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Edited Transcript of BUFAB.ST earnings conference call or presentation 11-Feb-20 9:00am GMT

Full Year 2019 Bufab AB (publ) Earnings Call

VARNAMO Feb 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Bufab AB (publ) earnings conference call or presentation Tuesday, February 11, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jörgen Rosengren

Bufab AB (publ) - President & CEO

* Marcus Andersson

Bufab AB (publ) - CFO

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Conference Call Participants

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* Robert Redin

Carnegie Investment Bank AB, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the presentation of the Q4 results conference call. (Operator Instructions)

I must advise that this conference is being recorded today, Tuesday, 11th of February 2020. And I would now like to hand the conference over to first speaker today, Jörgen Rosengren. Thank you. Please go ahead, sir.

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Jörgen Rosengren, Bufab AB (publ) - President & CEO [2]

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Thank you, and good morning, everybody. My name is Jörgen Rosengren, and I am the CEO of Bufab. Welcome, also, everybody, to this conference call presenting the fourth quarter 2019 results. I am here together with our CFO, Marcus Andersson, who will be handling part of this call. And we will be referring throughout the call to a PowerPoint presentation, which is available on our website, www.bufab.com, Investor Relations and to the page numbers. We'll start on Page 2, which is called Q4 2019 in brief.

In the last quarter of 2019, we had, as in previous quarter of the year, good sales growth, 16%. But all of that sales growth was acquired, we recorded in the quarter a minus 5% organic growth, which was lower than previously end year. However, the order intake exceeded net sales by a small margin.

The low growth -- low organic growth in the quarter was primarily due to the lower underlying demand, but it was also affected by longer than usual production stoppages at our major customers over the week of the holidays, Christmas and New Year's. And also, we judge according by inventory effect at our major customers.

The operating profit in the quarter was unchanged, if adjusted for the acquisition cost of SEK 9 million, which we had in the quarter, but the operating margin, however, was down very sharply and to an unsatisfactory level. And the deterioration of the operating margin was mainly due then to the low demand previously mentioned.

In our 2 segments, in the segment International, we have rather a sharp decline in the profit and the operating margin compared, however, to a strong fourth quarter of 2018. And this decline was due to negative organic growth to unfavorable business mix, especially in one of our subsidiaries in that segment and also to insufficient sourcing savings relative to our plans.

In Sweden, we had a slight operating profit increase, which is good. However, it was compared to a rather weak quarter in Q4 2018. The increase in itself, however, is due to the acquisition made in Bufab Sweden in 2019 and also partly to an acquisition in 2018 and also at a good cost control managing them to maintain margins relatively stable on an organic basis despite negative organic growth.

We had strong cash flow in the quarter, and that concludes the year where every quarter had a good cash flow and the full year cash flow was a little bit more than double, actually, the cash flow we had in 2018, which is good.

Now looking ahead, of course, we are continuing to focus on sourcing savings, and we believe the market is quite favorable for it as well. But overall, low demand in the industry and the world leads to, of course, low utilization in our suppliers and also to low raw material prices. And therefore, we are quite confident in our ability to secure further sourcing savings.

We have also, since the second quarter of last year, again, running on efficiency program globally in our group. And in this last quarter, we have intensified it and also quantified it and are now aiming for a total of SEK 40 million of OpEx savings on a full year basis, which will in turn to show a full effect of in the fourth quarter of this year, 2020.

After the end of the quarter, we have also announced a new organization, which I will get back to later on this call, aiming at more focus on growth internationally, but also on more operational focus on our individual subsidiaries. An important step for Bufab in the fourth quarter of 2019 was also a very strategic acquisition of a company called American Bolt & Screw in North America. This acquisition comes after a long period of search for a good partner for us in the U.S., which we can then use in order to accelerate the growth with our global customers in North America. The acquisition is also sizable. The turnover of last year was approximately SEK 500 million with a 11% EBITA margin.

And as part of the communicate for the full year results, we are also communicating that our Board is proposing to our annual general meeting and increase dividend by SEK 0.25 to -- let me see now, it's SEK 2.75.

So that concludes the headlines of the quarter. I would like now to hand over to Marcus Andersson to take you through the financials for the group and also for individual segments. And we turn then to Page 3 of this presentation. Please, Marcus.

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Marcus Andersson, Bufab AB (publ) - CFO [3]

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Thank you very much, Jörgen. By starting going through the financial highlights of the group on Page 3. You can see that order intake increase was 17% compared to the previous year. Net sales increased with 16%, mainly driven by the acquisition of HT BENDIX and American Bolt & Screw. Organic growth was actually minus 5% in the quarter. The underlying demand was lower, but the market share seems to be somewhat higher.

If you look at the gross margin, we can see that the gross margin decreased or declined to 26.4% as compared to 28.51% in the comparable quarter. But adjusted for acquisition, the gross margin was actually 27.2% compared to 28.1% quarter-over-quarter. The organic decline was mainly attributable to 4 products -- sorry, business mix in segment International and also a lower level of capacity utilization in our manufacturing companies, mainly in segment Sweden, also had a negative impact on the gross margin. While price increases and purchase savings provided a positive contribution to gross margin.

If we look at the OpEx, we can see that the quarter was charged with acquisition costs of SEK 9 million, as Jörgen just said. Adjusted for those, the share of operating expenses actually declined to 19.1% compared to 19.6% previous year. Of course, this key figure was negatively affected by low organic growth, but positively by lower share of operating expenses in acquired companies.

Also during the quarter, we saw the first result of the group-wide efficiency program that was launched in the third quarter and is now being intensified. All in all, the operating profit, EBITA declined to SEK 73 million equal to a margin of 7.5%. But as said, adjusted for acquisition cost of SEK 9 million, the operating profit was SEK 82 million, which is exactly the same as the comparable quarter of 2018.

If you take a look at the EBITA bridge in the lower left corner, you can see the currencies added about SEK 2 million to the EBITA; volume, minus SEK 18 million; price/cost/mix/other, plus SEK 4 million; and acquisition excluding acquisition costs, added about SEK 12 million making the EBITA from continuing business basis to be the same as previous year, SEK 82 million and then also after acquisition costs of SEK 9 million, making the EBITA as reported and at SEK 73 million.

If you turn page to Page 4, we can now see that in this quarter actually had negative growth. If we look back, the other 24 consecutive quarters or actually 25 consecutive quarters, we have seen good growth, both organically and through acquisitions. And even though we had a negative growth in the fourth quarter of 2019, as you can see, the acquired -- the acquisitions we have made helped up quite a bit. So the total growth ended up on almost 16%.

If we take a look on the right graph, you can also see that we have had a strong net sales development, just as the left graph shows for more or less 26 consecutive quarters. The EBITA development, however, has been a bit bumpy you can say mainly back in 2014, '15 due to negative currency effect, mainly weak Swedish krona and also due to the raw material price increase back in 2017.

In Q4 2019, the full decrease of the EBITA is actually related to those SEK 9 million in acquisition costs. So except those, we are flat compared to the comparable quarter, so to say. But of course, our ambition is to continue the good historic year-on-year track record when it comes to the EBITA development.

If we turn to Page #5 and take a look at segment International. We can see that segment International had a good order intake in the quarter. Net sales was up about 9% to SEK 699 million. Organic growth also in International was minus 5%. Underlying demand was considerably lower, but the market share seems to be slightly higher compared to corresponding quarter of last year. The gross margin was 28.8% compared to 30.6%, and the decline is mainly due to a forward business mix than in the strong comparable quarter of 2018.

If we take a look at the OpEx, we can see that our share of operating expenses increased during the period, which was mainly attributable to low growth and investments made in Leadership 2020. The review of the cost base for the focus of addressing potential lower growth in the future quarters was intensified. Due to the core mix and higher share of costs, the operating profit EBITA declined to SEK 55 million compared to SEK 68 million, which equals a margin of 7.8% compared to 10.6% in the comparable quarter.

If you take a look at the EBITA bridge on the lower right corner, we can see that currencies added about SEK 4 million. The low demand affected volume by minus SEK 13 million. Price/cost/mix/other, minus SEK 10 million and acquisitions added about SEK 6 million in acquisitions, in this case, it's American Bolt & Screw.

If we turn to Page 6, we can also, in segment International's case, see that we have negative growth of sales, but total growth ended up on 9%. And as you can also see, even though we had negative growth in this quarter, we have had a really good track record, 26th consecutive quarters of growth.

If you look at the right graph, you can also see that growth, as said, year-on-year has been really good in segment International, but also EBITA development has been strong, but has been decreasing the last 2 quarters, mainly due to unfavorable business mix and investments made in Leadership 2020 initiatives.

If we turn to Page #7 and take a look at segment Sweden, we can see that segment Sweden had an order intake that was more or less in line with net sales. Net sales, on the other hand, rose by about 32% to SEK 424 million, and the increase in segment Sweden's net sales is fully attributable to the acquisition of HT BENDIX.

Organic growth was minus 5%, and those 5% was achieved mainly due to lower underlying demand and the market share, it seems to be unchanged compared to the comparable quarter. The gross margin declined to 23.5% compared to 25.1%, adjusted for the acquisition of HT BENDIX, the gross margin was 24.9% compared to 25.1%. The organic decline was mainly attributable to lower capacity utilization in the segment's manufacturing companies relative to comparable quarter, which was driven mainly by the low demand in the quarter.

If we look at the operating profit, we can see that EBITA increased to SEK 29 million compared to SEK 28 million, corresponding to a margin of 6.8% compared to 8.7%, the comparable quarter. And if we also take a look at the EBITA bridge on the lower right corner, we can see that currencies affected with minus SEK 2 million; volume with minus SEK 5 million; price/cost/mix/other, plus SEK 1 million; and acquisition mainly HT BENDIX contributed with plus SEK 7 million.

If we turn to Page 8, we can see that we also have negative -- in the left graph, we can see there's also a negative growth in segment Sweden net sales, but given the acquisition of HT BENDIX, the total growth came in on a strong at 32%.

Also, segment Sweden have had -- have shown good growth rates, not only total growth, but also organic growth in the last 15 quarters. If you look at the right graph, you can see that net sales level is going in the right direction since more or less 2015, so a good growth phase. The EBITA development has been quite bumpy, mainly due to the reasons explained under the group's financial development, namely big Swedish krona during 2015, '16. Raw material price increases during 2017 and the weak Swedish krona, you can say, during 2018 and '19.

That was the financial highlights for the group and the 2 segments, and I leave the word over to you, Jörgen, to talk about Page #9.

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Jörgen Rosengren, Bufab AB (publ) - President & CEO [4]

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Yes. So we're turning now to Page 9, I will speak a little bit about the challenges and opportunities that we're seeing in this now somewhat weaker markets than we've had in the past few years, at least. It's part of Bufab business and business model to be able to respond to the organic growth changes that occur in the industrial environment.

We were last -- we suppose -- I guess back in 2015 or so exposed to a rather weak organic growth, and we will do now with what we did then, and which is to try to adjust our cost base to the weaker underlying growth. But to do so, mainly using efficiency measures and, thereby, be able to continue to invest in our leadership strategy.

The internal efficiency measures that we're making now are being helped actually not to small extent by the investments that we have made over the past several years in our digital infrastructure and in making many of our manual processes, digital. Also the interfaces with our customers and suppliers are now increasingly digital rather than manual. And all that helps us to be able to continue to increase our efficiency and thereby have room also for further investments in leadership.

In a weaker market, however, there are also very strong opportunities. Firstly, our customers are much more focused on efficiencies in weaker markets, and they also have time to work on it, and that creates new business leads. Our suppliers have less work, and that means that they are more easier to deal with when it comes to price of the service. And we're also seeing some competitors who are in big trouble, who does, of course, create business opportunities in the market as well.

But we also think that this kind of market climate generates more acquisition candidates with which we can handle potentially quite good for Bufab. We talked a lot on this call on our gross margin. Part of the reason for that is that we're not happy with it, and I'll get back to that. But first, to clear up, the effect of the acquisition, as you can see on Page 10, the gross margin for segment Sweden for the group with and without the effects of the acquisition of primarily HT BENDIX. HT BENDIX has a lower gross margin, but a comparable operating margin as the rest of the group.

And as you can see, the gross margin development in segment Sweden took a step down in the middle of last year, but since then has been stable. It is, of course, however, our ambition to improve the gross margin during this year, both for segment Sweden and for the group, and the main tools we are going to use for that are the sourcing savings I spoke about earlier.

To wrap up this section about the finances, I guess, it's also good to take a broader view on the development. And if you then turn to Page 11, we can see our EBITA development over the past 1, 2, 3, 4, 5, 6, 7, 8 years. And as you can see, this year, 2019, that we are now talking about was the fourth year in a row, where we received -- where we achieved an all-time high, both sales actually and EBITA. And we have developed our EBITA by about 13% here since 2012 and by about 18% a year since 2015. So overall, long term rather stable and good development, which we, of course, intend to continue also going forward.

On Page 12, some information about the new organization, I spoke about earlier. We have adjusted our organization in order to both support growth and also efficiency. Firstly, we moved from 2 to 4 operating segments. The segments we are currently reporting in Sweden, International have been in place since 2013, and now we're affecting this with -- and also our increase in International scope and reach with 4 -- 2 geographical segments called West, Northeast, covering Eastern Europe and also Asia Pacific, and then from the U.K., U.S.. Within these segments, we are changing from previously 6 regions to 10 business units. And the purpose of that is to increase the focus on growth opportunities, but also on operational improvement for every subsidiary and to allow for future scalability.

And finally, as we spoke about, we have launched already in the middle of last year an efficiency project, which we are now both intensified and quantified. And we expect that this would yield savings of SEK 40 million on a full year basis and the total savings will be probably visible from the fourth quarter of 2020. And neither the efficiency project or these organizational changes are expected to generate any significant restructuring costs nor have they generated any significant restructuring costs in 2019.

On Page 13, an overview of the acquisitions we made in the past years, now 9 of them since 2014 for approximately 2 years. And the latest and one of the largest thus far, I guess, the largest, is the acquisition of the company, American Bolt & Screw we made in North America in November, which helps our strategic footprint on that continent and adds about SEK 500 million of net sales with a good profitability.

Turning then to Page 14, Marcus, would you like to comment on the EBITA bridge?

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Marcus Andersson, Bufab AB (publ) - CFO [5]

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Yes. I will not go through it in every detail, but I will focus on the group. As said, if we take a look on the quarterly figures for the group, as I said, we see that currency affected the EBITA with plus SEK 2 million due to the low demand we saw volume -- the lower volume decreased the EBITA with SEK 18 million, price/cost/mix/other add about SEK 4 million and acquisition of HT BENDIX and American Bolt & Screw, excluding those SEK 9 million in acquisition costs contributed with SEK 12 million.

So EBITA, quarter-to-quarter, is unchanged to those SEK 82 million. Acquisition costs, as said, was SEK 9 million. So EBITA, as reported, ended up or came in on SEK 73 million.

If we look at the full year figures, we can see that currency added about SEK 5 million to EBITA; volume is plus SEK 19 million; price/cost/mix/other, minus SEK 23 million; acquisitions, which in the full year figures, actually relates to also Rudhäll Industri added about SEK 28 million; and total acquisition cost for the year was minus EUR 12 million. So EBITA Q4 2019 as reported ended up on SEK 385 million.

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Jörgen Rosengren, Bufab AB (publ) - President & CEO [6]

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Okay. So let me then try to summarize the year of 2019. First, on the fourth quarter, I guess, a very short summary. The operating profit was unchanged for the ongoing business, but the margin was quite unsatisfactory for the reasons that we have gone through now. I am now on Page 15 of the presentation. The full year of 2019, we recorded a very important step forward for Bufab. But obviously the margin needs to improve. We saw a very good growth in a quite a challenging market, actually, and that was partly due to acquisitions and partly also due to our improved market share. And we did show very good progress in our leadership initiatives. It would take a little bit too long to go into all of them now, but on many fronts, we are moving forward there and strengthen Bufab's long-term competitiveness.

We made 2 large acquisitions, which help us have a stronger offering to our customers and which increased our International reach in a very good way. And we recorded an all-time net sales and all-time operating profit both at [24% and] (inaudible). For this year, 2020, our priorities are: number one, to have even our focus on new business generation, which we think as said before, will be helped by the market conditions. We are going to focus on improving our profits and that involves mainly sourcing and OpEx savings when it comes to organic improvement and then also, of course, to safeguard a very good contribution from our 2 recent sizable acquisitions.

How we intend to continue investing in building our leadership platform according to our established strategy, which has proven, we think rather successful so far.

And with that, that concludes the comments that we had prepared for the fourth quarter of 2019. So operator, please, if there are any questions, now it's a good time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your question comes from the line of Robert Redin.

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Robert Redin, Carnegie Investment Bank AB, Research Division - Research Analyst [2]

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Just a small detailed question. I found this in the EBITA bridge, the volume impact in International SEK 13 million negative, it sounds like a big number sort of in the quarter given the organic drop. Was there something extraordinary there or am I wrong?

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Marcus Andersson, Bufab AB (publ) - CFO [3]

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Robert, you're hard to hear. Robert, good morning. I took the question to be this that you saw a negative volume effect in segment International minus SEK 13 million in the quarter, and you're asking what caused it? Is that correct?

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Robert Redin, Carnegie Investment Bank AB, Research Division - Research Analyst [4]

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Yes, exactly. It sounds like a big number to me.

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Marcus Andersson, Bufab AB (publ) - CFO [5]

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Yes. Well, it's more or less directly related, I think, to the 5% of organic negative growth that we have. So as you can see, that 5% translates into 5% negative for Sweden and SEK 13 million for International. And International is about 3x as big as Sweden. So it's related to that basically to the 5% organic.

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Robert Redin, Carnegie Investment Bank AB, Research Division - Research Analyst [6]

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Okay. Okay. Perfect. Also, on acquisitions, I mean, you get the numbers now so you see how much they add to basically sales and earnings. How are those developing? I think maybe the addition in Sweden from acquisitions to EBITA is a bit smaller than what you could have expected?

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Marcus Andersson, Bufab AB (publ) - CFO [7]

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Yes. I think that's a fair assessment. The company that's acquired in Sweden last November, I think, Rudhäll Industri is consisting about 50/50 manufacturing and trading. And -- especially the manufacturing part of that company is more exposed to -- it's basically more cyclical than the rest of the business group so more exposed to short-term swings in the demand, especially when it comes to margin because of the fixed cost nature of such an operation. We've also had, as we mentioned earlier in the call, rather low utilization, both in that -- in those companies and also in our -- previously, the companies in manufacturing that we previously owned, right? So in manufacturing, our experiences, when this kind of volumes then come then the customers reducing them to have reduced deliveries, especially once ahead of the year-end for cash flow purposes. And that, of course, impacts the manufacturing entity harder than the trading entity.

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Operator [8]

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(Operator Instructions) There are no further questions. Please continue.

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Jörgen Rosengren, Bufab AB (publ) - President & CEO [9]

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Okay. If there are no further questions then I'd like to thank everybody for attending this morning's call, and I wish you a nice day going forward. Take care and goodbye.

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Operator [10]

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That does conclude our conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.