Bulten AB
STO:BULTEN
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Bulten AB
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Welcome to Bulten's 2020 Q3 Presentation. My name is Kamilla Oresvärd, Senior Vice President, Corporate Communications. Presenting the report are Bulten's President and CEO, Anders Nyström; and our acting CFO, Claes Lundqvist. [Operator Instructions] I will now hand over the word to Anders Nyström. Please go ahead, Anders.
Thank you, Kamilla. Welcome, everyone. The agenda for today will be a brief overview of Bulten, the market development, the results for the third quarter and finally, some words about our focus for the rest of this year and going forward. So next slide, please. Bulten is, as most of you know, a supplier of fasteners, primarily to the automotive industry. We don't just supply the hardware. To many of our customers, we are a partner for product development support, innovation, procurement and logistics. 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, 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, it is a clear strength. Customers value the way we cooperate with them and recognize us for our service. Most of the customers in Bulten's space have potential for further growth. Next slide, please, Page 5. Our geographical footprint is another unique advantage of Bulten. None of our competition has 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 1,700 employees whom we offer local production in Europe, the U.S., China, Taiwan and Russia, which is unique in our competitive set. Through the acquisition of PSM, we have an even more comprehensive geographical coverage than we had before. So Page 6, please. In February, before the real outbreak of the pandemic, we presented our revised strategy, which we have named Stronger 24 and the way we will go about reaching our new targets. It's through a number of building blocks visible on this slide. So to start with, we have a strong position with the uniqueness that's taken Bulten to what it is today. We have growth momentum, both organically through the contracts that we're currently ramping up as well as the new contracts we recently won and nonorganically through the acquisition of PSM. We aim for sales reaching SEK 5 billion in 2024. Our margin expansion will come through the obvious synergies with PSM, improved exposure to customers in North America and China, an accelerated effort to improve efficiencies in both production and distribution and through launching new technology with a value-add for customers. We aim for an EBIT margin above 8% in 2024. We also have a strong financial position, which is something that's -- that we really want to emphasize. The global downturn 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 of the strategy to get there. We've used the last 2 quarters to come out even stronger now when the demand has returned. So we move now to market development and ask you to turn to Page 8. Looking at the shorter perspective, the industry forecasting company, LMC Automotive, estimates a downturn in production of vehicles this year, a consequence of the COVID-19 situation. LMC now predicts a 17% lower global production volume during 2020 for light vehicles. This is a somewhat more bright forecast compared to the last quarter when LMC estimated a deeper downturn. For heavy commercial vehicles, the full year prediction is 21% lower volumes, also that somewhat more positive outlook compared to last quarter forecast. Translated into Bulten's automotive customer mix, this would mean about 17% lower market production volumes in 2020 compared to 2019. Looking into LMC automotive sales estimates for light vehicles globally for the first 9 months of 2020. We look at a decrease of approximately 19% compared to 2019. Next slide, please. Longer perspective then, LMC estimates a bounce-back of production of cars in the years to come, now with an increase of 14% in 2021 and 7% in 2022. Looking at the same thing for heavy commercial vehicles, LMC estimates an increase of production of around 11% in 2021 and 9% in 2022. Turning to Page 11 for some highlights during quarter 3. Throughout the quarter, we've been -- we've continued to mitigate the effects, of course, of COVID-19. However, gradually from August, we've seen increased sales and a stronger order intake. This indicates a vehicle market in recovery, but more importantly, that Bulten continues to gain market share as a result of new contracts but also favorable development of PSM acquired earlier this year. A significant FSP contract we won in July has an annual value of approximately EUR 60 million at full pace. And more about that in the coming slide. During the quarter, Bulten and PSM's respective operations in the U.S. began moving into a shared greenfield site in Streetsboro, Ohio. The transfer will be finalized shortly. We've also signed a lease agreement for a new production facility in Taipei, Taiwan. The new facility enables more efficient and sustainable operation and forms the basis for future expansion. The current operations in PSM Taiwan will be moved to the new facility during the autumn. Our focus on technology and innovation is further intensified. And I'm very pleased to welcome Emmy Pavlovic to a newly formed position as Senior Vice President, Technology and Innovation. During the quarter, the President of PSM, Marco Suzuki, has chosen to leave his position, and I have taken up the role as acting President of PSM until a new management structure is in place. Turning to Page 12. As announced on July 2, we've signed an FSP contract for supply of fasteners to European automotive manufacturer at an annual value of approximately EUR 60 million at full pace. The contract runs over 5 years. The date of the delivery start was July 24. The contract is a takeover of an existing FSP from a competitor for 2 assembly plants, which means that deliveries started immediately at the point-in-time pace. The contract will improve the utilization of a number of manufacturing facilities for Bulten and its supply base and has not required any major investments. The start-up costs are estimated to approximately EUR 1 million, of which EUR 0.3 million have been spent in the third quarter. Margin improvements are expected when value chain optimizations have been carried out. And with that, I will leave the word to our acting CFO, Claes Lundqvist.
Thank you, Anders. Page 13. On this slide, you can see our financial summary of the third quarter. The quarter was, of course, affected by the COVID-19 effects on our business and the industry, especially in July. Then gradually in August, volumes started to come back. The order intake, sales and profitability have gradually improved throughout the quarter as production for us and our customers have started again and increased in pace. Looking at our 12-month net sales. We are not far behind our full year 2019 figure despite our 40% drop in the second quarter. Even though September was good, the situation going forward is same for us, like for many of our peers. It is very difficult to predict the development in the coming months. Let's look at our sales and order intake. Next slide, please. On the right graph on this page, you can see our quarterly sales development this year and monthly this quarter. As I referred to on the previous slide, the gradual upturn of volumes are very visible. Order bookings amounted to SEK 1.322 billion, an increase of 70% compared to the corresponding period last year. This is partially explained by the acquisition of PSM, but also probably a pent-up demand from the spring when many of our customers' production plants closed down. The new FSP contract is, of course, another addition to the order intake as well as other new contracts ramping up. Net sales for the group amounted to SEK 853 million, and increased by 19% compared to the same period last year. Our earnings performance was affected by the improved -- sorry, the next page, please. Our earnings performance was affected by the improved volumes in the quarter. EBIT amounted to SEK 40 million in the quarter. Our EBIT margin for the third quarter amounted to 4.7%, an improvement compared to the comparable quarter last year of minus 1%. Adjusted EBIT margin for the quarter amounted to 5.2% compared to last year's quarter with an adjusted EBIT of 2.6% for restructuring costs in Germany and relocation costs in China. We have, during the quarter, also received government support of approximately SEK 8 million. And as of 1st of October, all Bulten employees are back from short-term layoffs. The ramp-up cost for the new FSP contracts affect us negatively by about SEK 3 million and is part of the previously communicated SEK 10 million. The rest of the expected costs will be allocated in the next 2 coming quarters. Moreover, adoption of production to demand during the quarter has affected the company's earnings negatively in the form of underabsorption and consequently, put pressure on margins, especially in July and part of August. The last -- next page, please. The last 2 quarters, we have naturally focused on cash management and our net working capital. The cash flow from operating activities before changes in working capital amounted to SEK 75 million, clearly an improvement compared to Q2. Thanks to focused cash management efforts with a good development of customer receivable payments, working capital has decreased in the quarter. Cash flow from the change amounted to SEK 82 million and contributed to a positive cash flow for operating activities in total, which amounted to SEK 157 million. Cash flow from investing activities amounted to minus SEK 12 million, 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 positive and amounted to SEK 1 million, with a cash position of SEK 147 million at the end of the quarter. Our net debt excluding lease liabilities has reduced since the beginning of the year and amounted to SEK 238 million at the end of the quarter. Next page, please. Page 17, key indicators. Our key indicators have improved since Q2, but on a last 12-month basis, still affected by the lower profitability level and lower capital turnover times due to the COVID-19 situation. We have a return on capital employed of 2.5%, or adjusted for relocation, restructuring and acquisition, 3.1%. Our net debt EBITDA ratio, adjusted for lease liabilities, is at 1.1 at the end of the quarter. This, in combination with an equity ratio of 56% at the end of the quarter, shows that Bulten's financials is on a very solid level. Next slide, please. Financial targets and guidelines. 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 moving in the right direction. We normally comment on the guidelines for some other key figures. But as mentioned earlier in this presentation, our business has been in a very special situation. Since our key figures is calculated on a rolling 12-month basis, further detailed comments may not be so relevant for this quarter. We will, of course, strive to improve the key figures gradually. And I will now hand over to Anders again, on what is more relevant, our focus going forward.
Thank you, Claes. And I'll ask you to flip to Page 20. And this slide is, for those of you who normally tune in to our quarterly reports, you've become familiar with this. And it shows our backlog of orders taken but not yet implemented into production. As of now, Bulten has an expected annual sales growth of just over EUR 100 million at full pace in 2022 compared to 2019. I do want to draw your attention to the fact that due to COVID-19, 2 of our electric vehicle customers have decided to postpone industrialization of new products, which is why you see that the start date of the top 2 contracts in red have moved 1 year. So that's the explanation for that, for those of you who noticed. Even though there is still uncertainty in our industry due to COVID-19 and other macroeconomic factors, this is a very good buffer and the sign of strength for us going forward. We predict a stronger organic growth for Bulten versus the market as already shown in Q3, and we had a strong position. Next slide, please. So the focus for 2020 and the rest of the year. So far, we've done everything to handle the COVID downturn and do that in a responsible way for our stakeholders. We've implemented significant actions to mitigate the situation in the industry with rigorous cost and cash flow control. We will, of course, continue to do so. And despite the strong September, there are still uncertainties about the short-term development. During the downturn, we stayed prepared for a swift ramp-up. That's an important factor why we were able to deliver flawlessly on the higher demand in September. Moreover, we continue to focus on delivering on our synergy plans with PSM, which we've done from day 1 after the transaction. We have coordinated our operations in the U.S. and are pursuing numerous other opportunities, especially in sales and purchasing. We're in a product-focused business, and we'll step up our innovation activities in order to provide both functionality and sustainability to our customers. One example of this is our continuing collaboration with TensionCam for sensorization of threaded joints after a minority stake acquisition in TensionCam in June of this year. Finally, we deliver on our new Stronger 24 strategy and continue to build an even stronger Bulten. And that concludes our presentation. And I think we're ready for Q&A.
[Operator Instructions] Our first question comes from Max Fryden from Danske Bank.
Just a question on the sales development. Can you share if all of that outperformance versus the weighted light vehicle production is related to the recent FSP contract ramp-up?
You mean if all of the outperformance of the market is really...
Yes. Of you versus markets.
Okay. We -- actually, we don't break down the organic growth. What we can tell you is that our organic growth is definitely outperforming the market. And then if you add PSM on top of that, which is our unorganic growth, that makes up the sales development. So that's the amount of breakdown I'm prepared to give you.
All right. I guess as it comes down about demand, it doesn't really matter how you get there. But if we leave it at that and then just to the EBIT margin development. On the order wins and ramp-up of contract, you mentioned that you will source less of your components as you ramp up, and that should be beneficial to margins. Can you say how large part is sourced today on these contracts? And at full production, what is the target of in-house versus outsourced production?
Well, I think we previously said we manufacture about 60% of our total sales, and the rest is traded or outsourced. And that relation varies a bit over time as the product mix changes, but it is in that neighborhood still.
All right. And then was trying to -- if I look at the seasonal pattern for EBIT margins and over the years, you seem to always or almost always report better margins in Q4 versus Q3. I'm just wondering if there's anything that we should be aware of as we try to put in our estimates for the next quarter due to different seasonality in PSM. I mean further underabsorption as you ramp up this contract, and then it's a little bit of a different world this year compared to historically.
Correct. And you're right in your observation, yes. Q4 is normally a bit better for us than Q3, naturally since a large portion of Bulten is European-centric and July and August are normally low production months for Europe. I don't think that they will follow a different pattern. I mean everything being equal, you will see the same -- maybe you can expect the same type of relation for Q4 this year. In terms of impact of PSM, if anything, I mean, they are more Asian-focused than the rest of the group. And December is not a big shutdown month in Asia. That's rather February. So of course, that will have a certain impact. And I think the overall pattern of growth will stay pretty much the same.
Yes. Okay. And just finally, the CEO of PSM leaving. Can you share any more details on that? Was that a mutual agreement or initiated from your side? And anything that would help.
Well, he chose to leave. And his reasons for doing so, I'm not going to elaborate on. But when you go through acquisitions and integration, those things happen. And you can just conclude that we've parted ways, and we're going to handle it.
Yes. And just remind us, where is the head office for PSM? Just to bear in mind that you recruit for the CEO.
Well, the holding company for PSM is based in the U.K.
Okay. And recruitment of the CEO could be based in U.K.?
It could be. But since it's a global company, we're not that geographically dependent.
Our next question comes from Mats Liss from Kepler Cheuvreux.
Well, congrats on a good set of numbers. I just wonder about the FSP contract, the EUR 60 million. Is it included fully in the order figure?
Again, it depends on what you mean. I mean the production rate right now, the cost...
No. I mean the full-service contract you received in July, that's included in the SEK 1.3 billion?
Yes. That is correct. Yes. Of course, a portion of the add to the order intake is generated by that contract, yes.
Yes. And well, talking about PSM, a bit lower then. I mean you have -- talking about the synergy there, could you be somewhat more specific there? What kind of amounts we could expect going forward? Or is it still in a ramp-up phase of...
Yes. I mean we will harvest synergy effects for -- I mean, we've done so this year, and will be even more so next year and in the coming years. I mean since we're aiming for both cost synergies and revenue synergies, the revenue synergies normally take a little bit more time to come into fruition. I'm not going to give you any amounts, but it is the obvious areas that we're targeting, like increasing our exposure to the combined customer base. I'm giving basically the sales force the access to the total product portfolio of the group, that's on the revenue side, on the cost side. And we've mentioned one example in the report, and that's the combination of the activities in the U.S. moving in under one roof and saving lots of overhead. So -- and we will see more of that going forward, where we get a better utilization of our combined manufacturing sites as well as insourcing of components that are historically in classically traded and outsourced by Bulten for the FSP contracts. Those are typical products that the PSM manufacture. And we are insourcing some of those as we speak. So there's a number of areas that we're targeting, and that will gradually come into fruition, both this year and the next couple of years, I would say.
Then -- well, just trying to get a feel about the fourth quarter here, and you have sort of indicated that you have sort of gradually ramped up production during the third quarter. And given the current production level, how much more could we expect in the fourth quarter? Keeping in mind, I mean, there we are approaching the holiday season, then you never know how December will be. But if you look at the current level and sort of make a quick calculation there about a step-wise change in the fourth quarter compared to the third.
Well, I think our customers have basically ramped up their production level. It looks pretty stable going forward. We don't see further increases. But the uncertainty here, of course, is around the infection rates in various countries. Whether there will be a hard Brexit, that will definitely have an effect on both consumer confidence and other things. So I mean, there's tons of uncertainty out there, as we all know. In terms of production rates, I'm expecting the customers to continue unless anything disruption happens that they will continue the pace right now.
Okay. And finally, just about -- I saw the tax rate was a bit on the high side. Maybe you had mentioned that with the report, but could you give some comment about that one?
So the high tax rate is very much coming from our internal situation with subsidiaries and their performance. And we are not taking in deferred tax into our balance sheet. And so that's sort of the short explanation.
Okay. And in the fourth quarter, will it sort of "level out," come down?
That will come down, that will come. Yes. So when we come into end of the year, that we'll give a more balanced view.
[Operator Instructions] There appears to be no further questions. So I'll hand back to the speakers for any other remarks.
Okay. So we have one additional question by mail from [ Claus ] [indiscernible] who wants to know what's our definition of order intake.
Okay. So the way we are calculating our order intake, I think this has been mentioned before, but we are calculating on our order stock on a 100-day basis. So given the incoming order stock and the outgoing, together with the actual sales for the period, will give you the orders received.
We're talking about working days, 100 working days.
Yes. 100 working days.
Okay. So I guess there are no more questions.
Yes. In that case, thank you for tuning in and listening. Thanks for your interest. And bye to you all.
Thank you. Bye-bye.
Bye.