Hi everyone, and warm welcome to Bufab's Q3 report. My name is Erik Lundén, and I'm President and CEO of Bufab Group. Together with me here, I have Helena Hager, Acting CFO. This presentation will be recorded, and by attending to the meeting, you agree to the recording. I will start this meeting to go through our Q3 highlights, and then I will give the word over to Helena to take us through some financial details. After that, I will go through some regional highlights and some group news before we end up the meeting with sum up the quarter and the Q&A. If we start then with some highlights of the quarter. Overall, I am very pleased with our performance in the quarter. We continue to execute very well on our strategy, and it continues to give results.
Something that was very positive to see was that we finally got some organic growth, 1.4%, first time in two years, primarily driven by increased market shares. The market, though, contains uncertainty with the big variation depending on geographical areas and customer segments. Demand was still strong in energy, agriculture, and food, medical technology, and defense, but weaker demand in mobile homes, trailer markets, and also in construction and furniture. We ended up having a very nice gross margin in the quarter, record high on 32.7%, and we now have eight consecutive quarters of gradually improved gross margin. Our operating margin adjusted and ended up at 14.2%, which is actually in line with our financial targets for 2026. If we look then on our cost base, the underlying cost base was changed in the quarter compared to Q3 last year to adjust for one-offs.
I think we are good in managing our cost base overall, and we continue to invest in growth at the same time as we take good cost control throughout the organization. Something that was very nice to see in the quarter was some new customer projects across key segments like defense, infrastructure, and general industry. I'll come back to that. I am also very pleased that we managed to finalize the acquisition of Novia Group in early October, and I have also one slide on that later on. I will now leave the word over to Helena for some financial highlights. Please introduce.
Thank you, Erik. Let's look into the financial highlights, starting with the net sales. We can begin by noting a 2% increase in net sales in the quarter, bringing the total to SEK 1,917 million. Even more notable is that we can see a positive increase of 1.4% in organic growth, as Erik mentioned earlier. That is driven by our increased market share and also the impact of higher prices resulting from U.S. tariffs. The organic growth is also being driven by all regions, with the exception of Ireland and the U.K., which is of course positive, and with the Americas making the most contribution. The change in net sales is also influenced by a negative currency impact of 4.4%, and it's coming from the strengthening of the Swedish krona against most currencies, but especially the U.S. dollar, and that has then led to a revaluation effect.
The increase in net sales is explained by the acquisition of Vital, which has then contributed with 5%. Let's move on to the margin. As Erik also said, we are pleased to see a significant improvement in our gross margin, as well as a record high operating margin in the quarter. The gross margin for the quarter reached 32.7%, an improvement from 30.6% in the previous period. We are also pleased to notice that the gross margin increases across all the regions. The gross margin is then, of course, contributing very nicely to our record high operating margin, giving us an adjusted EBITDA margin of 14.2%. Moving on and looking at our operating expenses, we can see that the cost level is consistent with last year when we do an adjustment for one-off items.
The primary one-off items include the capital gain from the divestment of Lannenhalvan last year, and also cost from a divestment within Component Solutions Group in the U.S., and that happened this year. We also have an effect of the operating expenses in Vital, which is also explaining the difference. Additionally, we had a revaluation of earnout in the third quarter last year. Also worth mentioning on the positive side is that we have a benefit from a favorable currency effect. We also continue to focus on cost control while investing some of the savings into growth initiatives. Our primary focus, I would say, is investing in people and our facilities to support and also drive the growth further on into the future. The cash flow from the operating activities amounted to SEK 293 million, corresponding to a cash conversion of 108%.
The cash flow from operating activities was slightly lower than last year's quarter, mainly due to the reduction in inventories not being as significant as in the comparable period. The inventory levels in subsidiaries have normalized, you could say, after the pandemic years. We also see some inventory buildup taking place during the year, and that is mainly in order to improve the service level of the customers, but also we see a buildup of inventory for new businesses that will come next year. Finally, the net debt/EBITDA ratio has shown a positive trend this quarter, decreasing to 2.3%. In the current month, we anticipate an increase in net debt to 3.0% due to the acquisition of Novia Group. However, our estimates indicate that we will continue to improve this ratio, and we expect the net debt/EBITDA ratio to reach approximately 2.7% by the end of Q4. Thank you.
Over to you, Erik.
Thanks, Helena. I will then take you through the regional highlights, and I will start with the region North & East. The total growth in the region was -2.1%, and organic growth was positive 0.5%. We saw strong development in BU East and also in Bufab Finland, and stable demand in general industry, while furniture and kitchen, for example, at Denmark and the energy sector in the Nordic, remained weak. Gross margin was strong, up by 3.9% points, driven by improved value sales, customer product mix, and consolidation of purchasing savings. In addition, carousel effects had a positive impact on the gross margin. Operating expenses increased SEK 27 million compared to last year, but the difference was mainly explained by revaluation of earnout and one-off effects in connection with divestment of Bufab Lannenhalvan, but also negative carousel effect and inflation.
Adjusted operating margin improved to 14.6% compared to 14.2% last year for the region. If we then continue with the region Europe West, here the total growth was 20.5% linked to the acquisition of Vital, and the organic growth was positive 1.7%. We continue to see very strong development in Bufab Czech, also followed by Bufab Spain, driven by market share. Demand in energy, defense, and infrastructure continued to be strong in the region, while automotive and construction continued to be on low levels. Also here, the gross margin was up 0.3%, driven by price adjustments. Operating expenses increased by SEK 80 million year on year, mainly related to Vital, but also investments in some customer cases linked to growth in the coming years. Adjusted operating margin ended up at 12.7% for the region West.
If we then continue with the Americas, the total growth amounted to 3.6%, and organic growth was 12.6%, driven by tariffs revenue. The demand was stable in the Americas on a quite low level for mobile homes, but also for the automotive industry for CST. We divested a small manufacturing unit within CST in the quarter, and that expects to continue to have a positive effect for the profitability for region Americas in the coming quarters. Our gross margin increased 6.2%, driven by improved customer product mix, general price adjustments, but also the effects of tariffs. If we estimate the short-term effect of tariffs, it's estimated to be half of the gross profit level in the region. Even despite support from the tariffs, we see very strong development in the Americas on a gross margin point of view.
Operating expenses increased by $1 million year on year, but adjusted for divestment within the CST group, the operating expenses decreased for the region. All in all, the operating margin improved to a strong number of 22.2% versus 12.5% last year. If we continue with U.K. and Ireland, U.K. and Ireland is the region that now are challenging the toughest market conditions, I would say. The growth amounted to -9.6%, and organic growth was -4.1%. In the region, we see continued low demand in the manufacturing and general industry, impacting both Apex and Bufab U.K. . For Apex, that operating within stainless, there are still very low prices in the market, and that impacts their performance. Timco, though, is holding up volumes and profitability well in a very challenging market. Gross margin increased by 0.2%, mainly driven by sourcing savings for the region.
The operating expenses for the region were in line with last year, and the adjusted operating margin was 10.7%. Finally, we have Asia Pacific. Here we had a total growth of -7.4%, but a positive organic growth of 1.3%. Bufab Shanghai and Bufab India continue to show strong organic growth in areas such as electronics, marine, rail, and energy. Gross margin improved for the region by 0.8% due to purchasing savings and also good work with value-based pricing in the region. The operating expenses decreased by $7 million year on year, primarily driven by positive currency effects. The adjusted operating margin then improved significantly to 14.3% for the region. I will take us through some group news that happened in the quarter, but also in October.
I will start with the great news about the acquisition of Novia Group that we see as a very important strategic platform within the Bufab Group going forward. Novia Group is a German expert provider of global sourcing solutions, and it fits very well with our strategy. The group has a turnover of €50 million in 2024, and profitability is significantly higher than Bufab's targets for 2026. They have operations in Germany and Switzerland, with sales in Europe and the U.S., and also assembly in China and Vietnam. What Novia does is that they provide customers with sourcing solutions, engineering expertise, and assembly, which creates clear customer value and will be a good addition to our portfolio in terms of offering. They have an interesting profile in terms of markets and customers. They are strong in medtech, energy, sanitary, and general industry, as an example.
We are also pleased to see that Marcus Bauer will continue as MD for Novia Group also going forward and also be a minority shareholder in the group. We managed to finalize the acquisition in mid-October, so it's now in our books. Why then Novia Group? For me, this is in line with our strategy and fits perfectly well in our plan for the future. As I mentioned before, Novia brings important new capabilities to Bufab through their engineering expertise, also how they work with assembly and technical services, and a very interesting place in the value chain. It also expands our footprint in Germany and also in Western Europe with a strong and diverse customer base, where I think it could be a win-win both for Novia's growth going forward, but also for the Bufab Group. It also will have a positive impact on our profitability in the group.
Novia had a run rate on a significantly higher operating margin than our 2026 target. I see Novia as a perfect platform for both organic growth within this field, but also add-on acquisitions to build a big player within this field going forward. All in all, I'm very pleased that we now can welcome Novia and the Novia team to the Bufab Group. As I also mentioned in my intro, I'm pleased how we're working actively in the market and taking market shares in many regions. One example that took place now in the quarter was the framework agreement that we signed with Babcock, that is one of the leading suppliers within defense, aerospace, and security. We won a competitive framework agreement with competition with other C-parts suppliers in a very interesting growth area for us going forward, which is defense.
A little bit short about Babcock, it's a big player within this field, has GBP 4.8 billion in turnover and a backlog of approximately GBP 10 billion. We think that they are a perfect type of customers for our services. For Babcock, we have tailor-made logistic solutions that will be on-site for them. It's now up and running, actually, but hopefully more to come in the coming quarters. As I mentioned, we believe that we can streamline and support Babcock on the procurement and efficiency overall, and it will be a win-win with this partnership. One important enabler for us is sustainability. In the deal with Babcock International Group, but also with other customers, we see more and more, especially in Europe, that our strong position within sustainability is a key enabler for us to take market share.
One strong recognition for our work with sustainability was that we got the Platinum EcoVadis rating in October. For me, this is a positive signal and achievement that we are in the top end when it comes to sustainability within the C-parts industry. I will then finally sum up the quarter and say a few words about the outlook and our priorities going forward. First of all, I would like to highlight once again that I'm pleased in the way that we are delivering on our strategy. I think that our strategy gives clear value to our customers, and that is also paying off now in the organic growth, but of course also in our gross margin and operating margin. We delivered a record high gross margin and adjusted operating margin.
Even if we then adjust for the tariffs that help us short-term in the U.S., we still have a record high gross margin and operating margin in the group. I am overall pleased how we work with that. We'll continue to have strong focus on cost control, but at the same time invest in key areas for growth. It could be customer cases, but also of course in infrastructure in sales. It puts us in a strong position while the market rebounds. The market is still tough out there, it's uncertainty in the market, but all in all, we are still positive about the future. We'll continue to focus on things within our control and put us in the best possible position when the market rebounds. To sum up, continue our work with our strategy, that is to continue to be active in the market and take market share.
Of course, continue with the gross margin journey that we are on. We still have much work to do here and continue to strengthen that margin, but also then be cost-efficient overall in the organization to end up on a strong operating margin. Ensure that we continue delivering a strong cash flow, focus on our networking capital and inventory. That was all for today. I will now leave the floor open for Q&A, please.
Welcome to this Q&A session. I would like to ask you to use the function raise your hand if you have a question, and don't forget to unmute when it's your turn. We start with the first question from Johan Sandberg. Please ask your question.
Hello. Good morning. Can you hear me?
Yes.
Hi. Just a couple of questions from my side. I think I'll start with a quick one on the gross margin in Americas. I mean, you mentioned already that roughly half of this strong gain stems from temporary effects from tariffs, so I suppose it's roughly 3%. Can we expect the tariff effect to disappear completely already next quarter, or could this effect remain a little bit ahead as well? That's my first question.
It can remain a little bit ahead as well, so that will be a gradual decline. As I mentioned, there are still a lot of other works ongoing to gradually improve also the gross margin in Americas. It will be two factors here: one, decline due to the tariff effect, but also gradual improvement with the work the team is doing both in ABS and CST.
Okay. I suppose that's more structural. This temporary effect will gradually disappear coming quarters.
Correct. Correct.
Yes. Okay. That's clear. Moving to region Europe West, EBITDA margin there is down 100 bps despite the inclusion of Vital, and you also showcase organic growth in that region and higher gross profit. Can you explain a little bit what happened there on the EBITDA margin and how should we view that going forward?
Yes. We have some higher operating expenses in the quarter for West. We have quite significant investments in growth, actually, in West that is impacting the numbers in the quarter that will benefit positively for the region in 2026 and 2027. That is impacting. Of course, there is for some companies a little bit tougher situation in the market that is impacting the performance. I would say that I'm all in all not that concerned about the situation in West. I think they have the cost level under control.
Okay. Understood. Was it any unusual high cost in that segment this quarter that should not be extrapolated, or?
Yes, they will not be on the same level going forward.
Okay. Can we say something about the magnitude of those costs in the quarter?
No, not really, no details. Some of them is investment in growth that will gradually disappear. Yeah.
Okay. Then one on North & East. I mean, gross margin is also very strong in that region. Could you maybe elaborate more what is driving this? Is there any temporary effects that is benefiting you with the strong or a weaker dollar? How much is structural, would you say, and how much is are there any temporary effects there?
The majority of the improvement is driven by the good work they're doing in the region with the customer product mix, sourcing savings, and so on. They also have a positive currency effect for the region in the quarter. It's both contributing, both good work, but also tailwind because of the currency effect.
Can we pinpoint the magnitude of the currency effect in this quarter from the margin?
The bigger effect is on the other areas, not on currency, but it's impacting the margin. Yes.
Okay. Yeah. One final on outlook and demand here. You're now back on organic growth trajectory. I mean, you recently press-released the Babcock International Group contract, and I feel like you have some momentum in the business now. This contract, I suppose, is also a result of you having long discussions with customers before signing. Can we expect more of these types of contracts announced going forward? Can we expect this organic growth to continue here in Q4 and onwards as well?
Yes. When it comes to our activity in the market and market share gains, I'm positive with the development in 2025. I think we've secured several important projects that will pay off mainly in 2026, 2027, and onwards. With the new way we are working with our customers, where we do often tailor-made solutions when it comes to logistic solutions and so on, the good thing is that you get a bigger part of the cake, but also that drives initially bigger investments to make it happen. We expect more of those to materialize in top line in 2026, I would say, mainly. That is positive. The market overall, I think, still remains on a cautious level. I hope to see us delivering organic growth by being good in the market and to see some hopefully this trend continue. That is what we're aiming for.
Yeah. Interesting. We'll see. Just one final, I mean, I think you usually don't press-release new customer contract wins like this one. Was there any particular reason why you chose to press-release this, or could you say something about the size of this deal?
I can't talk about any numbers, but there are a couple of reasons why we did the press release. First of all, it's the size of the deal and potential. The second is that we see defense as a very interesting focus area for us going forward, and we have secured interesting projects in this area in 2025. Thirdly, it's the way also that we provide service and solutions to our customers in a case like Babcock International Group, where we do, I would say, significantly help the customers with efficiency and the way of working and also cost and total cost when it comes to C-parts. There are a couple of factors why we choose to do this. Of course, also that in this case, the customer is also positive and willing to do this as well, that impacts.
Okay. I understand. Is it fair to say 1% or 2% of sales, and then it's beneficial for mix? It could be even more on.
I will not share any detailed number. I will say that it's a good framework agreement that we have signed with a customer that consumes a lot of C-parts.
Okay. Interesting. Thank you. That was all for me.
Thank you.
Henric Hintze, welcome to ask your question.
Yes. Hi, everyone. This is Henric . First of all, just one follow-up on the Americas thing. Can you give any guidance regarding how long it will take for the tariff boost effect to dissipate completely from the gross margin?
In the coming quarter, we estimate it to gradually decrease.
Will it still be there in Q1, Q2, or will it be partially there in Q4 and then?
I need to have a crystal ball. I don't have it, so I can't share that, how the market will develop exactly in Q4.
Sure. On the organic growth in this quarter, you reported slight organic growth. I was just wondering if you could give any flavor on how much of the net positive impact here is from new customers year on year compared to how the market is developing.
We see the main reason for the organic growth is market share gain in different parts of the world. We see it as the main driver for this positive number in the quarter.
Okay. That's interesting. You have been speaking quite a lot about new customer contracts, not only this quarter, but over the past year or so. I was just wondering, do you expect at some point to see an acceleration in the contribution from market share gains? Can you sort of see that in your pipeline or anything like that?
If we sign contracts like Babcock International Group and others that we have communicated, that will gradually give us a positive impact on the organic growth and market share gains. We don't guide on how much this will impact for the coming years, more than that it will be a gradually positive impact. Often how it works is that you build up a foundation with, for example, solutions in place, and then you gradually increase the number of C-parts for those customers' accounts. That is what we expect to happen. On top of that, it is, of course, impacting the speed depending on the market situation and how quick the market rebounds in many areas where it's not that high activity as it was before, for example, with those that are quite low volumes. No detailed guidelines I will give you, more than that it will be gradually impacting positively.
Do you think it's more reasonable to expect that new customers will gradually start contributing to organic growth rather than that we'll see a step change in growth rates at some point when a lot of contracts start?
Yeah. Gradual improvement, I would say. That is the normal how it works in our industry. Even though those types of contracts, of course, start on a higher level than maybe traditional sales that we had in the past, it's a gradual increase that you can expect.
Okay, thank you. That's all for me.
Thank you.
There are no further questions. I hand over to Erik Lundén to close the meeting.
Okay. Thanks, everyone, for joining today. I wish you all a nice day ahead. Thank you.
Thank you.