Bulten AB
STO:BULTEN
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Bulten AB
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Hello, and welcome to Bulten's 2018 Q4 Presentation. My name is Kamilla Oresvärd, Senior Vice President, Corporate Communications. Presenting the report today are Bulten's President and CEO, Tommy Andersson; and our Executive Vice President and CFO, Helena Wennerström. [Operator Instructions] To start, with us today is Anders Nyström, who would take off the position as Bulten's new President and CEO as of tomorrow. Anders, can you say a few words about yourself before we start the Q4 presentation?
Yes, absolutely. Thank you, Kamilla. Tomorrow is my first day as the President and CEO of Bulten. Tommy has served the company for almost 2 decades and I have a lot of respect for what he and his team has done, especially in the last 5 years. As some of you know, I've served most of my career on the OEM side of the business. I'm a mechanical engineer by training and started in quality in Volvo Cars, moved on to product development and then to purchasing. I stayed with Volvo Cars for 27 years in which 6 were in different purchasing management roles for Ford Motor Company, both in North America and in Europe while Volvo Cars was part of the Ford family. When I left Volvo Cars, I was responsible for all materials and components purchasing and that was back in 2011. I then joined Kongsberg Automotive, where I have the opportunity to run a global business units with customers and manufacturing facilities around the globe. I did have a short stint with IAC Group as well before being asked the question whether I would be interested in leading this fine company, which Bulten is. And I've been looking forward to get to work ever since the day in June when I signed the contract. And the last few weeks and months, I've had the chance to shadow Tommy and start to understand the business and the organization. And I have to say that we have good people, we have good technology, a wealth of knowledge in the company and a global presence to capitalize on. So my observations so far is that we have a very solid foundation to continue to build the company from. And I now hand over to Tommy and Helena for the Q4.
Okay, thank you, Anders, and I'm convinced that you will do a great job in your position here. And now going to the fourth quarter and full year outcome. Car sales within EU has been extremely volatile during Q4 due to new regulations, what we call Worldwide Harmonised Light Vehicle Test Procedure, in short, WLTP. Bulten has, due to ramp-up of new contracts, managed the situation well and are still on a growth pace.Coming to the agenda for today, we have Bulten in brief, market development, fourth quarter 2018 and our plans going forward. Going on to Page 4, Bulten in brief. Bulten's business concept is getting stronger every day. And during the year, we have been involved in successful launches of several new cars and model shifts with flawless execution. Investments in quality, engineering, logistics as well as dedicated people are the key to this performance. As mentioned, this is the reason for maintaining growth also in this volatile market. Bulten's vision to support the global automotive industry with state-of-the-art fastener technology and services as well as developing the FSP concept into perfection has been the main reason for Bulten to be a winner in this highly competitive industry. Moving on to page 5. Bulten has a lean and well-positioned operation and entry into the U.S. market will open doors into new customers, but more important, strengthens Bulten's position on global platforms to customers we are already supplying. There are not so many in our industry that can offer local content in Europe, U.S.A., China and Russia. We have today the largest fastener operation in the industry in the low-cost country, Poland, and we are planning to expand it further. We have also a big portion of outsourced production, approximately 40%, which also creates flexibility. Regarding volumes, Bulten has proven that we can adjust to volume fluctuations both up and down. Moving on to Page 6. Bulten has many customers with potential for further growth when consolidation and need for strong FSP supplier will be required to assembly cars and engines to most cost-effective ways. Cars are the main foster market within automotive, as it is also for Bulten. And Bulten's 3 largest customers are Ford, JLR and Volvo. Coming to market development on Page 8, market volatility. As we committed in our report today, the industry has been quite volatile the last few months. In Europe, car sales have decreased each month since September, and in December, EU car sales were down 8% according to ACEA. This is due to several factors. The new global test procedure for new cars, called WLTP, is more strict in terms of CO2 emission, and this has created distortion in many EU countries. This has created the demand for cars produced prior to the new test procedure was introduced and the trend towards more CO2 friendly cars, hybrids and electric vehicles is in the long-term perspective and very positive for Bulten. Also concerns about Brexit has had an impact especially in the U.K. We can see a drop in car sales in Europe of 7% to 8% during the fourth quarter, while Bulten managed to remain almost unchanged due to new business. And as you can see in the graph, car sales in many key markets were down in December. Raw material prices will remain in the same level as in Q4 during the first quarter 2019,[ all ] further increases are announced. Going on to Page 9, market development for production. If you then look at the production of cars in Europe during Q4, the most relevant statistics for Bulten, LMC, reports a clear drop, this is, of course, the result of lower sales but also result of lower exports of cars throughout the continents like China. The market has had, as mentioned, also weakened in Q4. According to LMC, especially Germany and U.K. production were down in Q4. In an overall market perspective, it's obvious that Bulten managed to keep production volumes at the good level during the quarter. LMC Automotive has reported an estimate to 2018 for light vehicle production in Europe of 0.2% growth and heavy commercial vehicles to grow 0.7%, which is with Bulten's mix, an estimated market growth of 0.3%. The LMC estimate has been lowered since the Q3 report with the influence from WLTP and Brexit. Page 10. Looking in the longer perspective, LMC Automotive estimate a bumpy production of cars in Europe in years to come with a decrease of 0.5% in 2019 and an increase of 3.5% in 2020. And looking at the same thing for heavy commercial vehicles, this estimate an increase of production of around 2.1% for 2019, and 4.1% for 2020. For Bulten's mix, minus 0.1% for 2019 and 3.6% for 2020. Page 11, market shares and what's about our market and position. Bulten is growing and continue to take market shares. Bulten's market share was 18% during 2018, defending its -- Bulten is defending its position as the leading FSP supplier well. We increased our market share from 60% to 65% in 2018, mainly due to a new major FSP contract. The growth we are planning for 2019 is to a large extent coming from FSP contracts. Going on to the fourth quarter and operational highlights, Page 13. Bulten is growing even though the market was down in the quarter, an effect of our continued ramp-up of new contracts in the quarter. The order intake decreased due to a weak market as well as a tough comparable last year. The profitability decreased somewhat during the quarter due to irregular production caused by a volatile market, high level of prices on raw material and negative currency effects. We continue to take new contracts within the quarter as well as after the quarter, 2 new FSP contracts will drive strength to electric vehicles of SEK 7 million, and 1 new FSP contract of SEK 13 million after the quarter. And the board is proposing a dividend of SEK 4 for 2018, increase from SEK 3.75, 2017. And I will now hand over to Helena for some financials.
Thank you, Tommy. Bulten's sales stays at SEK 747 million in a quarter, up 1% compared to comparable quarter last year. Our EBIT amounted SEK 48 million, and operating margins lower compared to the comparable quarter last year, an effect of irregular production due to market volatility, higher raw material prices and currency effect. Looking to our EPS, it decreases with 34% during the quarter. This drop mainly relates to our financial net, which were SEK 10 million lower than Q4 previous year, which, basically, the most of which relates to currency effect. More comments about earnings in just a minute. Page 15. Some comments on the net sales and order intake. Sales for the quarter were up 1%. However, adjusted the currency, the organic growth was down 3.3%. In an overall market perspective, our performance comes from the increasing volumes related to previously announced contract wins and overall good demand from our customers. However, the market has been volatile, especially in December, but the situation differs from customer to customer. Looking at our order intake, it was down 11.7%, this also, of course, as there was some market volatility, but as importantly, the tough comparable quarter, 2017. This was posted by ramp-up of contracts. The speed of ramp-up of contracts in Q4 2018 has been somewhat affected by the market situation. Page 16. Our EBIT margin for the fourth quarter amounted to 6.4% compared to 7.5% comparable quarter last year. And looking at the underlying profitability, excluding currency, the difference is much lower with the margin of 6.8% in the quarter 2018 compared to 7.1% the previous year. In addition, we also need to take into account the higher level of raw material prices compared to a year ago. And during the quarter, we also started to see some costs for our start of relocation of production in China. And as a result of volatile market, we have just started adjustment of our production levels with some lead time. And as mentioned previously, and as you can see on the right chart, our earnings on EPS level was down in the quarter but much less if we disregard the currency effect. Page 17. The cash flow from operating activities were mainly affected by the operation result. And our total cash flow, was, of course, also impacted by this high investment level as we're in the phase preparing for growth and increasing our capacity. And our investment and efficiency continues as we aim to become the industry's most cost-effective fasteners manufacturer. Our balance sheet and financial position remains strong, and we have a net debt by the end of the quarter of SEK 181 million, which equals to 0.6x EBITDA. Page 18. Our return on capital employed has decreased down to 12.8%, mainly due to the margin development. Of those, our return on equity is impacted by this and amounts to 9.9%. Capital turnover times also were at the same level compared to the full year 2017. The equity ratio was on a level 64.8% at the end of the quarter. Page 19. On this slide, we continue to give you some short guidelines regarding some key figures for Bulten, and as always, these guidelines are not to be considered as financial targets. Average net working capital in relation to 12-month sales amounted to 23%. Working capital is being driven by positive developments for a while but this quarter; was also impacted by reduce from [ new ] developments in the last part of the quarter. Capital expenditures as percentage of 12-month sales, they are on a level of 5.3%, an evidence of the 3 invest in future growth activities. And we predict that we would end up over this level in coming years. More about this in the next slide. Depreciation of 2.9% of 12-months sales is within the range of our guidelines. And our average tax rate was 29% rolling 12 months, which is above our guidelines. And during this year, we can see an effect of revaluation of deferred taxes due to coming new tax rate in Sweden, but also other change in tax regulations, mainly in Poland, which also affect the average tax rate. However, the tax rate really vary from quarter-to-quarter going forward. Page 20. Let me show a preview of our investment strategy in the coming years. For guidance, it is to reinvest 2% to 3% of 12-month sales into daily business. On top of that, to handle the growth pace. We will invest more in the years to come, as previously announced. We will invest in new capacity, value-added production as well as a new production plant in Poland. This investment has, however, being delayed due to negotiations regarding land development and the building. And we'll -- and [ pay ] some additional investment compared to earlier estimates, but it is still under negotiations. We also see some delays in finalizing our plans of a the [ treatment ] line in Poland due to the reason that I just mentioned. In connection with the release of our Q3 report, we announced the relocation of our production facility in China from Beijing to Tianjin with a purpose to catch growth opportunities. The move has started and we will be finalized with -- by the end of 2019 with associated investment of SEK 25 million. But all in all, these investments will improve Bulten's production efficiency even further. Page 21, financial targets. We are growing more stronger than the industry on average with 9.7% for the full year 2019. [ Growth is forecast is ] market growth of 0.3%. We continue to have a good profitability with an operating margin of 6.7% on a rolling 12-months basis, even though raw material prices and a volatile market has made the environment more challenging. Return on capital employed of 12.8% or 14.6% if you adjust for goodwill, reduced mainly due to the margin development. EPS developed negatively, mainly to the financial net and translation effects but also due to higher average tax rate, as mentioned earlier. And our board will propose today an ordinary dividend of SEK 4 per share, an increase compared to SEK 3.75. Now back to Tommy again.
Okay. So with that I'm just going forward, I'm going to page 23. Bulten continued to perform better than the market in Q4, the major part of this growth is coming from ramp-up of the new contracts. On this slide, you can see the updated different ramp-up contracts that -- and what phases of implementation they are in respectively. Moreover, contracts signed but not yet into production will support Bulten's growth even further in the years to come. The market situation, of course, will have an impact on Bulten. And for Bulten's mix to market, according to LMC, is estimate to be flat during 2019. To that, you have to add ramp-up of new contracts that have started as well as new business not yet started, together totaling over EUR 65 million yearly. And going on to page 24. Going forward there, the European car market dropped from 7% to 8% during Q4 compared to previous year, but Bulten remain on the same level as Q4 2017 due to ramp-up of new contracts. Strong financial position and an increased dividend is proposed, preparing for future growth through investments and continued streamlining to become the most cost-effective FSP supplier in the industry. Finally, we're also in a good position to win new contracts when the industry is changing for more environmental-friendly ride trains. The long-term trend toward hybrids and electric cars works in our favor. And I hope you all got a clear picture of the opportunities within Bulten. And I think we are now ready for Q&A. Thank you.
[Operator Instructions] Our first question comes from the line of Kenneth Toll from Carnegie.
First you commented a bit -- so you commented a bit on the Polish project that there are some delays there. But the project for capacity increases in Hallstahammar and the move in China, are those moving according to plan?
Yes, they are moving all according to plan. They're setting it up now in Hallstahammar. The machines are there, and they are following the plan. It's just the negotiations regarding land and buildings in Poland that take some time. So they're on plan.
Okay, great. And then I was curious, on the new contracts and the ramping up you're doing, how is that working operationally? If it's smooth or do they incur extra cost and so on?
Thank you. You have seen over the years that we are really skilled to implement new contracts, we don't incur a lot of extra cost. We're doing it with quite a good execution, so I don't expect it to be anything special there. Yes, it's a ramp-up. They would, of course, in some cases -- and a little bit of -- maybe under observation with machinery, but we are quite good on ramping up new contracts.
Okay. And then finally, the raw material prices have gone up during 2018 and now seem to stabilize. And over the long term, you are usually good in adjusting your own prices, but this year, you have been -- or last year, 2018, you were hurt a bit from higher raw material prices. Do you think that you can still increase some prices from the level you had in Q4, in order to, sort of, mitigate for some of the increases last year or...
I think we're always working with our customer to get compensation for raw material. And as I mentioned before, a lot of our customers -- [ I will ] to call out the material. We just take some time before -- it's getting in there. The problem we have had is so many quarters in a row with increases, but I would also expect now when the market is slowing down a little bit that we will have some more leverage on the raw material suppliers.
Yes. So if the current raw material prices stay flat for the remainder of 2019, then the difference between your pricing, sort of, raw material pricing would be more favorable in '19 than what it was in 2018?
It should be. It's quite natural, when the market is up at a high demand the raw material prices increase and the opposite is going down. And of course, we always lose a little bit when it's going up.
And as long as you will not have further increases, it will not be the delay effect.
No, no.
Yes. And then one thing, you're selling quite a lot of products in the U.K., and there might be Brexit coming. How are you preparing for deliveries in the U.K. in the case of a hard Brexit?
First of all, we have no production in U.K. so that help us. It's basically logistics, and of course, we are looking over the situation, build up inventory in case there is a stock fall. So we are not the showstopper of what will happen. And that's basically what we can do right now. Of course, we have looked at all our flows. What we can do? Is there is something we can move? Steps going to U.K. that we don't need to send and things like that. But that's basically -- we just make sure that we can maintain the production and of course, if it's -- if something is getting really bad, which I don't think it will, but that's -- then of course, the car company will -- there were probably other things that stop the [ current production ] , but we are prepared. I -- we are not going to -- Of course, it might hurt us, it's for sure, it could hurt us, if the production stopped, but hopefully that will not happen.
And the next question comes from the line of Mats Liss from Kepler Cheuvreux.
You've talked about the slow down there in -- late in quarter and I expect the same situation have continued during the beginning of the year, is that so?
I think it's quite a mix, of course, it continue on a slower pace. But I mean, it's WLTI made a lot people buying cars before and then -- the day -- they -- yes, I mean if you take Sweden for example, it dropped 34% in December, but it's back. Now only dropped 10% in January. So there is quite a change in the market right now but, of course, you're right, it will. As I mentioned on the LMC report, it's almost -- it's -- it's about 0.5%, 0.3% with our mix, so of course, it is a weaker market and we are used to -- with the growth in market growth.
Well, the best guidance is, of course, the order intake you had in the fourth quarter to be delivered during the first quarter.
Yes, on the other hand, as we also said, the order intake there was somewhat affected by the very high order intake the year before. So it was maybe indicating a little bit more or whatever. I don't know if you want to add anything, Helena? Yes.
I think you were talking about the absolute demand.
Yes, yes, yes. But I think we -- of course, it is -- as I said 7% to 8% down and you probably can expect things like that to continue.
Yes. Okay. And then the delays there in Poland. Do that affect your ability to ramp-up the new FSP contract you have?
No, we are still managing that, I -- as it is right now, I mean that the volumes still will be going down, so we are still managing that. And we expect it to be not negotiated in time, so we are not retorting there. I think we -- that contract is just starting to ramp, so I was starting to -- going in by the end of the year. So I think we have time to ramp it up. I don't think it will affect that.
And then about the FSP contract, you are gradually you're ramping up now. I mean, expecting unchanged car production in 2019. Would -- how much would you outgrow the underlying market there given the contract you have -- are ramping up?
I mean we are not giving forecast in that way. You could see that we, of course, outgrown the market. The market was down to 8% in the fourth quarter and then we were almost flat. And the only thing we have is SEK 65 million that will be in ramp-up and things like that, and exactly to say how and when they will go in this is a little bit difficult to say. But -- so I'm not going to give -- it's clearly uncertain now to give a number. And, of course, we don't give forecast. We just reference to the LMC report. Helena, you have anything else?
No, no I don't know.
And then the -- well just the [ return on ] the tax rate, it was a bit higher in the quarter. And you're right, something out the Polish takes...
Yes, there are some changes in what is the deductible and different kind of changes that [ effects ] now when we are adjusting to the new regulations. So we can see an effect here.
So -- but that's a temporary impact though. In 2019, you will have, sort of, within the indication that [ went before a different date ] that sound...
We will end up to the newer regulation, absolutely.
[Operator Instructions] As there are no further questions, I'll hand it back to the speakers.
Yes, so this was my last report for Bulten. And I want to thank you all for listening in, and I wish you all the best for the future and thank you.