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Edited Transcript of BUFAB.ST earnings conference call or presentation 25-Oct-19 8:00am GMT

Q3 2019 Bufab AB (publ) Earnings Call

VARNAMO Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Bufab AB (publ) earnings conference call or presentation Friday, October 25, 2019 at 8:00:00am 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 -- sorry, presentation of the Q3 results conference call. (Operator Instructions)

I must advise you that this conference is being recorded today, Friday, the 25th of October 2019.

I would like now to hand over the conference to your speaker today Mr. Jörgen Rosengren. Please go ahead, sir.

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

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Thank you, operator. My name is Jörgen Rosengren, I'm the CEO of Bufab. And I have with me, Marcus Andersson, Bufab's CFO. And thank you, all, ladies and gentlemen, for joining this presentation of our third quarter 2019 results, which were released this morning at 7:30 a.m. CET.

Throughout this conference call, we will be referring to a PowerPoint presentation, which is available on our corporate website bufab.com in the Investor Relations section. And there will continue to be referrals to page numbers in that presentation.

So let's start out and summarize the third quarter, a quarter where we had, despite slightly tougher market conditions, good growth and good profit growth and in fact an excellent cash flow. The growth on the top line, to start with, was up 17%. The market itself, the underlying market that we refer to, was slightly weaker than in the second quarter and in the first half and also slightly weaker than in the third quarter of last year.

It was a noticeable slowdown sequentially, but more of a flattening out than falling off a cliff. And that is also noticed in the order intake development, where the order intake in the quarter was in line with net sales. Usually, if there is a very strong net slowdown we see a stronger slowdown of the order intake in the sales, but that was not the case in this quarter. So slowdown but not quite.

As a result of this, we had only slightly positive growth and it was then driven by increased market shares. So although, the market was slightly down, we were able to compensate for that with increased market shares and achieve a very slight positive organic growth.

The rest of the growth was made up primarily by acquisitions. We've made 2 acquisitions since the third quarter of last year, and both contributed well to the result development and of course, also to sales.

Turning then to profitability. Our operating profit was up 10%, and our net profit was up approximately 15%, if I remember correctly. And that was compared to a relatively strong quarter 3 in 2018. Looking down the P&L, we had a slightly lower gross margin, but we also had a lower percentage of operating costs, and this was -- both these key ratios were influenced also by the acquisitions, both of which have a slightly different profile in that respect.

The operating profit, however, in money terms, increased. And the main contributor to that were in fact these 2 acquisitions that we had made relative to our segments. In our segment International, we had organic growth. But the operating profit was slightly down over strong comparables Q3 2018. And in Sweden, by contrast, we had negative organic growth. But the operating profit was up quite a bit, mainly due to acquisitions but also as a result of good cost control in face of adversarial markets.

As I said before, the contribution from our acquisitions was quite good in the quarter, and we do continue to work on our acquisition pipeline, which is -- which looks quite okay in fact. We think that there may be possibilities for more acquisition candidates coming online in this current market climate, and that's, of course, something that we'll also capitalize on.

We had in the quarter and also year-to-date a very strong cash flow. It's a little bit easier to achieve that, of course, in a low growth environment. Plus it's also quite good for us because it means that we get helped with financing the recent acquisitions from our operating cash flow. And our focus is unchanged, in fact, going forward. We're focusing on share gain, as we have been for the last many years now, at least since 2012. And we hope to be able to continue that. We are focusing on implementing our leadership strategy. And there, we're focusing a bit more on the implementation of the initiatives and on generating results from the initiatives. But we're also looking into the many opportunities presented by strategic market climate at the same time as we're endeavoring to adjust our cost base to deal with this market climate.

So all in all, good results in the quarter in terms of sales, good result in terms of profit development. And unchanged strategy going forward is what characterized this quarter report.

Now I would like to turn over to Marcus Andersson, our CFO, who will take you through the P&L for the third quarter and for the year-to-date. Please, Marcus. So now we'll turn then to Page 3 of the presentation.

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

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Thank you very much, Jörgen. (inaudible) please turn to Page 3, and you will see the financial highlights for the group. As you can see, the order intake came in about 17% higher than last year, in line with net sales of same period.

Net sales grew with -- about 17%, mainly driven by lower demand, you can say, compared to the [previous] quarter, [following] increased market share gains. The gross profit came in at 26.7%, which is about 1.2% -- sorry, 2.1% lower than last year. The main reason for this is due to the acquisitions made in segment Sweden, namely Rudhäll and HT BENDIX, which have lower gross margin than the remainder of the group. But on the other hand, a comparable EBITA margin. So you should note that adjusted for these acquisitions, the gross margin was 28.1% compared to 28.9% last year.

If we take a look at the operating costs, the proportion of the operating cost declines during the period, mainly driven by the acquisition of Rudhäll and HT BENDIX. So actually, the organic share of the cost actually increased a bit. And this was mainly due to the low level of growth and measures implemented under our Leadership 2020 initiative.

We are looking through the cost level of the company, and we are focusing on cost control going forward. The operating profit increase was about 10%, but however, the EBITA margin went down was about 0.6 percentage points compared to last year. However, we experienced a really good cash flow of SEK 122 million as compared to SEK 50 million last year, which is, of course, very good.

If you take a look at the lower left corner, you can see the EBITA bridge from Q3 2018 to Q3 2019, and here you can see that currency affected the EBITA negatively by SEK 2 million, volumes positively by SEK 2 million, price/cost/mix and another negatively by SEK 4 million and the acquisitions of Rudhäll and HT BENDIX added about SEK 12 million to the third quarter results of the last year.

If we turn to Page #4, we can look at the graphs, including development of the group. We can now see that we have seen growth and not only growth but also organic growth for the last 25 consecutive quarters, even though we had low levels of organic growth in Q3 2015 and also in Q3 2019. The organic growth in 2000 -- in 2019 was just slightly positive.

If you look at the right graph, you can see that we have had really good development in general. If you look at the net sales development, the blue dotted line, really good development during the last 25 consecutive quarters. Also the historic development has been very good, but due a to lower gross margin in the period, together with slightly higher operating cost due to initiatives in mainly leadership, the EBITA margin was down compared to the comparable quarter.

If we turn to Page 5, and take a look at the financial development of segment International. You can see that order intake increase was about 2% compared to last year, and came in more or less in line with net sales. Net sales increased with 5%, whereof 2% was organic. The gross margin was down about 1 percentage point, mainly due to a weaker mix than the strong comparable quarter.

On the other hand, a slight positive development when it comes to OpEx, due to good operational leverage, which means that operating expenses in percentage of net sales was down slightly. If we look in the bottom row, due to the weaker development in the gross margin, the EBITA came in about SEK 4 million lower than the comparable quarter 2013 -- the comparable quarter 2018.

If you take a look on the lower right corner, you have the bridge for segment International. Currencies added about SEK 2 million, volumes added about SEK 5 million, price cost mix and other, minus SEK 11 million, and there were no acquisition in this segment during this quarter. So EBITA came in SEK 69 million.

If we turn to Page 6, we can now see -- you see that we have seen growth for 24 consecutive quarters, it's actually 26 consecutive quarters. If you look further back, not only growth but also organic growth, together with strong acquired growth during the last couple of years. And as you can see, on the right graph, segment International has had really good development, a strong development [in the third quarter] and an even stronger development when it comes to the EBITA improvement. But as explained earlier, due to a lower gross margin and -- but a slightly lower also OpEx margin, the EBITA margin was down from comparable -- compared to the last -- last year's comparable quarter.

If we turn to Page #7 and look at segment Sweden, you can see that the order intake increase was 57%, and came in more or less in line with net sales as well. All of the increase in both order intake and in net sales is attributed to the acquisition of Rudhäll and HT BENDIX. The organic growth was minus 4% in the period, the underlying demand and the market share is deemed to be unchanged in this segment for the quarter. The gross margin was down year-on-year, fully attributable to acquisitions. Adjusted for acquisition, the gross margin was actually slightly better, it was about 0.3 percentage point compared to the comparable quarter.

Good cost control has -- done, driven mainly also here by the acquisition of Rudhäll and HT BENDIX. But all in all, a strong addition to the bottom line EBITA of about SEK 6 million or an increase of 28%, even though the operating margin went down from 8.9% to 7.6%.

If you take a look on the right corner, right left -- right-down corner, you can see that the EBITA bridge closed on SEK 22 million, and currency added minus SEK 4 million, volumes minus SEK 2 million, price/cost/mix and other, plus SEK 5 million and acquisition of acquired companies added about SEK 7 million.

If we turn to Page 8, you can see that we come from a period where we have seen actually pretty good growth, both organically and through acquisitions in segment Sweden. But the last 2 quarters, we have seen negative organic growth. But however, we had good acquired organic growth except [one of these important] quarters. If you take a look on the right graph, you can see that growth-wise it's going in the right direction, good growth the last couple of quarters. When it comes to profit development, of course, it's a bit up and down in segment Sweden and has been mainly due to weak Swedish krona and also due to raw material prices historically. But as you can see, the profit is going the right direction, it's not really keeping up with the net sales development, but going the right direction. So of course, cost focus important going forward, but also we need to make sure that we actually realize those [financial] savings, which is [expected important] in segment Sweden going forward.

Due to the -- if you turn to Page 9, due to acquisitions, we have made the last couple of years, mainly Rudhäll and HT BENDIX, we felt the need to present how the organic development of the GP percentage has been during the last 4 quarters. And as you can see, if you look at the green line, which is segment Sweden excluding Rudhäll and HT BENDIX, you can actually see that we have been able to keep those gross margins on a pretty steady level, actually. But those companies, due to that they have a lower gross margin, affect the segments with at least 2 percentage points, even more in Q3 also adding Rudhäll, HT BENDIX. And you also can see on the right graph, which is for the group as a total. You can also see the effect, slightly down on the gross margin, of course, as I said, very much focused on purchase savings going forward. But as you can see, we have been able to keep it [incredibly] steady even though the challenges with weak Swedish krona segment Sweden.

So with that said, we can turn to Page 10, and I will leave the word to Jörgen Rosengren again.

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

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Okay. So it's clear for us that there has been a slight slowdown of the market. We have done -- [quite a bit of work done probably] what that means for us. And we see, in fact, some challenges, of course, with slower market growth rate than what we've been able to enjoy in '17 and also in '18 challenges and opportunities, and those are outlined on Page 10.

When it comes to the challenges, it's important to understand that it's very much a part of Bufab's business model to be able to navigate, both very strong market conditions and very weak market conditions. In strong markets conditions, we're typically faced with other challenges, such as ensuring supply to our customers, such as making sure that the organization is able to deliver high quality and high precision in a very high-demand situation. And those are some of the challenges that we've successfully navigated in the past 2 years.

Now however, we have a different set of challenges. First, of course, we do need to adapt our cost base to a weaker underlying growth. Fortunately, we were able to take market share. We have been able to take market share, and we certainly intend to take market share also going forward, which is a great (inaudible) in this. And therefore, we are not foreseeing wholesale cost cuts, but rather somewhat slight -- slower growth rate of the organization in the past -- than in the past 2 years in the next 12 months.

And that is important for us because we intend to continue to invest in Leadership 2020, albeit, with a slightly different focus, as I said before, now more on implementation and generating results. And as an example of this, we can mention our sourcing organization, which we have built up quite a bit now over the past 18 months or so and that's very timely because now it's a good time for the sourcing organization to generate good results, which I will get back to in a minute.

All of this taken together means that we are focusing more on internal efficiency. And that's something that we think is going to be helped by, and we now see the first examples of that is going to be helped by the investments that we have made over the past years in various processes and digital tools for improving the precision and efficiency of the internal work that we do. And that enables us, we think, to continue to invest in strategic areas, while slightly drawing down the spend that we have of time and money in areas that are more automatic or administrative in nature.

In this market condition -- in these market conditions, there are also many opportunities. Firstly, we see already now that customers are starting to become more focused on efficiency, whereas, in the last 2 years, they have been mainly focused on deliveries. Now they want to explore solutions to make their supply chains more efficient. And this, for sure, generates more business leads for us, which we then intend to capitalize on. We see that in our supplier bases especially in China but also in other places, there is now significant lower demand, driven, of course, by a slowdown, not least by the global automotive industry and not least by the European automotive industry, but also to some extent exacerbated by the tariffs imposed by the U.S. on imports from China.

And this lower demand, of course, creates for us very good opportunities to generate sourcing savings from our existing supplier bases, which we're now aggressively pursuing. We see that some competitors who are fortunate enough, are finding it hard to navigate this adjusted landscape. And we have also seen some first examples of some, especially, manufacturing companies with low margins, getting into difficulties or even failing, which, again, generates business leads for us.

And last but not least, perhaps, they're also finds that the current market climate generates more leads for acquisition candidates, which is, of course, also quite interesting for us.

Speaking of acquisitions then , turning to Page 11. We now count 8 acquisitions since 2014, in fact, since 2015, I believe. And the latest of them we made in July of this year, a company called HT BENDIX, which has sales of approximately SEK 500 million. So for us, one of the larger acquisitions and already a strong contributor to our results -- sales and results in this quarter. And we also are quite hopeful, actually, for the growth synergies that can result from combining the forces with HT BENDIX with our other forces in the Nordics. So that looks quite promising.

To summarize then the quarter, let's turn to Page 12. We have made an EBITA bridge, which is both the quarter and the year-to-date figures. Looking at the year-to-date figures, you can see that last year's EBITA was SEK 285 million. And this year's EBITA is SEK 311 million that's approximately 9% up. And that improvement is going to split more or less 50/50 between organic improvement of the EBITA and acquired improvement of the EBITA, where the acquisitions have generated 14 and the organic improvement has generated, and I suppose, 12 of the EBITA improvement.

We would not have minded a slightly bigger profit growth than this. But in the current market climate, we also think that we can be content with this as long as we are able to continue to invest in future growth for Bufab, which we are doing.

So to summarize and turn a bit to the outlook also, please turn to Page 13. This last quarter, the third quarter of 2019, was characterized by continued execution of our strategy, and we have also continued to invest quite significantly in our leadership initiatives, which we have explained elsewhere. There was a lower underlying demand, a lower market demand, and that was actually [as part] of both segments than earlier in the year. But the slowdown was, of course, a bit more in marketing segment Sweden, and that led to our organic growth, which was only a very small number, despite the fact that we continue to increase our market share.

However, it's important to note that the order intake was in line with net sales, which we find comforting and a sign that this is not a very dramatic change in the market climate. We have strong cash flow.

Looking ahead, we see a market situation that does bring some challenges, but also many opportunities, which I just spoke about. And therefore, our priorities going forward are unchanged from the second quarter. We are going to focus on continuing our market share gains. We are going to continue our investment in Leadership 2020, but we will focus now more on implementation and results, investment innovation. And as example of such results, we can see the sourcing savings that we consider to be possible now in the existing demand situation, but also internal efficiency. We need to capture the opportunities that are generated and not least on the sales side in this [type of climate --] market climate. And we need to make sure our cost does not outgrow our demand -- sorry, that our cost does not outgrow our sales growth.

We have actually quite good confidence in being able to generate good development also going forward in this current market situation. And with that -- that concludes our prepared comments. But -- operator, can you please open up for questions from the participants, if any?

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Questions and Answers

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Operator [1]

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(Operator Instructions) So the first 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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Two questions, if I may. There's lots of positives to take home for us, of course, the market share gains in International and the strong cash flow and the potential savings you see going forward. But I have 2 questions. One, focused on the negative, but -- the first on International, you talked about mix being, sort of, a negative in Q3. And I see that the price/cost mix in the EBIT bridge for International was quite sizable, sort of, negative number. So I wonder, what are the comparisons like looking into Q4, Q1 in International?

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Jörgen Rosengren, Bufab AB (publ) - President & CEO [3]

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That is just one question, Robert. Yes, in International, it's true that we had a tough comparable I think when it comes to gross margin. If you look over a longer time, you will see that the margin -- the gross margin that is, varies between the quarters but has had overall a favorable term in International over several years. But now was, of course, significantly down. But you have to understand that 1 percentage point in a particular quarter down is not -- it easily -- happens easily, so to speak, depending on the -- like in this case and the business mix.

And we did have a good quarter, Q3 last year. Looking ahead for International, I guess, the -- it's so that we don't make forecast for the gross margin, as you know, but it is definitely our ambition in International and in Sweden, by the way, to capitalize on the weaker demand situation in order to generate sourcing savings, which, of course, were intended to help the gross margin going forward. So even though we have what historically is a relatively good gross margin in International, our ambition is to, in fact, improve it further, all things being equal.

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

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Right. Okay. Cool. And the second question then would be on the profitability in the acquired units because, of course, you gave us EBIT pitch number for how much acquisitions contributed to EBIT. And it seems like, if I work out the numbers that maybe margins were 5 or something percent in the acquired units. Are there any one-off costs or something in this?

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Jörgen Rosengren, Bufab AB (publ) - President & CEO [5]

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No. I don't think it's correct to say that margins were 5% in the acquired units. Again, we don't give out [possible] numbers on acquired companies. But first, regarding the Danish acquisition, which is -- the Danish acquisition. It's important to note that it only affected 2 months out of the 3 in the quarter. So that may help you work that out. But it's so -- definitely that the -- while the Danish acquisition has contributed very well to the results in the 2 months that counted. We've had less favorable development in Sweden generally, of the margin, and that also involves this acquisition. So somewhat lower profitability down last year in that acquisition organically, if we put it like that. However, I think 5% sounds like a very low number. So I don't think that is correct.

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

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Okay. And finally, on the gross margins in Sweden, where you have seen a lot of headwind over the past couple of years. I saw that adjusted for the acquisitions, the gross margins in Sweden went up in the quarter. So how do you see that going forward? How -- are the actions...

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Jörgen Rosengren, Bufab AB (publ) - President & CEO [7]

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The graph, which -- yes, it's a good question. The graph which shows the adjusted margins then for the acquisitions, does show an organic improvement year-on-year. But we can, of course, not be happy with that because if you look further back in time, the margins were significantly higher. And we have had the ability to withstand this further decrease of the SEK ratio in this year, which has been quite noticeable. I don't know what the latest number is, but it's something like slightly below 10%, right? By price increases. But nevertheless, we still have some ground to recover relative to earlier years when it comes to gross margin. And that is definitely our ambition. If the ambition is to improve the gross margin in International by sourcing savings that is much more so the case, of course, in Sweden, where we have significantly lost -- significant lost ground to recover. So definitely, we are not happy with that gross margin level, and we do need to improve it.

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Operator [8]

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So there are no further questions at this time. Please, continue.

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

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Okay. If that's the case, then I'd like to thank everybody for attending this conference this morning, and wish you a good continuous Friday and a nice weekend. Thank you. 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 standby.