess the gross margin in these companies are a bit maybe lower than your other -- so if you could go through that a little bit would be quite helpful, I think.

[Erik Lunden, executive]

Yes. It's not that much on the gross margin. It's more actually on the EBITA level where we see the biggest difference actually. So the gross margin in manufacturing business is not that bad, but on the EBITDA level, it is lower. And as we have communicated before, we have been on a level between 5% and 10% EBITA on the manufacturing business, and there is 5% more or less of our total turnover. So that point will give impact on the profitability level for Region North in the coming quarter.

[Johan Skoglund, analyst]

Yes. And then with that, as you said, you should see an improving margin there in your larger segments. So I'm just wondering, do you think it's fair -- or do you think it's possible to reach, let's say, stable EBITA margins year-over-year in the second half of the year? Or will that still be tough?

[Erik Lunden, executive]

Stable EBITDA -- yes. What we see is that -- what's your question specific for...

[Johan Skoglund, analyst]

I mean in general for the group, I guess, because, I mean, now you lost, I think, 130 bps year-over-year, but that's mainly related to Americas or that's a big delta, so to say, while West is stable. U.K., Ireland is quite stable. East is [indiscernible].

[Erik Lunden, executive]

It's general on the group and no specific for -- okay. No. But as we have communicated, we see there a chance to continue to gradually improve our gross margin. On the OpEx level, we will continue to cut, but at the same time also continue to invest. And as Par pointed out, on all -- all in all, we see some reduction in the coming 2 quarters, but we will not be significant. And then, of course, we have the uncertainty that we can't control, and that is how the demand will look like that will set how it will end up. But we are satisfied with the work that we're doing overall. When we continue working hard on the cost savings initiatives and manage cost overall, but at the same time, we will be clever and invest for the future. That is what we're going to do now also in the coming 2 quarters, and hopefully, creating a stronger Bufab.

Thanks a lot. And if no further questions, then thanks a lot for joining and wish you all a nice summer. Thanks.