Bufab AB (publ)

STO:BUFAB

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to today's presentation of the Q3 result conference call. [Operator Instructions] I must advise you that this conference call is being recorded today, Thursday, 25th of October 2018. I would now like to hand the conference over to your first speaker today, Jörgen Rosengren. Thank you. Please go ahead.

[Jörgen Rosengren, Chief Executive Officer]

Welcome, everybody, to the presentation of Bufab business result for the third quarter of 2018. We are in Sweden here and enjoying a beautiful, crisp, sunny autumn day. And together with me here is Marcus Andersson, our CFO, and we will be, together, taking you through the presentation of our results. This presentation is available on our homepage, www.bufab.com/ir, and you can download it from there. And we will be continuously referring to the page numbers of that presentation throughout this call. Turning then to the presentation on Page 2. I would like to start by saying that, in general, we had a very strong quarter in the third quarter of 2018, as we have had the pleasure to enjoy now for several consecutive quarters. In particular, we had continued strong growth. The overall growth was over 20% and, as such, was one of our best growth quarters ever, in fact. And also, the order intake was in line with sales. Of this growth, approximately 9% was related to organic growth, which is also a good result we find. And the reason for the organic growth was higher underlying demand and also market share gains, actually, in both of our operating segments, which is -- was gratifying. On top of those 9% then, we have another 10%, which is driven by a good performance of our acquisitions and also by currency effects. Our operating profit improved almost as much 16% in the quarter, and that was driven by several -- different several effects. Firstly, the gross margin strengthened, and the main strengthening factor for that were the price increases we have been able to execute towards our customers. And that improvement of the gross margin of about 0.5 percentage point versus last year is realized despite, of course, the fact that we have higher raw material prices by far and also associated cost increases of our input costs than was the case last year. We did have higher OpEx in the quarter, both in absolute terms and also as a percentage of sales, and that increase was partly driven by an acquisition-related cost item of SEK 5 million in the quarter, which amounts for something like 0.7% or so of that 1% cost increase -- percentage cost increase. If we look to our operating segments, we had a very strong performance in International, which we'll go through in a moment, but we also have to say that the performance of our segment Sweden was disappointing in the quarter, as it was also in the second quarter this year. But overall, like I said, the operating profit or EBITA improved by 16% in the quarter, which still needs -- is -- which we still, at least, regarded as a good improvement despite the fact that the EBITA margin was slightly lower than last year. After the end of the quarter, we made an acquisition of a company called Rudhäll Industri. How we'll manage company growth, we'll get back to that later in the presentation but something which we feel strengthens our offering to key customers both in Sweden and in abroad.And with that, I would like to turn over the word to Marcus Andersson, our CFO, who will take you through the financial results of the group on Page 3 and following. Please, Marcus?

[Marcus Andersson, Chief Financial Officer]

Thank you very much, Jörgen. If we start by looking at the financial highlights for the group on Page 3, you can see that the order intake in the period were more or less in line with net sales, up 19% compared to last year. Net sales was very strong in the period compared to the comparable quarter, up 22%, whereof 9% was organic. The gross margin, as Jörgen said, strengthened in the quarter, up about 0.5% compared to the comparable quarter, driven mainly by price increases to customers. So the OpEx was a bit on the high side, of course, partly explained by the SEK 5 million in acquisition costs that we take in the quarter. All in all, we landed on an operating EBIT of SEK 81 million, which is 16% up compared to last year. And if you look at the bridge of the EBITA in the lower right corner, you can see that the currency actually contributed on the EBITA level with about SEK 5 million, volume increases with SEK 7 million -- SEK 17 million and price/cost/mix and other reduced the EBITA with about SEK 15 million. And acquisitions net, actually, 9% contributing from our acquisition, Kian Soon and Thunderbolts. But it's a net effect with those minus SEK 5 million in acquisition costs in the period, which gives a net from acquisitions of SEK 4 million. If we take a look on Page 4, we can now see that we have had growth for 21 quarters in a row, not only growth but also organic growth. And if we look at the last quarter of Q3 2018, we can also see that, that quarter is actually the best quarter we have had during the last 24 quarters. We're really happy to see that the growth continues. If we take a look at the right graph, we can see that it is not only growth that is going in the right direction, we also can see that we now have actually 5 quarters in a row with increased EBITA level.If we take a look at Page 5 and take a look at segment International, we can see that segment International had a really good order intake in the period, actually, 2%, which is higher than net sales. Net sales was up with a record level, you can say, 28%, whereof 10% were organic. The gross profit development in segment International was good already in Q2, but it's even better now in Q3, and that is, of course, driven mainly by price increases to customers but also due to favorable currency effects in the period. Operating expenses, a bit on the low side, we have to say, a good operational leverage, which is also the reason for the EBITA to increasing with about 62% compared to third quarter last year. If we look at the EBITA bridge, you can see that currency effect is a bit on the high side in segment International at SEK 8 million compared to last year. Volumes at another SEK 12 million. Price/cost/mix and other is actually a positive figure here, plus SEK 1 million. And acquisitions at SEK 9 million, and that is more or less Kian Soon, you can say. So that's that. If we take a look at Page 6, we can see that segment International has now shown growth for impressively 24 quarters in a row, and also here, not only growth but also organic growth in the last couple of quarters, really good organic growth.If we look at the right graph, you can also see that the development on the EBITA side has been really, really good during the last couple of quarters. And all in all, we have to say that we are really happy with the development in segment International, not only in the period but more or less during the whole year.If we turn to Page 7 and look at segment Sweden, we can see that the order intake in the period was a bit lower than net sales. Net sales was up about 9% to SEK 248 million. All of those 9% in increase was organic. Gross profit, on the low side in the period, mainly driven by, actually, both raw material price increases and a weak Swedish krona. The segment has worked much with price increases to customers, and they have been successful but does not really been able to offset the negative effects by those 2 expense cycles that we have mentioned. When it comes to OpEx, OpEx is a bit on the high side. And in general, you can see on EBITA level, we are down about 15% compared to comparable quarter last year. So overall, we have to say that the result is disappointing, as Jörgen mentioned earlier. If we take a look at the EBITA bridge, you can see that about minus SEK 3 million in the EBITA development comes from currencies. About 5% comes from volumes, and minus SEK 7 million comes from price/cost/mix and other. And in this segment, we have no acquisitions.If we turn to Page 8, we can see that we have been showing growth now for 10 consecutive quarters, and that is really a positive, we have to say, if you look back on the history of the other quarters. So we are really happy with the net sales development in general in segment Sweden. But when it comes to gross margin and OpEx, we are not happy with the development. And overall, as I said, the development in segment Sweden is disappointing during the last couple of quarters.

[Jörgen Rosengren, Chief Executive Officer]

Okay. So if we turn to the next page, Page 9, we can speak a little bit about our acquisitions. As many of you know, we started a new drive to renew our acquisition strategy in 2014, so roughly 4 years ago. And since then, we have made 7 acquisitions, one of which was then completed during this month, October. And we are happy, we have to say, with the general trend both with the acquisitions we have made in terms of financials when we made them, but most of all, about the development that these acquisitions have had since they joined the Bufab Group and the contributions that they have made. Both the stand-alone companies, inside their bubble, they have developed well, but also in how they have contributed to the rest of Bufab in terms of bringing specific competencies, customers, expertise and so on. Our last acquisition is this company, Rudhäll Group, which has a turnover approximately of SEK 200 million [ lower ] and an operating margin of around 9%, which then did not contribute to our sales in Q3, but did, however, generate acquisition costs. And that will then hopefully contribute positively to our EPS starting in this current quarter, Q4 of 2018. We can also say that the shares to date, we've had good contribution from our acquisition, generally speaking. And in a year-on-year basis, we then primarily are helped by the acquisition of Kian Soon in Singapore, which we completed in, if I recall correctly, in December of last year, 2017, and we should therefore have a full year effect throughout this year. And also, it's enjoying good growth, we have to say, in its main market, which is Southeast Asia, a market that's critical to Kian Soon but also quite strategic for Bufab as a group.Turning to the next page and to summarize the result development for the group in the quarter we have made an EBIT bridge, which an operating profit bridge, which bridges from last year's third quarter to this year's third quarter. And as you can see in this bridge, the net effect of currency and volume and pricing/cost/mix and other, in fact, everything that -- of the -- let's say, the standalone development of the group, is SEK 5 million from currency, SEK 17 million from volume and minus SEK 15 million from price/cost/mix and other. And that's up SEK 7 million. And then acquisitions in the quarter contributed positively by SEK 9 million and acquisition costs negatively by minus SEK 5 million, which adds a [ net item ] of SEK 4 million in the quarter. So in total, the EBITA of the group developed from SEK 70 million last year to SEK 81 million in this year's third quarter.Looking ahead a little bit, we have on Page 11 put together some comments about the quarter and about our outlook. About the quarter, we can say then in summary that we had good growth, in fact, very good growth, driven by demand, market share and acquisitions and also, of course, by currency translation effects. We're very happy to be able to note further strength in gross margin in the quarter because it is a hard-fought battle to realize that since all of the improvement, more than all of the improvement, in fact, comes from price increases, which we have been able to execute in discussions with many, many customers in many markets throughout the world. So a lot of hard work has gone into the development of that -- the positive development of that gross margin, which then happened, as I said before, despite a very negative -- for us, negative raw material trend in the past 1.5 years or so. We're quite happy with the performance of segment International. We said that it's good when you can develop the operating profit with more than 50% in the quarter, more than 60%. But unfortunately, we also have to say that we're unhappy about the performance of segment Sweden, which primarily has to do with a weak gross margin, and that, again, has to with currency effects and with currency effects specific to Sweden and mainly the weak Swedish krona then, combined with high raw material costs, but also, to some extent, actually, a disappointingly high OpEx. Now turning to the outlook, which I know interests a lot of investors now. We saw in the third quarter -- we should be specific about that. We saw in the third quarter sales and order intake, which was at the same level in -- as we had in Q2, which then was a very high level, right, or at that level or about that level, not a very noticeable increase in the pace from Q2, but on the other hand, also no clear impact in our numbers of the significant uncertainty, which is being talked about a lot in the press and externally generally, and also, to some extent, is visible in macro indicators. Yes, I guess, we should say. We continue to monitor the external demand development very closely and alert, of course, to any signals of a sharp drop in demand, which could happen. But so far, we have not seen any of that in our numbers. We need to -- looking ahead then further, we need to continue our price increases to restore the gross margin primarily in segment Sweden. And we also have intense amount of work on actually realizing cost savings now that we're in a climate where the raw material prices have stabilized levels of, and in some cases, even declined, we then need to make sure that we get corresponding productivity gains from our suppliers and also price decreases from our suppliers. And that work has gained in priority, throughout the year. We will, however, also continue to invest in our major thrust to become the strongest company in our industry in 2020, which we call Leadership 2020. And to finance that, of course, we rely on continued market share gains, which we also realized, but also on finding opportunities to gain efficiencies throughout the organization by working smarter and with better cooperation between our different units.Overall, we are happy about the year so far, and we're optimistic about the outlook for the rest of the year. But it has to be said that it's hard to predict what will happen in 2019, given the overall uncertainty prevalent in the world now. And with that, I would like to suggest that you turn to Page 12, where you see some of Bufab's solutionists at work. And with that, operator, also, I would like to open at this point for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Robert Redin.

[Robert Redin, Research Analyst]

Two questions, maybe. International was, of course, great in the quarter, so I won't ask about that. I'll ask about Sweden instead. Price increases in Sweden, are they sort of harder to realize than you thought, say, 6 months ago? Or is it this sort of gradual but maybe [ steady ] raw material cost inflation that has caused this sort of delay in getting gross margins up or are maybe competitors not following? So that question and then I have another one, but maybe you can take them one by one.

[Jörgen Rosengren, Chief Executive Officer]

Robert, thanks for that question. Regarding Sweden, we don't see that price increases are harder than we thought. But we thought that they were going to be quite hard. But the reason that Sweden is lagging behind in terms of gross margin is that although we have realized quite substantial price increases in Sweden, which was hard work, but which we thought also would be hard work. Although we have realized such price increases, we have, also during the year, had cost increases, which we did not know would happen, because of 2 reasons. Basically, the raw materials continued to increase, and our input costs continued to increase during the first half of the year, I guess, you could say. And also, the Swedish krona has continued to weaken during the major part of the year, and actually, during this particular quarter, Q3, was very weak. And since we cannot easily go to our customers and request price increases for future potential cost input -- input cost increases, there is always a lag between the price increases that we realize and the costs that we take when costs are on an upwards trend. So that's what's happening there. Now of course, that's not satisfactory as it is, and that means that we have to continue to increase prices, also looking ahead in Sweden, and we're also doing that. And our ambition as always is to, over time, present to our investors a stable gross margin trend in the whole company but also in both operating segments.

[Robert Redin, Research Analyst]

All right. So you're not worried that something is different this time, it's just these lag effects?

[Jörgen Rosengren, Chief Executive Officer]

Well, we're worried because price increases that we haven't made yet, we haven't made yet. And so it's not so clear that they will be possible to make. But in the past, we rely basically on a long story of having -- long history of having been able over rain or shine to have relatively stable gross margins despite the various factors that can affect them. And we intend to try to continue that trend also going forward.

[Robert Redin, Research Analyst]

All right, great. And then just a different question on this -- on Kian Soon. Basically, EBIT in the quarter, this SEK 9 million, it sounds very high in a quarter. Is this something sort of temporary there? Or is this an outlook that's really good in Q3? Or are they just performing well?

[Jörgen Rosengren, Chief Executive Officer]

They are performing well. I agree the number SEK 9 million is high. If you look at an individual company of Bufab, there are always such deviations and fluctuations between various periods for a large number of reasons. And as you know, this is now the only single company in Bufab that is, so to speak, reported separately to the market, by virtue of being the only acquisition which is new in this quarter, right? So if you had picked out another company, we'd find other companies that also performed spectacularly well in the quarter, but also some that performed badly. So I think we should not read too much into that, other than to say that we're very happy that Kian Soon, at least so far into its career in Bufab, to put it like that, is performing well.

[Robert Redin, Research Analyst]

All right. And on demand, you said that you're sort of recently optimistic about the rest of the year. That's Q4, basically. So...

[Jörgen Rosengren, Chief Executive Officer]

I didn't say that. I think I said that I'm positive, I'm optimistic about business development in Q4. But I don't think I commented specifically on demand in Q4.

[Robert Redin, Research Analyst]

Okay, okay. I mean, the outlook on your comments was talking about optimistic for the rest of the year, I guess, rest of the year?

[Jörgen Rosengren, Chief Executive Officer]

Yes. Generally speaking, yes. Demand, I mean, there are positive and negative signals for demand. Positive is that we continue to have good growth, and we've seen no impact in our sales or saw no impact in our sales in Q3 at least of this uncertainty. Negative is the uncertainty itself. And maybe you can read a little bit negativity if you're negatively inclined into the book-to-bill ratio in the quarter, which is significantly less good than it was last year.

[Robert Redin, Research Analyst]

Okay. But that points to sort of a gradual slowdown in the pace of growth, I guess?

[Jörgen Rosengren, Chief Executive Officer]

Points to a leveling out. But as you know, these book-to-bill ratios in Bufab are not a very strong indicator. But taken singly, taken separately, I guess, it points to a leveling out. But we'll see. I mean, we don't have such visibility to the next few quarters as maybe we would like, simply because we're dependent on what happens with the industrial production downstream from us, and very few people seem to know something about that.

[Operator]

Your next question comes from the line of [ Alan Mayer ].

[Unknown Analyst]

Two questions, if I could. Just both relates to market share gains. The first one is, at the 9% organic growth we saw, is it possible to even guesstimate how much of that came from market share gains? I realize it will be a very, very hard exercise to calculate, even just a finger in the wind would be helpful. And perhaps, the second question, if I could, is, are those market share gains, can you give us a sense, how much of that is coming from taking sort of existing customers' increasing share of wallet, so to speak, versus actually getting brand-new customers through the door?

[Jörgen Rosengren, Chief Executive Officer]

Yes. We said in the past that we -- our aim is to always gain market share corresponding to 3 percentage points of growth every year. And we have said repeatedly that we think we have succeeded with that over several years. And also, this year, that certainly is the case. Probably this year, it's even a bit better, partially because of the market share gains are driven by total demand, right? So if you take a new business, the new business becomes larger when the market is growing and smaller when the market is shrinking, right? So I guess, you could say, something -- so if you want to put your finger in the wind, that you should put it maybe something like half that growth is related to market share, at least that's as close a number as you can get. And we're actually able to monitor that relatively closely because we monitor, in fact, not the market's development, but we monitor how much new business we take, which we can easily measure, and deduct from that how much old business will lose and the difference, we've taken from somebody. And that's what we refer to as market share gains. Your second question was about how much of the market share gain are related to existing customers versus new customers. And there, the answer is that the majority of the market share gains is related to existing customers and always will be because it takes us a long time to ramp up new customers. So it's not so that we don't have new customers, we have plenty of such customers. And some of the new customers -- and some of the customers that were new a few years ago are now strong contributors to our growth. But it's unusual that the new customer corresponds to a large portion of our gain in such short a perspective as 12 months, which is what we refer to when we talk about the year-on-year figures. So although we constantly gain new customers, the majority of the year-on-year growth figure is almost always related to customers that we had already 1 year ago, if that helps your understanding.

[Operator]

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

[Jörgen Rosengren, Chief Executive Officer]

Okay. Then Marcus and I would like to thank all of you for participating in this growth-related, I guess you could say, result presentation from Bufab for Q3. So thank you so much for your time. Enjoy the rest of your day, and see you all soon. Thanks. Bye.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.