Bufab AB (publ)

STO:BUFAB

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the presentation of the Q3 2020 results. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Jörgen Rosengren. Please go ahead, sir.

[Jörgen Rosengren, President & CEO]

Thank you. Good morning, everybody, who are joining this call. Welcome also. My name is Jörgen Rosengren, I'm the CEO of Bufab. And I have with me here in the room, Marcus Soderberg, who is the CFO. And we'll, together, be taking you through this presentation today. As the operator said, there will be an opportunity for questions and answers at the end of the call and you'll be given instructions there. But we would first like to take you through a presentation of the quarterly results, and that presentation is obtainable on our home page, www.bufab.com/investors, and then you can find it under the Q3 presentation heading. We'll be referring throughout this call to the presentation by page number, and I will be starting it on Page 2, which is called healthy growth and strong increase in profits. And that is also indeed the situation. As some of you may be aware, we've pre-released third quarter results, or at least the headlines of them, last week because the results were so good. And we can say also that we have, indeed, in the third quarter, enjoyed healthy growth and an increase in profit. And in fact, we have also enjoyed healthy growth and an increase in profit for the 9-month period ending at September this year. Starting with growth. And we had good growth in third quarter. Sales was up 13%. But maybe more importantly, there was organic growth in the quarter of 1%, which is a very, very strong improvement over -- sequentially over the second quarter of this year when we had very much negative organic growth. We'll get back to that in a moment. And on top of that 1% organic growth, we also had a healthy portion of acquired growth, most of it due to our latest acquisition, American Bolt & Screw in the U.S. We saw a recovery in demand, as I mentioned earlier, and it was spread rather evenly across all segments. We also saw a recovery of the demand during the quarter. We had minus 10% negative organic growth in July, but we had plus 4% organic growth in both August and September, adjusted for working days, which is then the finance cost that there is -- despite this worldwide pandemic, there is still a good level of demand in our project initiatives. Coming then to our results. We recorded an all-time high operating profit and all-time high sales, in fact, also and an all-time high net profit in the quarter. And the same goes for the year-to-date results where the sales, the operating profit and the net profit were all at all-time high levels. The margins were also quite good. And the operating margin is the best in many, many years in a single quarter. And this is due to 2 group of things. First, we had a very strong contribution of our acquisitions and in particular in this quarter of our latest acquisition, but in the year-to-date figures also from our 2 latest acquisitions last year. But the organic improvement is due to a couple of different things. First, we had the benefits of having global operations, and in this case, in China and in Singapore and Southeast Asia. We were one of the first companies, we think, in Europe to be hit by the pandemic and were, therefore, forced to but also able to adapt to it in those geographies, but also learning how these geographies -- about how to handle this. And that's when the pandemic then came to the -- in North America, to the U.S. in particular, and also to Europe in the beginning of -- end of March, beginning of April. We were able to very quickly put the right measures in place. And that was, of course, important to protect the health of our employees and of their families and our partners and so on, which was our first priority. But it was also very important to be able to keep a sustained and high-quality deliveries to our customers in all our markets at a reasonable cost. Because as you will recall, during the spring, the supply chains in most of the world were quite a bit in disarray. But given a bit of a head start, we were able to then adjust to that quickly.The second reason for the good result development is that we already have a comprehensive efficiency and savings program in place since the middle of last year. And that made it easier for us to scale that up and adjust it to, again, expected tougher demand situations and also put those actions in place quickly. And the third and I think most important reason really is the business has a business model and open organization that allows us to be flexible when it comes to cost and allows us to be fast when it comes to adjusting and reacting to variations in the market demand. And all these 3 things taken together, plus our acquisitions -- or the contribution from our acquisitions, led to this very strong results. I mentioned our cost-savings programs. It was scaled up during the second quarter from a previous SEK 40 million target to SEK 100 million target. It is delivering as planned. It's quite evident also in this quarter's results that we are seeing results from it. And we are convinced that it will have to deliver its full potential, this SEK 100 million, by the 1st of January of 2021. We had, in the quarter, also a very strong cash flow, as I mentioned. And the cash flow is important for us, of course, for a variety of reasons. But here, we're -- especially part of it in this quarter because we had a good cash flow despite the fact that we have organic growth, and therefore, we built up, again, working capital, of course, relative to sequentially the second quarter. But despite that working capital buildup, we had a very strong cash flow. And the reason for that is that we have had good inventory control throughout the year due to the fact that we acted quickly to the change in demand situation in the second -- the first and second quarters of this year. Our focus going forward is to restart the business in a profitable way and then to go on to invest in the Leadership strategy, and I'll come back to those topics at the end of this call. Now I'd like to turnover to Marcus, who will take you through the financial results, starting on Page 3 of the presentation. Will you please, Marcus?

[Marcus Soderberg, Chief Financial Officer]

Thank you, Jörgen. Yes, let's start on Page 3. There, you can see that net sales increased with 13%. Those 13% were mainly driven by the acquisition of American Bolt & Screw. But as Jörgen said as well, the organic growth was also positive 1%. And as Jörgen also said, the organic growth is the result of stepwise recovery from the low levels recorded in the second quarter. The organic growth adjusted for a number of working days was minus 10% in July, 4%-plus in August and 4%-plus in September. The gross profit increased slightly. This increase was mainly driven by good development in segment East and segment UK/North America. The operating expenses as a share of net sales noted a sharp decline due to the expanded cost-savings program that was expanded during the second quarter of 2020. The program will achieve savings of approximately SEK 100 million on a full year basis with full effect from January 2021. And so far, the program is progressing according to plan in all segments. And the reason for the program to being successful, so to say, is mainly due to good cost controls and good flexibility in general in all subsidiaries throughout the group and as well as efficiency measures taken under the framework of our Leadership strategy. All in all, operating profit increased with strong 61% to SEK 142 million meaning an all-time high from an individual quarter for Bufab. The operating margin also increased with about 3.6 percentage point to solid 12.1%. The net profit or profit after tax and the earnings per share also noted an all-time high for an individual quarter, net profit increase was 55% and the earnings per share was 57%. If you take a look on the lower-left corner, you can see the EBITA bridge for the third quarter. You can see that currencies had a negative impact of about SEK 8 million. Volumes positively by SEK 2 million. Cost reduction and price/cost/mix/other, big positive figure, plus SEK 31 million. And acquisitions also contributed strongly with about SEK 28 million. If you turn to Page #4, you can see 2 graphs, one showing the quarterly net sales growth and one showing the development of the long 12-month net sales and EBITA. If you start with the left graph, you can see that we now, in the third quarter, once again, are back showing solid and healthy growth, not only total growth, but also organic as well. If you look at the right graph, you can see that we are once again adding growth to the long 12-month net sales graph, which is, of course, very good. But most importantly, you can see the big leap upward in the gray dotted graph showing the long 12-month EBITA figure, which has, of course, increased quite much in this quarter due to the cost savings mainly. If we turn to Page #5, we can have -- start having a look at the segments. I will just go through these quite quickly. But as you can see, segment North also saw growth in the period, mainly due to the acquisition of HT BENDIX. We have seen a gradual recovery throughout the trading companies. Also in the manufacturing units are going in the right directions, but from very low levels from the second quarter. Gross profit decreased with about 1 percentage point, mainly driven by lower volumes in the manufacturing companies. The lower gross margin was offset more fully, offsetted by really good operating expenses in comparison to net sales, which due to efficiency measures and cost-savings programs, et cetera, had a really good impact on the total operating profit, which increased with about SEK 7 million to SEK 45 million.If we turn to Page #6 and have a look at segment West. You can see that net sales decreased with about 10% and the organic decrease of about minus 6%. And the reason for the organic decrease is mainly related to lower volumes in our business in France and The Netherlands. Gross margin was slightly lower due to lower volumes and a poorer business mix. However, the lower gross margin was mitigated by a lower share of operating expenses leaving a slightly lower operating profit versus previous year of SEK 24 million. If we turn to Page #7 and have a look at the segment East. We can see that segment East had a strong development in net sales-wise, increased with 5%, also good addition organically. Gross profit slightly increased, mainly due to cost savings on purchases. Operating expenses, also really good development due to the cost-savings program and the implementation of that throughout the quarter. All in all, operating profit increased with about 31% to SEK 34 million, which is, of course, a very good result for that segment. If we continue to Page 8 and have a look at UK/North America. Of course, the nice development we can see in this segment is mainly achieved through the acquisition of ABS. But we have also, during the quarter, seen gradual recovery in demand in the quarter, especially in North America, as said, but also in the businesses in U.K. High gross margin mainly due to a strong contribution from the acquisition of ABS, but also from purchase savings. All in all, really strong operating profit increase, not only from the acquisition of ABS, but also from the already existing companies in the segment. If we take a look on Page #9, you see 3 graphs, the first one showing the development of the organic growth during the last 7 quarters. You can see that they come from good healthy organic growth in the beginning of 2019. From the mid-of 2019 also, we started to see an economic slowdown, which was then in the second quarter of 2020 accelerated by the COVID-19 effect. But anyway, significant recovery during the third quarter. What happened during the second quarter and the third quarter, mainly, if you look at the mid graph was that we, throughout the year, worked with the efficiency program that Jörgen talked about. We launched this in the second quarter '19 and we accelerated it in the second quarter of 2020. And this, of course, as you can see here, this is a graph of the price/cost/mix, which is, as you can see, a really good saving trend from the fourth quarter of 2019, but especially during the second and the third quarter of 2020. So significant savings achieved. And as a result of that, the operating margin has been able to keep that on a solid and stable level. Not only solid and stable, also actually increasing during the last quarter, the third quarter. If we turn to Page #10, and on that page, I will leave the word to you, Jörgen.

[Jörgen Rosengren, President & CEO]

Okay. Thank you, Marcus. The efficiency program that we've referred to a couple of times now is mentioned on this page. And we have also said it's -- are expanding our scope and target to SEK 100 million of savings by the end of 2020 on a full year basis and relative to the COVID 2019. They are many components and just to mention a few of them. We have worked now for a long time on investment in our digital platform, which we are making for a variety of reasons. But one of them is that we wanted to digitize our internal processes, which are, generally speaking, quite work-intensive in order to increase the efficiency and also the precision of those processes. We have, since the beginning of this year, a new business unit organization where we implemented 10 business units, start these up and these new organization of business units has helped in driving efficiency. Because we have put together companies that have a lot in common and that have cooperation opportunities and efficiency opportunities in common. And this new BU organization is then working on those opportunities and trying to center both the investment and also competence in a few places and a few organizations that we can refer to as centers of excellence. We've had in the past 12 months or so some restructuring, either planned or already being carried out or already completed in some -- especially larger companies. And that restructuring, of course, took off with new energy -- or with increased energy in the beginning of the second quarter this year due to the corona pandemic. All those things are part of our efficiency program. And on top of that, of course, we are keeping and advertising even more now the historical Bufab DNA thing about being quite picky with costs and very careful with costs. And that is something that, of course, has gotten more emphasis, more focus during this year than before. We also have a trading business model. I mentioned that before as well. And that enables us to both move quickly because of the nature of the business, but also to reduce costs quickly because most of our costs are in one sense or another there. We have very few absolutely fixed costs. For instance, as one example, we had a relatively low level of depreciation cost that, otherwise, is part of a fixed cost base and is hard to shift. Also, I think that our organizational model is one key -- one of the keys to success in this case. We are, as many of our long-time investors know, very focused on having a local responsibility and also local influence on managing the P&L and the balance sheet of each subsidiary. And in a situation like this, which is fast-moving and moving at different paces and at different levels, it's hard to grow. It's definitely a strength to be able to rely on a strong, good businesspeople and individual subsidiaries and having them make decisions in general framework that are the best of their company on a day-to-day basis. And that is, again, proving its worth now that the pandemic is speeding up again, especially in Europe. As a result of this, we have some charts to the right here, which are a bit busy, but we think important. And the first one, the top one, shows the increased efficiency. And where we, as a proxy for efficiency, we've shown here the last 12-month gross profit provided by the number of full-time equivalent employees at the end of each quarter. And as you can see, we had from the middle or so of last year an accelerating trend in this efficiency. Naturally, when we had this huge sales drop in the second quarter, the output per employee currently went down. But now we are continuing to restart, I guess, the trend, upwards. And it's definitely our ambition to have a long-term improvement in this KPI. But you can also see a more straightforward KPI, and that's the number of full-time equivalent employees we have in Bufab. And as you can see, we were in kind of an investment phase until the second quarter of 2019. These numbers are adjusted, of course, for acquisitions pro forma. But since we then started our efficiency program, we have reduced our numbers of employees quite substantially from about 1,460-or-so-plus to this current level, which I believe is just around 1,330, right, so about 130 employees less in Bufab. We've been able to do this in a good way, we feel, with very few actual dismissals, but instead using natural turnover. And that also means that our restructuring program, our efficiency program has been able to -- has been possible to execute with relatively low restructuring cost. I think we are targeting SEK 50 million as restructuring cost for this savings program of SEK 100 million. And even though SEK 50 million is a lot of money, it's a small amount relative to the total savings amount. As a result, in the bottom diagram, you can also see that our cost level, OpEx as a percent of sales then, has been decreasing, contrasting this since fourth quarter of last year when the efficiency program started to take hold. And in the second quarter, especially, I guess we're proud of being able to, despite this very low sales level we have them, have such a low percentage. I think at the time, it was an all-time low cost level, I believe, even though we had a very severe drop in sales. But as you can see, we're continuing that and we are now, for the first time, I believe, again, in Bufab's history, below 15% OpEx as a percent of sales. And there are opportunities going forward to further work on our cost efficiency and driving efficiency in our company, and we're certainly working on that. Another thing about efficiencies and cost of capital efficiency, and I'm turning to Page 10 -- sorry, 11 so Page 11. And there, we can see there's a small typo there. It says pertating cash flow, but it's, I guess, to say operating cash flow. But anyway, we have had a good operating cash flow in 2019 already. And part of that, of course, was due to the somewhat lower growth, but it was also due to our work on operating more efficiently when it comes to working capital. In 2020, we had a much higher operating cash flow. And part of that, again, of course, was due to the negative organic growth in the second quarter. But we are, however, now in a situation where we're back and have built up ourselves again in the third quarter. So most of this improvement is not, in fact, due to that, but it's, in fact, due to a lower usage of working capital in our company and also to some extent to our CapEx. And that cash flow has come in very handy this year because we ended last year with a relatively high net debt-to-EBITDA multiple. We were up close to 4, which is possible for Bufab today, but not something that we would like to be over sustained periods of time. But as you can see, over this year, we have reduced it, both by having a good cash flow, and of course, also by our profit improvement. And we're now back at a much more comfortable level, at least of below 3, I think, 2.9 or something like that. So that's good. And that brings us to acquisitions. Bufab has made quite a number of acquisitions in the past 5, 6 years. Those are depicted on Page 12 of the presentation. So we are seeing an increased level of activity from acquisition candidates in the past months. And we also feel that we are able to make acquisitions because now we have our internal operations and sales and profitability possibility in good order. We have restored our debt gearing to a comfortable level. So we are definitely working on making further good acquisitions. However, we're also equally -- worked equally hard on avoiding to make bad acquisitions. So we will make acquisitions also going forward, no doubt, and we will do so when we find the right candidates. But it's not so that somehow we're putting a halt or something like that, quite the contrary. To summarize then our results presentation, we have an EBIT bridge -- EBITA bridge on Page 13 of the presentation. And I'll just refer to the top -- actually 4 bridges there for the very interesting viewpoint. But I'll refer to the top right one, which bridges between last year's year-to-date EBITA, first to third quarter, and to this year's year-to-date EBITA, third -- first to third quarters. And as you can see, we started about SEK 311 million and then we had a bit of a negative currency effect, mostly due to translation effect due to a stronger Swedish krona. And then we had huge hit out of volume. And most of that hit, of course, came in the second quarter of this year when we had a very, very large negative organic growth, but also, in fact, in the first quarter. But we have countered that in what we feel a good way by, as well, in almost all of that with various forms of cost decreases. So after the SEK 114 million of loss organic growth, we have SEK 105 million various forms of cost decrease. And on top of that, we've had a very, very good contribution from the 2 acquisitions that were made this year of SEK 73 million, which brings us to an all-time high EBITA year-to-date of SEK 361 million. Our priorities going forward have already been communicated in the last call. They are depicted on Page 14 of the presentation. We're now successfully through. You'd find the protect phase where we worked a lot on the health and on the customer -- protecting our customers in terms of deliveries and resolving their issues and so on. We're also protecting Bufab. And now we're in a phase which we call restart. And the focus now is very much on being out with customers, being -- working closely with our suppliers on improving their operations with them, and of course, making sure that our cost level continues to match the development of sales in the good way that it has been this particular last quarter. And this puts us in a position, we feel, where we can continue to invest in our Leadership strategy. And just to have a date because we'll be probably back in that phase in the 1st of January. But in fact, we're already working quite hard on those things, especially in terms of finding out where the investments will be most good and marshaling our team and so on. But we feel fully confident that despite the uncertainty inherent in the corona pandemic situation, we will be able to continue to invest in being one of the leading players in our industry going forward. That's what this picture is supposed to say. And final then, I'll summarize this presentation and then I'll open up finally for questions and answers. The third quarter was, as we tried to show here, a quarter of strong demand recovery, but also a quarter where we reported all-time high sales and profit and a very, very strong cash flow. The outlook, of course, is extremely uncertain when it comes to the market and the societal situation. And there, of course, we're humbled, I guess, by the strong negative development of the pandemic in Europe and in North America in the past weeks only, which is something that we're dealing it and have to deal with like most businesses. But we feel that with this lower cost level that we achieved, the good cash flow -- by the good cash flow and lower debt level and our proven flexibility, that we're in a good position to tackle whatever comes up, so to speak. And we're quite confident that it will not be so bad as in the second quarter next year -- last year, I'm sorry -- second quarter this year, I should say. In fact, we feel that the demand uncertainty going forward is something that we can handle as a day-to-day thing as part of our ordinary operations. And that brings us to our part going forward. And as I said before, of course, we have been ready to protect, help customers in backup and then to restore profitable growth. We think we're well on the way into the restart phase. And that's also, we believe, evident in our figures for the third quarter of this year. And that's why we are now focusing 100% going forward on, number one, reaching our savings project by January 1. And on January 2, in the morning, to then we start our investment in becoming the leading company in our industry in the world. And that brings me to the end of our prepared comments and our prepared presentation. And now, operator, please, if there are questions on the audience, now is a good time to have them.

[Operator]

[Operator Instructions] We don't have questions at this time, sir. Please continue.

[Jörgen Rosengren, President & CEO]

Okay. Then I guess the presentation was clear enough in itself. I'd like to thank everybody for attending this call. And I wish you a nice Friday, the rest of it and a nice weekend. Take care. Goodbye.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect.