Bufab AB (publ)

STO:BUFAB

Earnings Call Transcript 2022-Q3

[Operator]

Hello, and welcome to the Bufab Quarter 3 Earnings Call. My name is Caroline, and I will be your coordinator for today's event. Please note that this call is being recorded. [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, Caroline, and good morning, good afternoon, everyone, and a warm welcome to Bufab's Q3 report. My name is Erik Lunden, and I am President and CEO of Bufab. And I'm sitting here in our head office in Värnamo, Sweden, together with my CFO, Marcus Söderberg.

I will start this presentation to give you a Q3 summary of our performance in the quarter, and then I will leave the word over to Marcus for some financial highlights. And then at the end, I will sum up the quarter, a little bit on the outlook. And then, of course, we'll have time for Q&A at the end.

So we can start then and go to Slide #1 and the Q3 summary. As you know, this was my first quarter as CEO of Bufab, and I'm very pleased to report that we had a very strong quarter, despite, I would say, challenging market conditions.

We had a healthy growth, stable gross margin and a strong result overall. But we can also see that due to the geopolitical and macroeconomic situation, uncertainty for the future has increased for us.

Looking then on the growth, we had a 49% growth during the quarter. The growth was largely driven by acquisitions that were completed in the year, but we also noted a strong organic growth of 9%. The underlying demand was solidly stable and organic growth was mainly a result of price increases that we were working with throughout the quarter, but also capturing market shares. When we look at the profitability, we had a stable gross margin and lower share of operating expenses. We saw that operating profit and operating margin increased significantly in the quarter. And I would say that there is continued strong cost control within the group. And together, the organic growth that we're seeing and the acquisitions we added, we ended up in a really strong profit development in the quarter.

Overall, we end up an EBITA plus 66% compared to last Q3 2021, and that ended up on an operating margin of 12.8%.

The cash flow remained weak during the quarter. And this is a direct result of continued increase in working capital for us, and this is, of course, mainly driven by the inventory.

We have seen a strong organic growth in the past, and the combination of 2 years of longer lead times, this has led to us for a need to increase our inventory. What we do now is taking different measures to ensure that our inventory goes down, and we expect the trend now to go down in the fourth quarter.

If you look then on the focus areas in the quarter and deliverables, we've been working hard now to be well positioned if the demand weakens going forward with company-by-company situation specific measures in place. Of course, we focus on inventory reduction, efficiency improvements, cost savings, and of course, also continuing price increases towards our customers.

We have done 3 acquisitions during 2022. So the work is full enough to integrate those acquisitions in the company in a good way, and of course, also realize synergies now. And this work will continue also in the coming quarters.

That was my first summary in the quarter, and I will now leave the word over to Marcus for some financial highlights. Please, Marcus?

[Marcus Andersson, executive]

Thank you, Erik. So if you please turn to Page #2, you will see a schedule over the group's financial highlights. And as you can see here, the order intake came in more or less in line or just slightly below net sales. Net sales increase was 49%, just like Erik said, and much was driven by acquired growth from the recent year's acquisitions, but also the organic growth was still quite strong, 9%. And organic growth was mainly driven by strong development in segment East and U.K./North America, even though all segments showed positive growth, organic growth.

Organic growth comes mainly from price increases, but also due to that we continued taking market share and the underlying demand, I guess you can say, was relatively stable.

Gross profit remained stable, and our OpEx in percentage of net sales decreased approximately 1.5 percentage points. The main reason for that is due to that there were some adjustments for revaluated additional purchase consideration in the comparative quarter. And if you adjust for this, the OpEx percentage of net sales was more or less unchanged year-on-year.

In total, this resulted in a strong EBITA development, just like Erik said, EBITA increased to 66% corresponding to an EBITA margin of approximately 12.8%, and also the nice result development fall down also to the balance, so to say, meaning that earnings per share had also strong development with an increase of nearly 62% and amounted to SEK 4.71 per share in the quarter.

With that said, we turn to Page #3, and we have some growth showing the more long-term development of the subgroups of the Bufab Group. If we start with the first graph at the left, you can see it's basically a track record showing our growth over the last 28 quarters, I believe. And as you can see here, we have shown now growth again for 9 consecutive quarters and not only growth, but also strong organic growth in basically all of those quarters, which is, of course, very nice to see.

If you look on the right graph, you see the longing 12 months development of net sales in the group, but also EBITA. And as you can see, both the net sales and the EBITA trend, strong trend is continuing. And the growth trend is, of course, highly supported by the acquired companies that we have made during the last couple of years, but also due to that organic growth has been there for most quarters as well. And now in recent quarters also on a strong level. And also strong EBITA trend, as you can see, it's continuing, and it's supported by strong growth in combination with a stable and somewhat increased gross margin over the last couple of quarters as well as good cost control.

With that said, we turn to Page #4, and we'll have a look at segment North. The order intake in segment North came in slightly under net sales for the quarter. Net sales increased 20%, where 4% was organic. Most of that organic growth came from price increase over the last couple of quarters. Gross margin decreased versus previous year, mainly as a result of lower volumes in the segment manufacturing companies.

OpEx in percentage of net sales decreased significantly, mainly as a result of that the comparative quarter was burdened with cost of those revaluated additional purchase considerations that I just talked about some minutes ago.

Adjusted for this, the OpEx in percentage was somewhat increased. In total, operating profit increased 39% to SEK 70 million, corresponding to an EBITA margin of approximately 10.7%.

We turn to Page #5 and have a look at segment West. The order intake in segment West came in line with net sales for the quarter. Net sales increased strong 45% where 15% was organic and the other 30% mainly comes from acquisitions. Organic growth was mainly driven by price increases, together with market share gains and also continued strong or good underlying demand in most of the companies in the segment.

Gross margin decreased slightly versus previous year, but this is mainly as a result of the acquisition of the Jenny Waltle that has a lower gross margin, but a comparable EBITA margin with the rest of the companies in the segment.

And also as a result of that, lower OpEx versus previous year, also a result of the acquisition of Jenny Waltle, but also, it should be commented on, is due to continued good cost control and operational leverage on the slightly higher volumes.

In total, the operating profit increased 101% to SEK 49 million, corresponding to an EBITA margin of 11.7%.

We switch over to Page #6 and have a look at segment East. The order intake and segment fees came in lower than net sales. Net sales increased 23%, where 10% was organic growth. Organic growth was mainly driven by price increases and increased market share. Gross margin increased versus previous year, mainly as a result of the acquisition of CDA Polska that has a slightly higher gross margin than the rest of the companies in the segment, but also due to [indiscernible] through price increases to customers.

OpEx in relation to net sales increased mainly as a result of onetime costs, I guess, you can say, or final costs from the earlier communicated sale of the segment's Russian entity. So that is now fully -- it's been fully closed, but there was an additional cost booked in the quarter.

In total, the operating profit increased SEK 4 million to SEK 39 million, corresponding to an EBITA margin of 14.4%.

With that said, we change page to Page #7, and we'll have a look at segment U.K./North America. Also in U.K./North America, the order intake came in more or less in line with net sales. Net sales increased strong 111%, where 15% was organic growth. Organic growth was mainly driven by price, but also by continued healthy demand and taking market share.

Gross margin decreased due to the acquisition of TIMCO, who just like Jenny Waltle, has a lower gross margin than the rest of the companies in the segment. But adjusted for this, the gross margin actually decreased just slightly.

Lower OpEx on the other hand, due to strong growth and continued good cost control, helped the overall EBITA development, which increased with strong 85% in the quarter to SEK 115 million, corresponding to an EBITA margin of 14.9%.

So with that said, we turn page, and we'll have a look at Page #8 showing 2 graphs, one showing our cash flow track record and one that shows our net debt/EBITDA development. If we start to look at the left graph, we can see that the development of EBITDA and our cash conversion during the 13 quarters, that's of 13 quarters, the cash flow remained weak during the quarter as a direct result of the continued increase in working capital, mainly in terms of inventory, just like Erik said. It is a strong organic growth in combination with almost the last 2 years longer lead times that we have seen that has been significantly longer than the past normal, so to say. And this is the reason for us needing to increase our inventory.

The [indiscernible], however, just like Erik also said, has now been decreasing for some time, and we have taken actions, several such, in order to make sure that our inventory follows the same trend going forward. We expect this trend to be seen somewhere in the fourth quarter, and that inventory absolute in actual figures will peak in that quarter as well. And then we will see cash flow also gradually improving.

If you look on the right graph showing the net debt/EBITDA KPI. As you can see, we have been increasing our leverage during the last year, mainly as a result of the last 12 month acquisitions. We made 6 acquisitions during the last 12 months and also one big 2 quarters ago. But it's not only due to acquisitions, it's also due to some unfavorable currency effects on acquisition loans and foreign currency. That is the explanation, you can say.

Our focus going forward is to do what we normally do when we just have made acquisitions, and that is, like Erik said also, focusing to make sure we land those acquisitions in a nice and good way in Bufab, and that we integrate them in a smart way, and that we start working, making sure that we start to see synergies and that we leverage on that loss just like we have done historically.

And of course, like Erik also said, focusing now going forward to really make sure that we increase cash flow and that we use that cash flow to pay off debt in order to continue the acquisition journey going forward.

With that said, we go to my last page, which is Page #9, showing the EBITA bridge for the quarter and accumulated full year. And as you can see, we have strong contributions basically from all segments in the quarter, but especially from U.K./North America together with West. And when it comes to the cumulative figures, it's basically the same, but also then segment North is also really contributing in a super nice way. So strong overall development even in East if you adjust for the cost we have taken for the sale of the Russian entity, so to say.

So a strong quarter in all terms, I guess you can say. And with that, I'll leave the word over to you, Erik, to talk a bit about acquisitions.

[Erik Lunden, executive]

Yes, that's right. Thanks, Marcus. On Page 10, you will see a slide about our M&A activities. And we have become stronger since back in 1977 as the acquisition is one natural part of our DNA to grow not only organically but also through acquisitions.

The last years, we have done 3 acquisitions. We've done TIMCO, the big one in U.K., 2 quarters back. We have CDA Polska in Poland and Thunderbolts in Denmark. All those will happen during 2022.

And if we see back in the history, we have done 15 acquisitions in 2014 and added more than 900 employees and SEK 3.4 billion in our turnover by acquisitions.

And as I said in the beginning, doing acquisitions will be a natural part of us growing the business. We are looking for profitable companies, well-owned companies that suit well in the Bufab Group. They should have some kind of synergies with us, how we operate today, but also maybe even further diversify our portfolio. And of course, we should have a price tag attractive for us to acquire the company.

And if you look back in the history, we have been, I would say, successful in adding that kind of companies into our portfolio and they've actually grown quicker when they added to Bufab.

And we are one of the few leading players in a highly fragmented market. So by doing a good job internally and growing organically, we will also have cash flow and opportunity to do more acquisitions going forward.

If we're going to go to Slide 11 on the final slide, I will start to sum up this and also look a little bit ahead. If we start then with the Q3 summary. As I said in the beginning, it's very strong quarter overall with continued healthy growth, stable gross margin, and a strong result.

Looking at the outlook, given the surrounding world right now, geopolitical and macroeconomic situation, the uncertainty about the future has increased for us. And we see, in some industrial segments, caution when it comes to the future and also a little bit lower demand.

Although what I think is very positive with Bufab is that we've a very well diversified portfolio of customers and product items with very good risk diversification.

Looking ahead then in short-term priorities, we have today, obviously, a good position for meeting potential future weaker demand in the market. We have put action plans in place company by company to be ready. And of course, also we do our best now to grab market share.

In more tougher times, there's opportunity for good companies to grow and take market share, and that is what we aim to do now going forward. Of course, we will also have a big work when it comes to cost savings, and continue working with price adjustments to our customers. We have work to do still when it comes to efficiency improvements, working with our inventory further, but also work with our operations in terms of productivity and so on.

And talking about net working capital, we are normalizing our inventory to secure cash flow. And of course, we continue to be focused also in Q4 and going forward.

That was the final slide of our update here. So now I will leave the word over to the audience for some questions. Please?

[Operator]

[Operator Instructions] We will take the first question from the line of Johan from DNB Markets.

[Unknown Analyst]

Congratulations on the strong quarter. So could you please shed some light on the actions taken to decrease the inventories and how drastic should we expect this to be going forward?

[Marcus Andersson, executive]

Absolutely. Like we said initially, I mean, if you look at the reasons behind the inventory increase during the last, I would say, 12 to 18 months at least, it's due to changes in the market basically. I mean the growth has been very, very strong, we're growing quite significantly organically, and that normally leads to that we tie up inventory additionally, so to say. And on top of that, which is maybe one of the bigger parts of it is the increased lead time, so to say. And we have seen increased lead times basically since the beginning of 2021, and they continue through 2021 and during the first half of 2022. But since the end of Q2, I guess, you can say, we've now really seen that those lead times are going back more or less to the same level that they were before the pandemic actually or at the end of 2019.

So the same thing that has happened basically with us adjusting our minimum order levels due to longer lead times the last 1.5 years will be the same thing now, and we already have taken action on doing the same thing now, making sure that we place lower purchase volumes, because that's basically what we're talking about, issuing less purchase orders, aligning the volume purchased in order to not only make sure that we have the customer, but also use down the inventory levels to reflect the new reality. So if we were in a normalization phase, let's say, a year ago, when we started building up inventory, we are in 3 normalization phase now where we make the opposite thing basically.

So we're talking about making sure that we are not placing too many purchase orders and that we utilize the possibilities we have in the Bufab Group. And if we have many companies selling the same kind of parts, making sure that we do not trade external purchase order, if we have groups internally, for example. So there's lots and lots of actions being taken and we will already see some of the results in the underlying KPIs. It's just a question of time before we stop seeing it also in terms of actually lower inventory values.

[Unknown Analyst]

And one more question, if we have time for that. So organic growth was strong, but mix where they come from. We see price in all segments, volume is healthy, and market shares what we see in U.K./North America? Is it mainly the Nordics that you see less volume demand? Or do you expect the other areas to follow? And obviously, the price increases evolving going forward.

[Marcus Andersson, executive]

Yes, it's a good question. And I can put it like this. There is obviously an uncertainty in the market, and we see certain customers placing lower volumes one month and then they increase them the next month, because they don't really know what is going to happen, as little as we do, and you guys do probably, that there is a slightly weakened demand going forward, I guess everybody can agree upon that. That's what everybody thinks will happen. It's just a question of how much it is, so to say. But it's not so that we see any clear trend at all. I mean, if you look on the level of organic growth in Nordics, for example, and the reason for that is lower than the rest of the group.

I guess it's also a question of market share because many of the companies in the Nordic regions are quite big and have historically as well not really grown as fast as maybe the smaller companies in some of the other segments. So that's also one thing we're having to [indiscernible], so to say. But when it comes to general market growth, I mean, we have certain industries that are ramping up now. We have some that are slightly ramping down. I mean, COVID affected industries, for example, that were stabilized during the COVID pandemic. They or ramping down slightly, not now. But the ones who were struggling during those periods are ramping up instead. And I guess, that's kind of what's good with Bufab, because we are super diversified among different industries and different segments, et cetera. And that's also what's reflected in this particular report as well.

[Operator]

We will take the next question from the line of Robert Redin from Carnegie.

[Robert Redin, analyst]

Robert from Carnegie. Just on that strong organic growth in U.K./North America with also volume growth. So could you say something about what was driving that. We have noted before that in the U.S. business, the RV market is an important segment, and there has not seen sort of bad nor a good news in Q3. So that surprised me. So what fueled that kind of organic growth there?

[Marcus Andersson, executive]

There is still good level of volumes, so to say, I mean, compared to the history, something like that. But on top of that, there is also quite a big portion of price increases together with taken market share. It's basically a combination of those two that makes that segment stand out in the quarter as well. So it's a combination. It's still high volumes, let's say, from the RV market, even if it's maybe a bit less than it has been during the last couple of quarters, but the underlying demand is still strong in general, together with price increases, and that the companies are successful in being out there, building relations with customers and landing in new business. So it's a result of kind of stable market, I guess, you can say, and that we're doing a good job.

[Robert Redin, analyst]

Right. Sounds good. And on my question on price, are you still rolling out price hikes across different areas, or a pricing action now is less active?

[Erik Lunden, executive]

Yes, we still do that. We still have work to do when it comes to price increases. As you all know, we see that the pressure on cost for us and others are increasing in turbulent times like this. And we do a combination of being more efficient as a company, but also put some more pricing to other customers as well. So it's a combination of what we're doing right now.

[Operator]

[Operator Instructions] We currently have no questions coming through. Thank you.

[Erik Lunden, executive]

Okay, then I would like to thank everyone for attending, and wish you a nice day ahead. Thank you.

[Operator]

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