Bulten AB
STO:BULTEN
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Bulten AB
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Hello, and welcome to Bulten's 2019 Q2 presentation. My name is Kamilla Oresvärd, Senior Vice President, Corporate Communications. Presenting the report are Bulten's President and CEO, Anders Nyström; and our Executive Vice President and CFO, Helena Wennerström. [Operator Instructions] Please go ahead, Anders.
Thank you. The agenda for today will be, first, a brief overview of Bulten, the development in our market, the result of the second quarter and then some comments about the future.So if we go to Page 3. Bulten has a lean and well-positioned operation with a global presence. There are not many in our industry actually that can offer local content in both Europe, U.S., China and Russia. We balance our production between approximately 40% outsourcing and 60% in-house production and can thereby be flexible and cost-efficient. Page 4. As can be seen on this slide, Bulten has a broad customer base. Carmakers makes up the largest customer group. Bulten's 3 largest customers are Ford, Jaguar Land Rover and Volvo Cars. Page 5. Being one of the leading fastener providers in our industry, we are also proud to be the peer leader in environmental impact reduction. This is in line with Bulten's strategy and increasingly important for all the stakeholders of Bulten. For example, carmakers are increasing their focus on full value chain sustainability; young talents choosing their employees more carefully and want their employers to mind the planet and work with integrity on those matters; and the rigorous requirements from authorities in production permit concessions. In June, Bulten received an award from EcoVadis for its sustainability work. Bulten has reached Gold Medal level in EcoVadis' sustainability ranking. And EcoVadis is used by some of our customers for -- as their third-party assessor of sustainability. So this is a very official award. Going to Page 6. That's market development. Going over to Page 7. As we comment in our report earlier today, the demand has continued to weaken also in the second quarter of 2019. In Europe, car sales have stabilized somewhat in the last 2 months but still the European market is down 3.5% year-to-date. Other key markets, for example, China, has continued to decrease. This is due to several factors. In Europe, the introduction of the new WLTP emission regulations caused car sales to accelerate in the first half of 2018 and slowdown in the second half of 2018. Obviously, the second quarter 2019 was matched against a tough comparable quarter. Also concerns about Brexit has had an impact, especially in the U.K. In the second quarter, raw material prices have remained at the same high level as in the last 2 quarters. Page 8. Car production statistics are the relevant ones for Bulten. And LMC Automotive is forecasting a 1.1% reduction in light vehicle production for the full year of 2019 compared to '18. Heavy commercial vehicles is forecasted to grow 1.6% with Bulten's customer mix. That means a forecasted market reduction of 0.7%. As Bulten has contracts not yet in production, we believe that we still have opportunities for gaining market share in the mid-term perspective. In the longer perspective, LMC Automotive estimates a bounce-back for production of light vehicles in Europe in the years to come with an increase of 3.3% in 2020 and 2.6% in '21. Similarly for heavy commercial vehicles, they estimate an increase of production of 4.1% for both '20 and '21. Also according to LMC Automotive, the development in China during the first 5 months resulted in a sales decline of about 13%, which also affects the suppliers' production in Europe. Going to Page 8 -- sorry, 9. Market shares, some words about our market and position. Bulten's market share, as has previously been communicated, is around 18%, judging the 2018 number in Europe. We defended our position as a leading FSP supplier well, and we increased our market share last year with 5 percentage points from 60% to 65%. And then over to Helena for the second quarter financials.
Okay. Thank you, Anders. We go to Page 11. Bulten shares of sales were SEK 781 million in the quarter, down 3.5% compared to the same quarter last year. And our EBIT amounted to SEK 21 million, a clear drop from previous earning levels. And as we communicated in the press release over the last week, this is due to lower production rate and the sector volumes but mainly by our efforts to reduce the inventory. More about that in just a minute. Moreover, they had relocation costs related to move of production in China of SEK 6 million in the quarter. Adjusted for that, EBIT amounted to SEK 27 million. And the order bookings of SEK 752 million reflected the slower demand late in the quarter as well as a slower ramp-up of our new contracts. On the positive side, Bulten continues to win contracts in the first half year, 1 FSP of EUR 13 million in annual value and several smaller contracts with a total annual value of EUR 2 million. And as Anders mentioned earlier, Bulten achieved a Gold Medal level from EcoVadis for our sustainability work. Going to Page 12, some comments on the net sales and order intake. Sales for the quarter were down 3.5%. And adjusted for currency, the sales were down 5.8%. The market has been weak, as we have mentioned before but also important to note that the second quarter last year was exceptionally strong, boosted by the forthcoming WLTP regulations Anders mentioned earlier. Also our newer contracts have had a slower ramp-up than expected pace in the second quarter. Looking at our order intake, it was down 12%. This is the result of weaker market especially towards the end of the quarter but also a strong comparable quarter. Page 13. Now back to our earnings performance. Our EBIT margin for the second quarter amounted to 2.7% compared to 7.1% comparable quarter last year. And the earnings levels are explained by a lower production rate. According to plan, this has resulted in a reduction of inventories but also a lower utilization on the production unit capacity and thus an under-absorption of fixed costs. This affected earnings by approximately SEK 25 million during the second quarter. The operating margin, excluding for relocation costs in China and margin currency effects, ended up at 3.3%. And looking at the year-to-date, operating margin, when excluding currency and relocation costs, it came in at 5.2%. Page 14. Some add-on comments about our inventory efforts the last quarter, the rest you can see in the graph. Our inventory in relation to sales gradually increased from third quarter 2017 to first quarter 2019. And this is partly due to create high readiness for our new ramp-up on new contracts and the last [ few ] quarter also in combination with a slower market and our preparation for the relocation in China and Brexit. In the Q1 report, we flagged for our efforts to take down the inventory. And we have managed to do so during the second quarter with approximately SEK 50 million. And given current condition, the production rate will continue to be lower at the beginning of the third quarter. Page 15. The cash flow has been affected mainly by the operational results. And working capital impacting cash flow was always neutral. Even though we released capital from lower inventory, current liabilities and receivables neutralized this effect. We have a higher investment level as an effect of relocation in China as well as preparing our contract volumes of in total EUR 67 million in full pace 2021 if you compare to 2018. And our investment in efficiency continues as we aim to become the industry's most cost-effective fastener manufacturer. Cash flow from financing activities was affected by paid-out dividend. Our balance sheet and financial position remains strong. And we have a net debt by the end of the quarter of SEK 595 million or SEK 347 million, excluding all lease liabilities. Page 16. Some words about the key indicators. We have a return on capital employed of 9%, mainly affected by the profitability level, [ tied-up ] working capital and a higher investment level but also by the effect of implementing our new accounting principles, IFRS 16. And if we exclude IFRS 16 financial lease, we end up at 9.5%. And if you also adjust for relocation costs, we end up at 9.9%. Also our return on equity is impacted by this and amounts to 7.6%. Capital turnover times was down to 1.6x and 1.7x adjusted for IFRS 16 financial lease. And this is lower compared to the full year 2018, mainly due to the same reasons as earlier mentioned. Page 17. On this slide, we continue to give you some short guidelines regarding some key figures for Bulten. But as always, these guidelines are not to be considered as financial targets. The average net working capital in relation to 12-month sales amounted to 26.9%, which is above our guidelines and activities are ongoing to reduce that level. Capital expenditures as a percentage of 12-month sales were on the level of 5.7%, an evidence that we invest in future growth activities. And these investments will, however, improve Bulten's production efficiency even further. The depreciation of 3.1% of 12-month sales, excluding IFRS 16 effects, is in line with our guidelines. And our average tax rate is 28.3% rolling 12 months, which is slightly above our guidelines. But however, the tax rate will vary from quarter-to-quarter. Now some comments about our financial key ratios in relation to the targets. And in this perspective, we are looking at the figures excluding the IFRS financial lease and relocation costs in China. Our rolling 12-month sales are down by approximately 3% and it is about in line with the market. But with our pipeline of contracts, we are in a good position to continue to take market share going forward. Our profitability with an adjusted operating margin of 5.6% on a rolling 12-month basis is affected by our inventory efforts short term and the volatile market. Adjusted return on capital employed of 9.9% is lower than our target due to a lower profitability level, [ tied-up ] working capital and a higher investment level. Our repaid dividend is once again better than our financial target. And now back to Anders again.
Thank you, Helena, and some final remarks about 2019. This quarter has been impacted by our efforts to balance inventory by lower in-house production. And these efforts will continue in the beginning of quarter 3. Even though we had a somewhat weaker market in the last few months, Bulten has a good pipeline of won contracts, as we previously said. We will continue to secure efficient production. Our plans for Poland remain, even though they are still delayed. The relocation in China develops according to plan. Our establishment in the U.S. also continues. As always, we aim for new FSP contracts during the year. And we continue to promote innovation and sustainability to build on our already strong corporate culture. We'll continue to build the strengths of Bulten. Turning to Page 21. Last but not least, we'd like to underline that we have a good pipeline of won contracts and this is important to know. In addition to the EUR 13 million of new FSP business that we won this year and previously communicated, we've also won an additional EUR 2 million of various smaller contracts, which brings us up to a total of EUR 67 million-worth of business to be ramped up. You can also see that 2 of our last 3 business wins were for electric vehicles. Changes in demands will, of course, impact this -- the macroeconomic effects, positive and negative, will impact ramp-up of contracts. And this concludes the presentation and we're ready to take Q&A.
[Operator Instructions] Our first question comes from the line of Kenneth Toll from Carnegie.
First, on the lower production that you are planning for the beginning of Q3. I was wondering how long do you think that lower production rate will last for? Do you think it's half of the quarter or even more or maybe the full third quarter?
Kenneth, it is not the full quarter for sure. It's the beginning of the quarter. And I don't want to define that in number of weeks. But we are still adjusting our inventory and it will continue for the beginning of the quarter. That's what I can say right now.
Okay. Then these new contracts that are a bit delayed and volumes are not coming through really, what are the plans for those contracts now? When do you see high volumes, if it's in the third quarter or fourth quarter? Or do we have to wait until next year?
The ramp-up of the new contracts really are impacted by the general weakening of the market. So it's very much in line with that. The vehicles are introduced and will be ramped up. And you very rarely see that new vehicles are being canceled on the back of a weaker market. It's just that the ramp-up is a bit slower and it's in line with the market. The volumes will come.
Okay. And you think it will have a more noticeable effect in the third or the fourth quarter?
We don't give forecasts for the quarter. But the ramp-up will be during the second half of this year.
So it would be fair to assume that the effect would be higher in Q4 than in Q3?
No. The ramp-ups take place in the second half of the year.
Okay. And then finally, when we look at your balance sheet, the net debt-to-EBITDA is coming up now. Most of the effect comes from this IFRS 16 accounting change. But still taking that into account, I think you're at 2.1x now and you have quite high CapEx plans for several projects going forward. Do you see the weakening of those ratios as a problem for your CapEx plans? Or would you consider changing anything?
No. Helena here. As we have always mentioned, we have used an extension option and we have prolonged the existing financial agreement of SEK 750 million. So we have still quite good headroom in that. And in that perspective, if you adjust for the net debt of SEK 595 million with all the financial leases, we have quite some amount left there. So I don't see any problems with that actually.
And there are no covenants that are based on net debt-to-EBITDA, including the IFRS 16 effects, that you are getting close to or anything like that?
We have good headroom in that perspective.
And the next question comes from the line of Mats Liss from Kepler Cheuvreux.
Mats Liss, Kepler Cheuvreux. Well, just coming back to the -- well, the demand situation, you mentioned the slowdown towards the end of the first quarter -- second quarter, sorry, end of the second quarter and that continued into the third quarter. And I guess you also indicate that there are some -- well, you will continue to reduce inventories. And I just wondered, should we expect the same amount of under-absorbed fixed costs in the third quarter? Or could you give some flavor there?
Well the slowdown has actually happened since mid-last year. So the slowdown has been a long process. And then we have taken the responsible decisions and taken the hit on underproduction in order to rightsize our inventory. That was absolutely necessary to do. We're not completely done with that. So what I can tell you, Mats, is that it will continue for part of quarter 3. But I'm not going to quantify that.
Okay. Great. And then just about -- well, you also mentioned some savings measures that you plan to implement or have implemented. Could you say something about those?
Yes. Of course, we -- apart from always working with improving our efficiencies, we also want to rightsize our cost base to the market. So those are activities that we are undertaking. I'm not prepared to specify those at this point, but we'll come back in due time.
Good. Then -- well, coming back to Poland and you had some negotiations going on to, well, start building capacity there. Could you say something about when you expect those negotiations to be finalized?
As we said before, these are negotiations that are taking place with a number of authorities and governmental representatives in Poland. They are ongoing, they are still delayed, not concluded. But the good thing is we're not under time pressure.
Great. And I guess, well, this additional capacity, are you sort of -- do you need that to be able to deliver on your backlog of contracts?
Actually, as I said, we're not under time pressure to do that, which means that we do have the capacity that we see we need in the foreseeable future. So as there is now, we don't need it immediately and we don't see that we're losing -- that we're rushing at the clock to do this in any sense.
Good. And well, finally, just about the tax rate there, you -- well, it was a bit above the target, I guess. And you mentioned there's a little bit difference between the quarters. But should we expect the full year to end up within the 24% to 28% target?
We are in a little bit higher tax rate as it is right now. So I think you can calculate a bit higher than you have done previously there. But still within the range but in the higher levels in the guidelines, I would say.
[Operator Instructions] And we have a follow-up question from the line of Kenneth Toll from Carnegie.
Well, one thing I'm wondering a little bit about is concerning both the inventories and the cost efficiencies. Demand is lower now but at the same time you have new contracts that are being ramped up and maybe demand recovers a bit as well as we go into 2020 or so. So is there a risk that you sort of takedown inventories too much now and you have to rebuild inventories again early next year and also on the cost side that you might sort of reduce employees and then you have to take them back again? So how do you balance the -- sort of the capacity and the manning you need in a couple of quarters and the inventories you need versus the shorter-term outlook?
When it comes to the employees and the manning, we have that under tight control. So surely, we won't do anything stupid in that sense. We're keeping the -- sort of mid-term ahead of us when we're planning our manning and our resources. When it comes to the inventories, this is a split picture. As you probably remember from previous reports, we've been building stock in China in order to get prepared for our relocation, which is happening right now. We also have had building inventories to be prepared for an uncontrolled Brexit. And then we have the necessity to reduce the overall inventory. So these are sort of forces that work in different directions. And this is what we need to juggle in our daily planning of our -- both material intake and production. But when you see the SEK 50 million of inventory reduction, that is the net of all of that and behind it is also the buildup of, for instance, the Chinese safety stock. So we are -- we do have to manage a number of different elements in our inventory. And net-net, we'll take it down. But we're not going to do that sort of as a peanut butter approach. But we're doing it in a very pointed way so that we have inventory where we need to have it and the part numbers that we need to have it. But overall, we're rightsizing it.
Yes. And also when it comes to costs and adapting the cost level, I guess it's most about manning, right?
Well, in the short term, of course, that's what you can affect.
We have another follow-up question from the line of Mats Liss from Kepler Cheuvreux.
Just a quick one here on the U.S. and the joint venture you have there with Ramco. Is there something you can say about that and the outlook in a couple of years there for potential deliveries and so...
Well, right now, we have -- we're localizing production of our first real order, which is ramping up and have in the past been ramping up the last few months in the U.S. Of course, as a next step, we're looking for the next contract and the next contract and building a sales organization in North America to be able to execute that. So I think that's about all I can tell you right now.
Yes. Great. And well, and just one more about the mix there in the inventory correction. I guess that -- more about light vehicles mostly. But could you just -- well, if there are any sort of difference there between the heavy commercial vehicles and the light vehicles?
Not sure I understood your question.
I mean 85% is light vehicles from top of my head, I guess. And well, the balance it's sort of more heavy vehicles. And is there any sort of flavor or difference there between the need of making the inventory correction?
Okay. You mean the effect in the stock regarding heavy commercial vehicles and light vehicles?
Yes. If you can sort of give some indication there.
No. [ It's an average ], I would say.
As there are no further questions, I'll hand back to the speakers.
Okay. If there are no more questions, then thanks, everyone, for listening in.
And we wish you a very nice summer.
Have a good summer.