Bulten AB

STO:BULTEN

Earnings Call Transcript 2021-Q4

[Ulrika Hultgren]

Hello, and welcome to Bulten's Full Year and Q4 2021 Presentation. My name is Ulrika Hultgren, Senior Vice President, Corporate Communications and Investor Relations. Presenting the report are Bulten's President and CEO, Anders Nyström; and CFO, Anna Akerblad. After the presentation, it will be possible for you to ask questions, both on the web as well as in the telephone conference. I will now hand over the word to Anders Nyström. Please go ahead, Anders.

[Anders Nyström, President & CEO]

Thank you, Ulrika. And welcome, everyone. The agenda for today will be a brief overview of Bulten, the market development, the result for the fourth quarter and some words about our focus for 2022 going forward. 2021 has been the second year in a row in a difficult business environment, where we've had to navigate around adverse external factors in the shape of both COVID waves, supply chain shortages and increasing costs. The high-performing team of Bulten around the globe have done an outstanding job to maximize the results in this turbulent year. Turning to Page 4, please. Bulten is a supplier of fasteners, as you know. Our primary customer group is light vehicle OEMs. The customers categorized as automotive suppliers and customers outside of the automotive industry had a greater share of our business in 2021 than in the previous year and are continuing to grow. Now we don't just supply the hardware, to many of our customers we are a partner for product development support, innovation, procurement and logistics. Note those 3 largest customers still are Ford, JLR and Volvo Cars. To be an approved supplier to these many customers is a strength and clearly facilitates further growth. And now over to market development. And I'd ask you to turn to Page 6. Looking back at the vehicle production statistics for 2021. LMC Automotive states 2.2% recovery in light vehicle production during the year compared to 2020. The corresponding number for heavy commercial vehicles is a drop of 2.9%. Considering Bulten's vehicle and customer mix, this would mean a market headwind of 1.6% in the year. However, as you can see from our net sales figures in 2021, we've recorded a 16.7% growth despite that market headwind. Next slide, please. Looking forward, LMC predicts a strong recovery of light vehicle production in 2022 of 12.5% and a more modest recovery for heavy commercial vehicles of 1%. The recovery for light vehicles is expected to continue in 2023 with close to 9% increase, coupled by a strong recovery for heavy commercial vehicles of approximately 13%. Next slide. As everyone knows by now, the global shortage of semiconductors has been a major issue for the industry. The estimated loss production impact caused by this problem in 2021 was 9.6 million light vehicles. Even if there are indications of an improvement, the problem will not go away in the short term, but will continue to be a limiting factor for vehicle production capacity in the world. It should be noted that the end consumer demand for vehicles is still very strong and OEM order books are generally looking very positive. Next slide, please. Another external factor impacting both this business and the [indiscernible] is raw material pricing. Here, you can see the wire rod pricing data related to the DSV Index, an index generated by the Deutscher Schraubenverband based on cost input from German manufacturers. Steel is the dominant raw material for Bulten. Our framework agreements with customers contained, for the most, raw material price clauses that regulate price compensation, but not to 100%, and in all cases with a certain time lag. And now we'll look at the fourth quarter in more detail, and please turn to Page 11. And these are the events we'd like to highlight from and after quarter 4. We renewed our financing agreement with Svenska Handelsbanken, and this gives us an additional SEK 550 million in credit. Our total credit now amounts to SEK 1.3 billion. We also signed an FSP contract for a new vehicle program worth SEK 100 million annually at full capacity. And I'm very delighted that we were awarded this contract since it also has clear sustainability objectives. This is a true milestone for Bulten. The Board will propose to the AGM a dividend of SEK 2.25 per share. So now I will now leave the word to Anna to run through the figures.

[Anna Akerblad, Chief Financial Officer]

Thank you, Anders. On Page 12, you can see a quick overview of our results for the fourth quarter and full year 2021 before going into the details. We had strong sales both in the fourth quarter and the best year ever for the full year. We had a strong flow on new agreements, as Anders mentioned, and increased cost levels put pressure on EBIT margin. Next slide, please. On Page 13, you can see our quarterly net sales development. And as Anders mentioned, the upturn in the second half of 2020 and Q1 2021 was disturbed by external factors in the shape of both supply chain shortages and COVID waste. However, the sales in the fourth quarter was stronger again with SEK 953 million and resulted in the third best quarter after Q4 2020 and Q1 2021. The full year 2021 was the best year ever with SEK 3,730 million, compared to SEK 3,195 million in 2020, an increase with 16.7%. The EBIT margin for the fourth quarter of 5%, compared to 8.5% in 2020 was affected by increasing costs on energy, steel and transport. The EBIT margin for the full year 2021 was 6.2%, compared to 3.6% in 2020, which was heavily impacted by COVID-19. We can still see a stable underlying consumer demand, as Anders mentioned. And Bulten has a good customer mix. Next slide, please. On Page 14, it is satisfying to see that all customer groups contributed to the sales growth and especially to say that our effort to grow in industries outside automotive and with automotive suppliers have given results. Our main customer group is still OEM light vehicles with 65.4% of total sales in 2021, compared to 72.3% in 2020. OEM heavy commercial vehicles represents 10.2% of total sales in 2021, a slight increase compared to 2020. Automotive suppliers increased to 15.6% in 2021, compared to 12.8% in 2020. And finally, other industries outside automotive now stands for 8.8%, compared to 5.2% last year. Next slide, please. Our earnings performance for the fourth quarter was affected by increased cost levels. EBIT amounted to SEK 48 million in the quarter. Our EBIT margin for the fourth quarter amounted to 5%, which is down from comparable quarter last year. There were no currency effects in the quarter or full year EBIT margin for 2021. On a full year basis, our margin increased to 6.2%, compared to 3.6% last year. Next slide, please. On Page 16, you can see our financial summary of the fourth quarter. As mentioned previously, Bulten delivered the third best quarter in sales that had a negative EBIT impact due to external factors affecting the whole industry. Earnings per share amounted to SEK 1.16 in the quarter and SEK 6.85 for the full year 2021, compared to SEK 2.66 last year. Next slide, please. The cash flow from operating activities, including change in working capital amounted to SEK 45 million in Q4. Cash flow from investing activities amounted to minus SEK 69 million in the quarter. The key figure affected by the start of the construction of the new facility in Poland in May 2021. Cash flow from financing activities amounts to SEK 71 million. The total cash flow for the quarter was positive and amounted to SEK 47 million with a cash position of SEK 242 million at the end of the year. Our net debt, excluding lease liabilities has increased since the beginning of the year, and amounted to minus SEK 323 million at the end of the year. Next slide, please. Our full year key indicators 2021 have improved or are in line with last year. We have a return of capital employed of 9.7%, which is a big improvement, compared to 5.2% in 2020. Our net debt-to-EBITDA ratio is at 1.6 at the end of the year. This, in combination with an equity ratio of 49.3% shows that Bulten financials are on a solid level. Next slide, please. On Page 19, you can see our financial targets as well as some of the guidelines regarding relevant key figures for Bulten. Worth noting is the full year growth in 2021 of 16.7%, well above the target of 10%. In the right-hand table, you can see some guidance for some other key figures, we are very much in line with our guidelines. 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 December, we had a level of 20.7%, 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 additional up to 2% for capacity, depending on the market development. At the end of December, we are at a level of 4.6%. As mentioned before, we started the construction of the new facility in Poland in May. The capital expenditure in 2020 was at a low level due to the pandemic and postponed capital expenditures from 2020, that was executed in 2021, has also an impact on this figure. 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 December, we are in line with our guidelines. And now back to you, Anders.

[Anders Nyström, President & CEO]

Thank you, Anna. And let's then look at our focus for this year, and now I'm asking to turn to Page 21. As we said, the underlying demand for our customers' products and that also Bulten products is healthy. Having said that, we are faced with a new set of uncertainties and our customer production is hampered by the semiconductor shortage that will have an effect on ourselves. COVID-19-related absenteeism in customer plants causing short-term production disruption is also a concern right now. However, we will remain prepared to ramp up our production in the Bulten plants at short notice to meet the strong underlying customer demand. Regarding metal prices, we don't see a short-term relief. We mostly face historical highs for quite some time, coupled with historical high rates for freight and energy. In order to offset these effects, we're working intensively with margin improvement actions. We continue to ramp up our activities in technology and innovation to stay determined to remain a leader in sustainable fastening solutions. We've taken important steps to that effect. And the recent new contract wins are very much enabled by the progress in these areas. Our sales force are using our track record of successful new contract launches to accelerate new business wins and generate additional organic growth. Next slide, please. So reiterating our strategy that we've presented at the Capital Markets Day back in February of last year. It's divided into 4 building blocks. To start with, we have our strong position with the uniqueness that's taken Bulten to what it is today. Our clear goal is to further advance our position when it comes to quality and technology leadership. The second block is growth. We have market share momentum through the contracts that we've won in the last year. Despite the past year's turbulence, we hold on to and aim for sales reaching SEK 5 billion in 2024. The same applies to our profitability efforts. Our margin expansion will come through realized synergy effects, improved exposure to customers in North America and China, accelerated initiatives to improve efficiencies in production and distribution and through launching new technology with a value-add for our customers. We stand by our EBIT target of above 8%. We also have a strong financial position, that's further emphasized now through our extended financing agreement, as Anna presented before. To summarize, 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 of the building blocks and the strategy to get there. And the next slide, please. Just before we conclude the presentation and open up for questions, I just want to welcome you to our upcoming digital Capital Markets Day on February 22, which I believe you will find interesting. And that is time for questions.

[Operator]

[Operator Instructions] We have a question from the line of Kenneth Toll from Carnegie.

[Kenneth Toll Johansson, Financial Analyst]

Yes. Thank you. So one thing that we have discussed every quarter, I think, for a while now is the timing between the raw material price increases and your ability to raise prices. I know that there are automatic clauses in agreements that you push that through. Do you think the net effect between cost increases and your price increases were sort of extra negative in the fourth quarter and that the net effect would be slightly better in Q1? Or do you think it will be similar? Or do you have any feeling?

[Anders Nyström, President & CEO]

Yes. Kenneth, it's a good question. We have -- as you say, we talked about this a number of times. And I think I've told you in the past that the lag that we have between material prices actually happening and compensation coming into the system is anywhere between 3 and 6 months depending on the customer. And yes, it's kind of simple math. When you have a sharp increase to record high levels, and those continue to soar over time, the delta becomes bigger, yes. That's true. And we haven't seen, I think, the peak of steel prices yet. So that means that there will be a bit of a headwind there on the margins, for sure, as you can realize. But then when that will turn again, when the tides will turn again, we don't know, of course. At some point, steel prices are down to -- sort of normalize and even start to go down, but it's extremely difficult to predict when that will happen. Yes.

[Kenneth Toll Johansson, Financial Analyst]

Also on the facility you are building in Poland, you started in May last year, when is it expected to be ready and can start to produce? And also, what will it change for you? What will it bring?

[Anders Nyström, President & CEO]

It will come on stream in the early part of 2023, the project is on plan. So -- actually bang on plan. So we're happy for that. And the whole reason why we're doing that project is to bring in-house the outsourced coating operations primarily that we have -- actually, we're shipping goods from our Polish plant to surface treatment suppliers in the rest of Europe and then back again. That's costly, both from a pure surface treatment pricing standpoint. When we in-source it and then we can keep that margin for ourselves. And secondly, as freight is getting even more expensive, it doesn't make sense to shift tons of uncoated customers all over Europe. So it will have an effect both on our manufacturing costs and will have an effect on freight costs, and not the least, it will bring our CO2 down. So -- and that's a factor that's very important to us.

[Kenneth Toll Johansson, Financial Analyst]

And working capital as well a bit maybe?

[Anders Nyström, President & CEO]

I'm sorry?

[Kenneth Toll Johansson, Financial Analyst]

Yes -- and working capital as well could go down a bit.

[Anna Akerblad, Chief Financial Officer]

Yes. Yes. Absolutely right.

[Operator]

And we have one more question from the line of Mats Liss from Kepler Cheuvreux.

[Mats Liss, Equity Research Analyst]

Yes. Just a couple of ones. First, I guess you have a pretty good volume performance in 2021 compared to the market, as you indicated, and for 2022 how you expect or the forecast institutes indicate or sort of expecting a pretty good volume improvements as well. Do you expect to continue to outperform or is it sort of a different mix there that sort of makes things more difficult to do that. So could you say something about that?

[Anders Nyström, President & CEO]

Well, we said in our strategy that we aim for a CAGR of 10% on an average and to outperform the market has been our aim over a number of years. And I think we -- you've seen that we've consistently done that. And, yes, it's our ambition for 2022 as well. Difficult here is going to be to predict how much the market actually will increase. The forecast companies, as we've alluded to in the presentation, are indicating now about -- with our mix, about 10%. So yes, we intend to outperform that.

[Mats Liss, Equity Research Analyst]

Okay. But given the contract portfolio you have and so -- I mean, the contract is there. Forecast institutes are sort of totally right. But could you say something, would it mean a similar outperformance as in 2021 or somewhat slower one, smaller one?

[Anders Nyström, President & CEO]

That will be to give you a little bit too much of a forecast, I think. And I think I'll stop by saying, we'll outperform the market. We have new business that will come on screen in 2022. So that's our absolute ambition.

[Mats Liss, Equity Research Analyst]

Sure. And given the price increases you have implemented, I mean, the price volume mix will sort of boost sales for 2022, I guess?

[Anders Nyström, President & CEO]

That's a fair assumption.

[Mats Liss, Equity Research Analyst]

Yes. Okay, great. Good. You mentioned the surface installations you make in Poland. And -- but do you have any sort of earnings or costs indication there, how much you will save of doing that in-house?

[Anders Nyström, President & CEO]

Yes, we do have a business case, but we haven't disclosed the savings. So that will be wrong on me to do that in this call.

[Mats Liss, Equity Research Analyst]

But there will be -- I didn't get it when this is in full swing and when it's sort of -- you're able to...

[Anders Nyström, President & CEO]

2023 is our ramp-up year. So we'll start producing early 2023, that will gradually face production from our supply base into the Rad plants during 2023. So that's the ramp-up here.

[Mats Liss, Equity Research Analyst]

Yes. And just coming back to the Kenneth's question there about sort of price increase cost [indiscernible], it seems that -- I mean, you have implemented price increases and the costs are continue to increase. But do you expect the margins to be squeezed also? Or is it more a same level as in the fourth quarter?

[Anders Nyström, President & CEO]

Well, it's -- as you know, since we have a time lag as long as steel prices are continuing to rise, we will have a disadvantage and that will be turned when steel prices go down. And -- so as long as it goes up, we'll have a pressure on the margin there.

[Mats Liss, Equity Research Analyst]

Okay. And finally, just about the production -- well, how much -- what the run rate do you expect to see compared to the fourth quarter, will it sort of increase there in first part of the year? Or is it sort of on a stable level?

[Anders Nyström, President & CEO]

You mean customer production?

[Mats Liss, Equity Research Analyst]

Yes, your sort of production serving just the customers of course.

[Anders Nyström, President & CEO]

Yes. The only thing we know is that we have the same pattern of volatility as we've seen actually since quarter 2 of last year, when it's somewhat unpredictable. And it's all supply chain issues and COVID-related absentee issues in the customer plans. And we were hit by reductions and replanning at pretty short notice. So we're managing that through being flexible and we're keeping a very, very close eye and very close contact with our customers so that we minimize the disruption in our own facilities. But it is pretty much the same situation with regards to volatility now as we saw in quarter 4 last year.

[Mats Liss, Equity Research Analyst]

Okay. And just a final one. I mean when steel prices maybe start to come down a bit, do you expect to sort of keep the cost advantage there? Or is it -- I mean -- or is it similar -- I guess it's similar situation. I mean the clauses in the contracts work both ways. So it's 3 to 6 months advantage for you, that's...

[Anders Nyström, President & CEO]

Yes, that's true.

[Operator]

And as there are no further audio questions, I'll hand it back to the speakers.

[Ulrika Hultgren]

No further questions here.

[Anders Nyström, President & CEO]

So okay. So if there are no more questions, then I just thank you for your interest, and thanks for listening in. And again, I'll welcome you to our Capital Markets Day on February 22.