Bulten AB

STO:BULTEN

Earnings Call Transcript 2021-Q1

[Kamilla Oresvärd]

Hello, and welcome to Bulten's Q1 2021 presentation. My name is Kamilla Oresvard, Senior Vice President, Corporate Communications. Presenting the report are Bulten's President and CEO, Anders Nystrom, and our new CFO, Anna Akerblad. Anna, would you like to make a short presentation of yourself?

[Anna Akerblad, Chief Financial Officer]

Yes. My name is Anna Akerblad, and I have worked as CFO for international manufacturing companies the last 15 years. Most recently, I worked for Absolent Group. And prior to that, I worked many years at Axel Christiernsson. I also have a background from auditing and consulting as manager at Deloitte. I'm excited to be part of the Bulten journey and get to know all the great people. I'm really looking forward to this.

[Kamilla Oresvärd]

Thank you, Anna. As usual, you will be able to ask questions after the presentation, both on the web as well as in the telephone conference. I will now hand over the word to Anders Nystrom. Please go ahead, Anders.

[Anders Nyström, President & CEO]

Thank you, and welcome, everybody. This first quarter of 2021 has been a very good one for Bulten, in which we have demonstrated what Bulten looks like in a normalized market. It's important to know that the results delivered is the product of hard work by both employees and the trust placed in us by the board and the shareholders. Before we start to go through the results and the numbers for quarter 1, let me briefly present Bulten those of you who aren't familiar with the company. So next slide, please, Page 4. As most of you know, Bulten is a supplier of fasteners, primarily to the automotive industry, but we don't just supply the hardware. To many of our customers, we are a partner for product development support, innovation, procurement, and logistics. In other words, we're a full-service provider of fasteners. As you can see in this slide, Bulten has a broad customer base with light vehicle producers as the largest customer group. Bulten's 3 largest customers are Ford, Jaguar Land Rover and Volvo Cars. When acquiring PSM during the first quarter of last year, we added a number of automotive customers, primarily Tier 1 suppliers, but also customers outside of the auto industry. To be an approved supplier to this many customers is a strength. Customers value the way we cooperate with them and recognize us for our service. Most of the customers in Bulten space have potential for further growth. On the next slide, please. Our geographical footprint is definitely a unique advantage of Bulten. None of our competitors have this geographical coverage. Bulten's value chain is balanced between in-house and outsourced production, and we can thereby be flexible and cost efficient. Including PSM, we have about 1,600 employees. We offer local production in Europe, U.S., China, Taiwan, and Russia, which is unique in our competitors' set. Through the acquisition of PSM, we have an even more comprehensive geographical coverage than before. Next slide, please, and turn to Page 7 for review of the global production statistics. While Bulten's share of nonautomotive business is growing, a vast majority of our business still remains dependent on the vehicle market. Vehicle production in 2020 was, as everybody knows, heavily impacted by COVID-19. The 16% drop in vehicle production corresponds to a loss of about 14 million units globally versus 2019, which in turn had already dropped almost 6% versus 2018. So 2020 was not a high year for light vehicle production. For heavy commercial vehicles, the movements were less dramatic, with a 6.4% drop in units produced in 2020 versus 2019. For 2021, LMCA predicts a bounce-back of light vehicle production volumes with an increase north of 15%, and then a more normalized growth of approximately 6% to 7% in 2022. Heavy commercial vehicles is predicted to increase in production rate about just below 4% in 2021 versus 2020, and then grow slightly in 2022 by just over 1%. It should be noted that the recovery in 2021 is uncertain, especially in quarters 2 and 3. Vehicle production is highly challenged by the shortage of semiconductors, and we should expect fluctuations before the capacity situation is resolved and the supply chain balance is restored. So we flip to Page 9. As mentioned, quarter 1 was a very good one for Bulten. The strong momentum we gained in quarter 4 of last year continued as the market came back to more of a normal and our customer mix had a particularly good development. As mentioned in our last quarterly presentation, we utilized a downturn last year well and drove efficiencies in our value chain. This helped us to realize higher margins, and the leverage from record-high volumes also resulted in record profits. We made improvements to our manufacturing footprint. Now in January, we held the grand opening of our new production facility in Taipei, Taiwan. And we're also happy to have welcomed Anna Akerblad as our new CFO and member of the group management. She took up her position in March, so this is her first quarterly presentation in her new role. And by that, I'll leave the word to Anna to go through the financial numbers.

[Anna Akerblad, Chief Financial Officer]

Thank you, Anders. On Page 9, you can see our quarterly net sales development. And as Anders mentioned, the upturn in the second half of 2020 continued in Q1 with a continued strong demand for our products. Net sales for the group in the first quarter amounted to SEK 1,103 million compared to SEK 821 million the same period last year, an increase of 34%. It's a new record level for Bulten in the first quarter. Net sales improvement is explained by strong growth, partly coming from the FSP contracts signed in July, as well as positive market development. Next slide, please. On this page, you can see our financial summary of the first quarter. As mentioned previous, Bulten performed a record-high net sales with improvement on both gross profit and strong leverage on EBIT level compared to same period 2020. Overall, the numbers are strong and the profitability development is mainly driven by volume, a positive outcome of efficiency initiatives, and increased capacity utilization. Earnings per share is calculated to SEK 3.21. The order book increased by 47% compared to the same period last year. However, last year was affected by the COVID situation, and today, we have the uncertainty regarding the shortage of semiconductors. Next slide, please. Our earnings performance was affected by the improved volumes in the quarter. EBIT amounted to SEK 98 million in the quarter. Our EBIT margin for the first quarter amounted to 8.9%, an improvement compared to the comparable quarter last year of almost 4 percentage points. The EBIT improvement is coming from good customer mix and increased capacity utilization. When adjusting the EBIT margin for currency effects, the improvement for the first quarter this year compared to last year is even somewhat better. Next slide, please. During the last year, a strong focus has been on cash management and our net working capital. The cash flow from operating activities before changes in working capital amounted to SEK 115 million in quarter 1. Cash flow from the change in working capital amounted to minus SEK 22 million. Increased sales has led to increased working capital for the period. Cash flow from operating activities amounted to SEK 93 million. Cash flow from investing activities amounted to minus SEK 16 million in the quarter, again, a much lower level than before as we have, as you know, halted operational and property investments during this uncertain time. In total, the cash flow for the quarter was negative and amounted to minus SEK 59 million, with a cash position of SEK 185 million at the end of the quarter. Cash flow from financing activities amounts to minus SEK 136 million, where the majority refers to repayment of loans. Our net debt, excluding lease liabilities, has reduced since the beginning of the year and amounted to SEK 42 million at the end of the quarter. Next slide, please. Our key indicators have improved in quarter 1 compared to the same quarter last year and also compared to the full year 2020. This is, of course, a satisfying trend, but also an effect of that 2020 was greatly affected by the COVID-19 situation. We have an adjusted return on capital employed of 8.2%, excluding financial lease. Our net debt-to-EBITDA ratio adjusted for lease liabilities is at minus 0.1 at the end of the quarter. This, in combination with an equity ratio of 57% at the end of the quarter, shows that Bulten financials is on a very solid level. Next slide, please. On this slide, you can see our financial targets, as well as some of the guidelines regarding relevant key figures for Bulten. In terms of reaching our financial targets, we are now clearly moving in the right direction. On a quarterly basis, we are above our financial targets when it comes to growth and profitability. In the right-hand table, you can see some guidelines for some other key figures. Our guideline for average net working capital in relation to 12-month sales is about 20% to 25%, depending on the growth pace. At the end of March, we had a level of 23%, which is in line with our guidelines. The guideline for capital expenditures as a percentage of 12-month sales are 2% to 3% for maintenance of equipment, and an additional up to 2% for capacity, depending on the market development. At the end of March, we are at the level of 1.7%. But as mentioned before, we have halted investments, which will have an effect on this key ratio going forward. The guideline for depreciation as a percentage of 12-month sales is 4% to 5%, considering IFRS 16 without IFRS 16, it has been in a level of 2% to 3%. At the end of March, we are in line with our guidelines. The guideline for our group weighted tax rate is 24% to 28% as a percentage of 12-month sales. At the end of March, the average tax rate was 30.1% and is recovering from the COVID situation last year. Now back to you again, Anders.

[Anders Nyström, President & CEO]

Thank you, Anna. And we turn to Page 17, please. Some words about our focus for 2021, the rest of the year. As you've seen in this presentation, our quarter 1 had strong momentum. The underlying demand for our customers' products and for Bulten products is very healthy. Having said that, we're faced with a somewhat new set of uncertainties. Our customers' production is hampered by the shortage of microprocessors, and that will have an effect on our sales going forward. Steel prices are at the high level now and will most likely continue to rise in quarter 2. We are, of course, closely monitoring all of these factors and maintain strict cost and cash flow control. We will continue to work on margin improvements, which we have successfully done recently. There are still synergies to be realized with PSM, and [indiscernible] initiatives are being executed as we speak. We continue to ramp up our activities in technology and innovation to stay determined to remain a leader in sustainable fastening solutions. We have important steps taken to that effect, not the least through the launch of BUFOe and our collaboration with TensionCam for sensorization of threaded joints, following our minority stake acquisition last year. Our sales force are using our track record of successful new contract launches, as well as the greater customer exposure that comes from the combined customer base of Bulten and PSM, to accelerate new business wins and generate additional organic growth. Next page, please 18. I just want to conclude with this presentation to remind everyone of our Stronger 24 strategy, the road map for how we will go about reaching our targets presented exactly a year ago, just before the COVID outbreak. It's divided into 4 building blocks. To start with, we have a strong position with the uniqueness that has taken Bulten to what it is today. Our clear ambition 3 years from now is to have further advanced our position when it comes to quality and technology leadership. The second block is growth. We now have growth momentum, both organically through the contracts we've ramped up and nonorganically through the acquisition of PSM. Despite the past year's turbulence, we hold on to the aim for sales reaching SEK 5 billion in 2024, and I think you can see that we're ahead of that curve with our current sales pace. The same applies to our profitability efforts through the obvious synergies with PSM, the improved exposure to customers in North America and China, accelerated initiatives to improve efficiencies in production and distribution, and through launching new technologies with a value-add for customers. And we aim for an EBIT margin above 8%. We also have a strong financial position, which is something that we really want to emphasize. To summarize, the global downturn that we experienced last year has not eroded the validity of our strategy. Our position is strong. We stand by our targets, and we stay committed to all the building blocks and the strategy to get there. And this concludes our presentation, and we're ready for Q&A.

[Operator]

[Operator Instructions] And our first question comes from the line of Kenneth Toll of Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

Yes. So a couple of questions here. You increased your production quite a lot in this quarter, and as I understand it, it was higher rates in Q1 even than in Q4. So are you starting to run into capacity issues in your own production?

[Anders Nyström, President & CEO]

Kenneth, actually, no. If we look at the machine capacity and the technical capacity that's installed, we still have headroom to grow further. But of course, we're balancing with the manning in our workshops, so if we would increase production more, then we will probably need to hire a few operators. But in terms of the technical installed capacity and if you're sort of thinking of investments needed, the answer is that we still have headroom to grow further.

[Kenneth Toll Johansson, Financial Analyst]

Sounds great. Also, you talked a lot about -- or let's take steel prices first. We have all seen steel prices come up quite a lot, and I feared that there will be more of a negative impact on your earnings already in the first quarter. But do you see that steel prices might have a more severe negative impact in the second quarter compared to the first quarter?

[Anders Nyström, President & CEO]

We will see more of that run through the books in quarter 2 and quarter 3, that's right. But we already had an effect in quarter 1 as well.

[Kenneth Toll Johansson, Financial Analyst]

But still, margins were very, very good. So yes, how much worse do you think it could be? Could it be double the negative effect in the second and third quarter, could be 3 times as bad or...

[Anders Nyström, President & CEO]

I don't want to guide you on that. You probably have difficulty find the baseline there for that calculation as well. But all I can say is that the -- I mean, we've had progressive increases in steel prices already from quarter 4 last year, and what that's going to look like when we go into quarter 3, we don't know that.

[Kenneth Toll Johansson, Financial Analyst]

Okay. Then also, you talked a bit about your strong balance sheet, and also that you stopped a lot of investments last year. So are you thinking about reinitiating those investments like the new plant in Poland, for example?

[Anders Nyström, President & CEO]

We're, of course, considering that. And I know this is sort of a question mark. When will we sort of restart that project again? And my answer would be that as soon as we've made the decision to start breaking ground in Poland, we'll let you know.

[Kenneth Toll Johansson, Financial Analyst]

Okay. And then, also, it was, well, about a year ago now that -- or even more that -- since you acquired PSM, and that seems to have been a very successful acquisition. So are you looking for more acquisitions now as well?

[Anders Nyström, President & CEO]

It's a valid question. We will not go on a shopping spree; that for sure. But given our strategic direction, we will look for possibilities to acquire companies that have a good fit into our strategy. And we're open to that, for sure, but -- and if it happens and when it happens, you'll know about it.

[Kenneth Toll Johansson, Financial Analyst]

Yes, I guess so. Then finally, you talked about taking market shares and so on, so are there any larger FSP contracts out that is discussed right now where you have a good chance of getting more business?

[Anders Nyström, President & CEO]

If you're thinking of the one that we won mid last year, I'd say that there is nothing out there of that magnitude, but there's a number of smaller ones, for sure, that we're discussing with customers, and we're always looking to win new business. I mean, we're very focused on organic growth right now. And whether it's FSP or not FSP, we're chasing the contracts that are out there.

[Kenneth Toll Johansson, Financial Analyst]

Okay. I guess one great opportunity to getting -- to become a supplier is when a car model changes and then you can change supplier. So are there a lot of sort of model changes being prepared right now that could trigger a change in suppliers? I'm thinking a little bit about last year, it was a very difficult year for the automotive industry, so maybe some projects have been postponed and so on. So do you see that their planned projects are coming back? Or is it too early for getting awarded the contract for sort of new car models and so on this year?

[Anders Nyström, President & CEO]

Well, there's a multitude of opportunities out there. And as you know, the whole industry is facing a technology shift, which results in sourcing of new platforms and new programs, for sure. And there's a lot of activity, for sure.

[Operator]

Our next question comes from the line of Mats Liss of Kepler Cheuvreux.

[Mats Liss, Equity Research Analyst]

Yes. Congrats on the strong quarter. Just coming back there first to Kenneth's question about steel prices, I guess you have these raw material clauses in your contracts and pass on those steel price increases gradually. But could you just indicated the delay to delay there, potentially, potential delay in the [indiscernible]?

[Anders Nyström, President & CEO]

Yes, you're right. We do have a high degree of material clause coverages in our contracts. And as you probably know, there is always a time lag between material prices actually taking effect for us and actual compensation coming in from the customer base. And, I mean, it's a variety of update frequencies in those contracts. But I'd say, on an average, that's 3 to 4 months, on average.

[Mats Liss, Equity Research Analyst]

3 month. So -- but I guess you will be compensated, by and large, at the end of the year, so it's not -- it's a standard progress if you sort of handle these contracts, I guess.

[Anders Nyström, President & CEO]

To a high degree, we will.

[Mats Liss, Equity Research Analyst]

Okay. And then the semiconductors, so it's -- I guess you have experienced some sort of production stops indication from customers. And is that sort of balanced to some extent by customers sort of trying to build some extra inventory just to -- well, [indiscernible] this shortage sort of means, so to say?

[Anders Nyström, President & CEO]

Well, I think all customers that are now -- all OEMs that are now sort of losing production because of semiconductors are paying a lot of attention to their inventory to make sure that, once the capacity on semiconductors is catching up, that they won't have any other shortages or any other disturbances in the value chain. So I think there are a lot of lessons learned from this, and we're certainly determined that we're ready to supply our customers, once they start to catch back -- if that's the answer to your question.

[Mats Liss, Equity Research Analyst]

Yes. I guess it helps somewhat from your position that -- yes, that's my interpretation, anyway. Okay, and then -- well, the foodservice contract, there are opportunities out there. But you also have some -- I missed a slide you used to have when you make the presentations about remaining part of the full-service contract as you're sort of ramping up. Could you sort of indicate how much left you have there in the year to come?

[Anders Nyström, President & CEO]

Well, I think we mentioned that in the last report as well, the Q4, that the contracts that we've won, the big contracts that we won, are basically ramped up. So they're now sort of following the generic market fluctuations rather than being in a ramp-up phase. There are, of course, a few small programs that we still have to ramp up. There are a couple that are postponed in time that we still need to SOP. But to -- from 10,000 feet, you could say that our volume fluctuations are going to be in line with the market fluctuations from now, so we don't have a major program to start up in 2021.

[Mats Liss, Equity Research Analyst]

Okay. Great. Then you also mentioned about the electrification trend and it is sort of was it PM that was sort of supported more than your -- well, don't make it -- but the electrification is sort of helping you at the moment in the car industry, the use of [indiscernible]. Is it also an increased content, the car? Or is it more like the ramp-up of production of electric cars that you sort of indicated?

[Anders Nyström, President & CEO]

Yes. As you know, the first wave of electrification is hybridization, where we actually multiply the number of powertrains in the vehicle. So -- and having one ICE and one electrical powertrain in the vehicle is fantastic for the fastener supplier. Then, as that migrates into more of pure electric vehicles, that sort of goes back more towards a normal fastener count again, and we can expect that to happen. However, at what rate, many have speculated in sort of what the migration rate is going to be into pure electrics. But we're certainly ready for it, and we're bidding for a number of electrical vehicle programs, and we're doing quite well on EVs, I have to say, at the moment.

[Mats Liss, Equity Research Analyst]

Okay. But you don't disclose every contract that you receive there, it's more the larger ones [indiscernible].

[Anders Nyström, President & CEO]

No. That's correct. We don't disclose every contract, and we're still winning business, which we're not disclosing.

[Mats Liss, Equity Research Analyst]

Okay. And finally, just as -- well Kenneth touched upon that also regarding the capacity utilization that I mean, last year, you received these huge full-service contracts already, but to take on another one of that size, or do you need to sort of extend capacity and mean this will be EUR 107 million contract that you received last year.

[Anders Nyström, President & CEO]

We can still absorb more in-house production. We can.

[Mats Liss, Equity Research Analyst]

Okay. Good. All right. Thank you very much.

[Operator]

[Operator Instructions] There seems to be no further questions on the phone, so I'll hand back to our speakers for the closing comments.

[Anders Nyström, President & CEO]

All right. Thank you. So yes, thanks, everyone, for listening in. And I'll, if not before, I'll speak to you in a quarter's time.