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Edited Transcript of BULTEN.ST earnings conference call or presentation 24-Oct-19 1:30pm GMT

Q3 2019 Bulten AB Earnings Call

GOTEBORG Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Bulten AB earnings conference call or presentation Thursday, October 24, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Nyström

Bulten AB (publ) - President & CEO

* Helena Wennerström

Bulten AB (publ) - Executive VP & CFO

* Kamilla Oresvärd

Bulten AB (publ) - SVP of Corporate Communications

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Conference Call Participants

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* Mats Liss

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Kamilla Oresvärd, Bulten AB (publ) - SVP of Corporate Communications [1]

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Hello, and welcome to Bulten's 2019 Q3 Presentation. My name is Kamilla Oresvärd, Senior Vice President, Corporate Communications. Presenting the report are Bulten's President and CEO; Anders Nyström; and our Executive Vice President and CFO, Helena Wennerström.

(Operator Instructions) Please go ahead, Anders.

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Anders Nyström, Bulten AB (publ) - President & CEO [2]

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Thank you, Kamilla. The agenda for today will be a brief overview of Bulten, developments in our market, the results for the third quarter and some comments about the future.

So if you turn to Page 3. Bulten has a lean and well-positioned operation with a global presence. We can offer local content in Europe, U.S., China and Russia, which is unique in our competitive set. We balance our production between approximately 40% outsourcing, 60% in-house production and can thereby be flexible and cost efficient.

Page 4. Bulten has many customers with potential for further growth when consolidation and need for strong FSP suppliers will be required to assemble cars and engines the most cost-efficient way.

Cars are the main fasteners market within automotive, and it's also true for Bulten. Bulten's 3 largest customers are Ford, JLR and Volvo cars.

Now some words about the market development. If you turn to Page 6. As we comment in our report today, the demand has continued to be weak also in the third quarter of 2019. In Europe, the market is down 1.3% year-to-date. In China, the decline has been greater. But in Europe, also, it's impacting European suppliers as well as some suppliers are still exporting parts out of Europe into China. This is due to several factors. The economic situation and also concerns about Brexit, and especially in the U.K., where there's been a lot of uncertainty around that and also the general uncertainty in the European economy.

Turning to Page 7. If you then look at production of cars in Europe during quarter 3, the most relevant statistics for Bulten, LMC reports a clear drop. This is, of course, a result of lower sales, but also a result of lower export of cars to other continents out of Europe, further WLTP emission regulations in several European countries and the uncertainty for Brexit also effects. LMC Automotive is reporting a forecast for the full year 2019 for light vehicle production in Europe a minus 2.3%. Heavy commercial vehicles is forecasted to grow 0.6%, which with Bulten's mix, a forecasted market decline of 1.9%.

The LMC forecast has been lowered since the quarter 2 report with influence from Brexit. ACEA reports for the European light vehicle sales that it will be down, minus 1.6% for the first 9 months. In September, they also reported that the demand for new passenger cars increased by 14.5% compared with the same month a year ago, and this is the result of a very weak September last year.

Turn to Page 8. Production of cars, as we said, is the relevant statistics for Bulten. In the longer perspective, LMC Automotive estimates a bounce back for production of light vehicles in Europe in years to come, with an increase of 1.6% in 2020 and 2.3% in 2021. Similarly, for heavy commercial vehicles, they estimate an increase of production of 1.1% for 2020 and 5.4% in 2021.

Now switching to Page 9. Some words about our market and position. Bulten's market share was 18% during 2018 in Europe. We have defended our position as a leading FSP supplier very well and increased our market share with 5 percentage points from 60% to 65% in 2018.

Now over to Helena for the financials.

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Helena Wennerström, Bulten AB (publ) - Executive VP & CFO [3]

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Thank you, Anders. Page 11, operational highlights. Bulten show sales of SEK 718 million in the quarter, down 0.6% compared to the same quarter last year. And our EBIT amounted to minus SEK 8 million, a clear drop from previous earning levels. But as we have communicated in the press release previously, this is due to relocation costs related to the move of production in China and by the restructuring in Bergkamen in Germany. Adjusted for these, we have an adjusted EBIT of SEK 19 million.

Moreover, there also is a lower production rate and affect the volumes, but mainly by our efforts to reduce stock, which had a negative impact on earnings during the quarter were approximately SEK 18 million. We will explain this more in detail in a couple of minutes.

In August, Fredrik Bäckström was appointed to be the new Senior Vice President of Production, and he will take up the position on December 1 and be a member of the executive management team. And Fredrik succeeds Jörg Neveling who will retire on October 31, 2019.

Page 12. One comment on the net sales and order intake. Sales for the quarter were down 0.6%, and adjusted for currency, the sales were down 2.8%. Also, our newer contracts have had a slower ramp-up than expected in pace in Q3.

Looking at the order intake, it was up 7.3%. However, the uncertainty about the economic situation and the outcome of Brexit makes the development in coming months difficult to predict. This could also affect the production rate for the fourth quarter and ongoing adaptations are being made in both purchasing and production.

Page 13. Now back to our earnings performance. Our EBIT margin for the third quarter amounted to minus 1% compared to 5.2% comparable quarter last year, and the earning levels are explained by the restructuring in Bergkamen impacted by the company earnings by SEK 20 million. Moreover, we had a relocation cost of SEK 7 million related to the move of production in China. But this is also explained by a lower production rate. According to plan, this has resulted in a reduction of stock, but also lower utilization of the production units capacity and thus an under absorption of fixed costs. Reduction of production to the demand impacted the company's earnings during the prior quarter by approximately SEK 18 million.

Operating margin, excluding for relocation and restructuring costs, ended up at 2.8%. Looking at the year-to-date operating margin adjusted for the restructuring relocation costs, it came in at 4.6%.

Page 14. Now some add on comments about our stock efforts the last quarter. As you can see in the graph, our stock in relation to sales gradually increased from Q3 2017 to Q1 2019. And this is partly due to create high readiness for our ramp-up of new contracts in the last year quarter also in combination with a slower market and our preparation for relocation in China and Brexit.

In the first Q1 report in 2019, reflect for our efforts to take down the stock level and to release working capital, and we have managed to do so during the second quarter with approximately SEK 15 million. And during the Q3, we have managed to keep the stock level on the same level as Q2. Volume reduction has shortened the effect and counted in the impact of stock reduction measures to some extent.

Page 15, the total cash flow from operating activities before changes in working capital amounted to SEK 38 million, and that's mainly been affected by operational results, including relocation and restructuring costs and a higher paid tax. The quarterly cash flow from operating activities after changes in working capital amounted to SEK 114 million and that's mainly in addition to the operating result which was affected by a positive effect of change in working capital with SEK 76 million. And the main reason is change in current receivables.

Cash flow from investing activities amounted to minus SEK 84 million and we have a high investment level as announced earlier. And our investments in efficiency continues as we aim to become the industry's most cost-effective fasteners manufacturer. The cash flow for the quarter amounted a total to minus SEK 27 million.

Page 16. We have a return on capital employed of 6.4%, mainly affected by the profitability level and the higher investment level, but also by the effect of implementing the new accounting principles, IFRS 16. And if you exclude the financial lease accordingly, we end up 6.7% -- at 6.8%. And if we also adjust for restructuring and relocation costs, we end up at 8.7%.

Our reported return on equity amounts to 4.8% and capital turnover times was down to 1.6x, which is lower compared to the full year 2018, mainly due to the same reason as earlier mentioned.

Page 17. In this line, we continue to give you some short guidance regarding some key figures for Bulten. And as always, these guidance are not to be considered financial targets. Average net working capital in relation to 12-month sales amounted to 26.6%, which is above our guidance and activities are ongoing to reduce that level. Capital expenditures as percentage of 12-month sales were on a level of 7.3%, an evidence of that we invest in future growth activities, and these investments will, however, improve Bulten's production efficiency even further.

Depreciation of 3.2% of 12-month sales, excluding IFRS 16 financial lease, is somewhat in line with our guidelines. And our average tax rate was 35.3% rolling 12 months, which is above our guidelines and the high tax rate is caused by relocation costs and negative results in China for the period. And these circumstances have an overall impact on the tax calculation for the quarter. However, the tax rate will vary from quarter-to-quarter.

Page 18. Now some comments about our key -- financial key ratios in relation to our financial targets. In this perspective, we are looking at the figures, excluding the lease liabilities and restructuring and relocation costs. Our rolling 12-month sales are down by approximately 2.4%, but with our pipeline of contracts, we are in a good position to continue to take market shares going forward. Our profitability with an adjusted operating margin of 5.1% on a rolling 12-month basis is affected by our stock efforts short-term in a volatile market.

Adjusted return on capital employed of 8.7% is lower than our target due to lower profitability level and a higher investment level.

Now back to Anders again.

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Anders Nyström, Bulten AB (publ) - President & CEO [4]

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Thank you, Helena. Some final remarks about our focused agenda for the rest of 2019. This quarter has been impacted by our efforts to balance inventory by lower in-house production, restructuring in Bergkamen and relocation in China. These efforts will continue in the beginning of quarter 4. Even though we had somewhat weaker market last 2 months, Bulten has had a good pipeline of won contracts, which we have pointed out before.

We'll continue to secure efficient production, and this goes in Bergkamen, Germany as well as our plants in Poland, where we remain developing the land that we have purchased and we're in the final stages of finalizing that deal. The relocation in China develops according to plan.

As always, we aim to win new FSP contracts, and we continue to promote innovation and sustainability and to build on our already strong corporate culture.

And lastly, on Page 21. Most of you who have been on these calls before will recognize this slide. We want to underline that the pipeline of won contracts is still there. It's important to know. And you can also see that 2 of our last 3 business wins are for electric vehicles. Changes in demand driven by macroeconomic effects, positive and negative, will have an impact on this, but the contracts are there.

This concludes our presentation, and we're ready for questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have a question from the line of Mats Liss from Kepler Cheuvreux.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [2]

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Just looking at the, well, potential under absorption here in the fourth quarter, under absorption cost, should we expect that to be at a similar level as in the third quarter?

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Anders Nyström, Bulten AB (publ) - President & CEO [3]

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With the order intake being improved from the previous quarter last year, I'm not expecting that, that would be anywhere near.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [4]

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Yes. Good. That's my question. I guess, given the backlog of FSP contracts you have, could you give some -- I mean, you have -- you pointed out them at the last slide there, but and I guess, most of them will be fully operating here in the next couple of years. Do you see any delays or potential delays there given the slow -- well, growth and uncertainty affecting the car industry currently?

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Anders Nyström, Bulten AB (publ) - President & CEO [5]

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As we pointed out before, Mats, we had delays in the ramp-up of these contracts that were taken before. We see them coming on-stream. And I think that when you also see the order intake, it's a confirmation of these previously taken contracts being on-stream to actually ramp up. Whether there will be further delays, as you were asking, delays are, by its nature, oftentimes surprise us. But it is important to point out that when we see the increased order intake, it comes from these contracts. So that's what's coming on stream now.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [6]

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Yes. Good. Then, I guess, electric vehicles is a very interesting sentiment for you longer-term and previously you have indicated that electric vehicles increase the demand for fasteners. Do you sort of have the similar picture now or given that you have received a couple of contracts on electric vehicles?

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Anders Nyström, Bulten AB (publ) - President & CEO [7]

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As we've said before, the electrification is coming in 2 stages. Firstly, you have hybridization, which basically adds a powertrain to the vehicle. So there's a combustion engine and an electrical powertrain and that, of course, is a great opportunity for us. And that's the big volume right now. Everybody's sort of offering hybrid variance of their current vehicle platforms. When it comes to pure electrical vehicles, they are still very immature in their concepts. The first ones that we see that we've also won contracts for, certainly contain more fasteners than a classic combustion engine platform. So that can be confirmed. Now what we need to do is to closely follow the technical development of the coming electrical vehicles to understand sort of if that's still the case and what they look like and what requirements will be on our products, and we're working closely with the customers to stay on top of that.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [8]

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And then maybe a bit of a follow-up regarding you mentioned that the orders were improving here and should we take that as an indication that we will sort of run production at a higher rate during the fourth quarter and maybe not close down so much for the holidays and so on? Or is it too early to say?

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Anders Nyström, Bulten AB (publ) - President & CEO [9]

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Well, the order intake will, of course, have an impact on our production as well as the sales. Now we know that the market is still volatile. We know that there will be factory close-downs in November in anticipation of Brexit and it's a holiday season that's coming up, which is probably the most volatile of the whole year. So we don't know until we get there, but indications are good.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [10]

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And finally, you mentioned Brexit there. And I guess, well Ford has a quite substantial engine factory there in the U.K. And is it anything you can do to prepare for a, well, maybe a hard Brexit?

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Anders Nyström, Bulten AB (publ) - President & CEO [11]

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We have prepared for quite some time. And part of the ramp-up of the inventory that you saw already in end of last year and beginning of this year, were actually due to being prepared for Brexit. So we're taking a number of actions in order to be prepared not only on the inventory side, but also on the administrative side. So we know that we can handle any customs clearance documentation and things like that.

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Operator [12]

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And there are currently no further questions registered on the telephone lines.

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Anders Nyström, Bulten AB (publ) - President & CEO [13]

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Thank you, and I apologize for my voice today but thanks for your patience.

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Operator [14]

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And this now concludes the conference call. Thank you all for attending. You may now disconnect your lines.