Welcome to the Bufab Quarter Two 2023 earnings call. My name is Caroline, I'll be your coordinator for today's event. Please note, this call is being recorded, for the duration of the call, your lines will be on listen-only mode. However, you'll have the opportunity to ask questions at the end of the call. To start, you're done by pressing star one on your telephone keypad to register your questions. If you require assistance at any point, please press star zero, you'll be connected to an operator. I will now hand over the call to your host, Mr. Erik Lundén, to begin today's conference. Thank you.
Thank you, good morning and good afternoon, everyone. My name is Erik Lundén, and I'm President and CEO of the Bufab Group, and together with me here today, I have Frederick Neely, Acting CFO. Warm welcome to this Q2 2023 earnings call. I will start with a short summary of the quarter. I will move the word to Frederick for some financial highlights. At the end, I will take over go through the segment short summary. At the end, we'll have time for Q&A. If we start on page three, and a short summary of the quarter, we had a good and stable development in the, in the quarter and delivered a strong operating result and strong cash flow.
Looking at the top line, was up 2%, driven by currency. Looking at organic growth, was down 5%. Here we should have in mind that we're up against a very strong comparative quarter. What we also see is that it continued to weak demand in a few segments, mainly East and North America, and this is driven by a few industries that were favorable during the pandemic, that's now struggling with lower demand. Looking at the segment first, they continue to have a very strong development in the quarter. Order and sales was in line with the net sales for the quarter. If you then go down and look at the EBITDA, we had a strong improvement in EBITDA, and you will see through the margin that we performed in the quarter.
Our gross margin was somewhat lower than previous quarter, but due to less favorable business mix. Operating expenses in line with the comparison quarter and looking then at the improvement EBITDA was 37%, and this corresponds to a margin of 14.0%. If we adjust for items affecting comparability, the operating margin was 13.5% in the quarter. If you look at the cash flow, as previously informed, we have been working hard to get our cash flow moving, and it worked out very well in this quarter as well. A strong operating cash flow amounted to SEK 488 million, and the that corresponds to a cash conversion of 147%. We expect the strong cash flow to continue in the coming quarters as well.
That was a short summary, and I will now leave the word over to Frederick for some financial highlights. Please, Frederick.
Thank you, Erik. As Erik mentioned, we'll look through the financial highlights in slightly more detailed fashion. If we start with the net sales, as Erik already mentioned there previously, it was up 2%. This is driven, totally by currency. As we're all aware, our functional currency is the Swedish krona, which has taken a beating in the last month. Of course, this gives an effect in the quarter. Our organic growth was lower, as Erik also has mentioned, and I want to bring it up again, that we have a very strong comparison quarter to compare to, which makes it tougher to perform against that good quarter that we had in Q2 2022.
Operating expenses, as Erik has already been in, was in line, adjusted for our earn out revaluation, and it had a switch effect during the quarters. You know, meaning that for this quarter, we had a positive impact when we revalued them, and in the last quarter, in Q2, we had a negative impact. Positive and a negative gives quite a large movement there. Adjusted for these, the operating expenses were 14.9% versus 14.8%, almost perfectly in line. Operating results, of course, affected by this, as it drops down in the same manner when we revalue those earn out considerations. Adjusting for those, we had 13.5% for the quarter, compared to the very strong quarter last year at 14%.
A decrease, of course, on the face value, but of course, very, very strong EBITDA, considering the market situation. If we continue on to slide number six, which should be some graphs. The first graph here on the left, it shows our net sales in terms of total growth, which is the gray portion of the columns, and our organic growth, which would be the blue portion of those columns. As you can see, in quarter two for 2023, the final column there all the way to the right, we had a total growth, which is grown, and as you see the blue, we have a negative organic growth.
As I previously mentioned, it bears to be mentioned again, our Q2 2022, if you look at that column, it was off the charts, fantastically good. As I said previously, a very tough quarter in comparison. The graph on the right there shows our net sales, which would be the blue trend line, and our EBITDA, which is the gray trend line, and of course, in terms of a 12-month rolling trend. In this trend, if we are or in this graph, we are more mindful of the trend and the way and the direction these lines are moving. As you can see, the gray line is as we want, it's diverging from the blue line, which would of course imply that we're conducting our business better in terms of productivity and efficiency.
If we go on to slide seven, cash flow and net debt EBITDA graph, where the graph on the left shows the relation of our EBITDA adjusted, which is the blue column, in relation to our operating cash flow, which will be the gray trend line. The parity between them signifies the cash, our cash conversion. As you may know, that in a perfect world, the operational cash flow line there would intersect at the top of each column, which would indicate that we have a perfect 100% cash conversion cycle. Of course, we don't live in a perfect world, and therefore, you have variances, that that line is not, super straight.
As you can see, we've had tremendous developments in our cash flow, very strong, and we're above, way above the perfect 100%, actually a hundred, above 140%. This, of course, is following our focus on re-normalizing and optimization of our net working capital, in particular for us, this has inventory, and we should see this going forward, that we will have a further strengthening of the cash flow in the coming quarters. The graph on the right is a ratio that shows a ratio that measures leverage. As you can see in our quarter two 2023, our leverage is slightly up due to payouts of earnouts during the quarter. However, we still had quite a good cash flow in the quarter, that we were able to amortize a sizable portion on loans.
On slide eight, we have a very summarized and condensed bridge showing EBITDA from our starting point in Q2 2022, and then ending up in Q2 2023, based on our segments, showing the segment movement during the quarter. North, West and East, you know, they're up and down, but the big star here, of course, is U.K./North America, which have continuously shown that they know how to conduct business over there and doing a very good job in a slightly demanding market, both in the U.K. and North America. I would turn the word back over to you, Erik.
Thank you. A few words about M&A on slide nine. As you know, part of our growth strategy is to continue acquire companies and be a consolidator in a very fragmented market. Of course, also a big focus right now for us to ensure that we take care of the companies that we acquired in the recent years. I would like to mention a few words about that work that's ongoing in terms of integration. At this stage, right now, we have been integrating Bufab of Denmark into Pajo-Bolte, and Pajo-Bolte, the company acquired in 2022. That work is ongoing and going very well, and we've seen also good development in Pajo-Bolte and actually in the whole region after the acquisition of Pajo-Bolte.
This is a part of our strategy is to ensure that we find synergies between the companies when we acquire them. We did a similar thing back in 2015 and a few years later after that, when we acquired Flos in Netherlands and integrated our Benelux business into Flos. Now that is also continuing performing very well, including in this quarter. The work is ongoing to ensure that the companies in the Bufab Group continue growing, hopefully quicker than with high speed than in the past within the Bufab Group.
Looking at the pipeline ahead, we are continuing looking at the acquisition targets for the future and also start to prepare ourselves from a balance sheet point of view, to be able to continue acquire companies in the, in the near future. If we then turn to the segment highlights and start with page 11, Segment North, and a few words about each segment. Starting then with Segment North. Here the total growth amounted to 1%. Organic growth was declined by 3%, and this is driven by the furniture kitchen industry, that are slowing down after really strong momentum in 2021 and 2022. Slightly decrease in growth margin due to the business mix.
Operating expenses have stable in the quarter, our operating profits are margin decreased, driven by the same reason as I mentioned before, the furniture and kitchen industry, that is, holding back improvement in the market there. West continues to have a very strong development. Total growth amounts to 14% in the quarter, at 4% organic, and still a strong underlying demand in the, in the segment. We're also taking market share and we're doing a very good job. Netherlands, Flos is doing very well and keep improving, and they are aiming for the, for the segment and also France has performed well in the, in the quarter. Overall, good momentum in segment West.
Growth margin stable in the segment, and the operating profit margin increased, and we have lower share expenses. We continue to have good cost control and operational leverage in the segment. Over to East, total growth 3%, driven by acquisitions to certain extent, and then also currency, but organic growth down 6%. All that points out, we are against strong, very strong, all-time high comparative figures for the group in Q2 2022. We also see a few industries in segment East that are struggling, and those are the ones, once again, that had a favorable development throughout the pandemic, both in Eastern Europe, but also in Asia.
Slightly decreasing gross margin, and the operating profit margin also decreased a little bit, driven by the outdoor and healthcare industry. Finally, look at the different segments, U.K./North America. Declining total growth 4%, organic growth also declined 11%. Once again, very strong comparative figures. Those companies here were booming during the pandemic, I will lower them on. These are companies in U.K., stainless, and also the RV industry in U.S. Looking at the growth margin, is positive, higher than previous quarter and also lower operating expenses. If looking at the overall results, operating results, operating margin improved in the quarter.
The companies in this part of the company doing extremely well in managing the cost level and to get the margin, despite very much lower demand. Really good to see that. Another one slide here to share a little bit about the value creation that we give our customers in TIMCO, and that always are developing every day, and how we actually give the keys to minor customers. I will start with one award that we got in the quarter. This is a sheet that we're doing things right for our customers, and that was a quality award that we got from Schneider Electric. Among 13,000 suppliers in Europe, we were selected for the one that had the best quality delivered to Schneider Electric Europe over the last two years.
I think it's a good example of the diversity that we bring, not only consolidation and giving a total cost of low total cost of ownership for the companies that we provide our services, but also quality is a big part of the service we provide. Another area that is increasing in interest for our customers is our sustainability offering that we provide. As you all know, we are continuing to integrate sustainability throughout our operations, and it's a very important area for us also going forward and of course, for our customers. What we see now is that more and more customers are putting higher demands on sustainability, and ask much more questions how we can support them on their sustainability improvement journey.
We are, I would say, industry leader in sustainability, and we're seeing and also experience now an increased business opportunity for us when it comes to take market share because of our strong offering in sustainability. What we do is that we strengthen our customer supply chain through our sustainability supply engagement program that we have. We can help our customers to with their carbon footprint and also reduction of the greenhouse gases and how their suppliers are actually performing. This is something that we'll continue supporting our customers with also in the coming quarters. If we then go to a summary of the quarter, a few words about that. As I said, I'm pleased with the quarter.
A solid development, very pleased with the strong operating profit that we delivered in the quarter, and of course, also get the cash flow. Sales growth, 2% up, but driven by currency effects, organic down, but we're up against a very strong comparative quarter. As previously mentioned, there is a mixed bag here. We see lower demand in some favorable business during the pandemic, and others are keeping up extremely well. It's a mixed bag in terms of demand right now. Strongly become margin, as I mentioned, of 14.3% and really good cash flow in the quarter. Given the outlook, it's a similar situation as we have seen now for in Q1 as well. There are still uncertainty in the market. It is caution also among customers in certain industrial segments.
As I mentioned already, we talked about the ones that have been very favorable during the pandemic, and others are keeping up very well. Overall, we have a very large and well-diversified customer, and a sector portfolio and a good diversification in risk to various industries and markets. I are optimistic for the future. If we now look at our short-term priorities, they remain the same. We set those in Q3 last year, and those still are very valid, and we continue to deliver on those priorities. That is how to take advantage of the market situation and continuing to take market shares and reacting in the market. Our offering feels very relevant.
Customers have cost pressure and want to reduce their number of people, suppliers, but also, as I mentioned before, taking other issues like we talked about sustainability and other things that are flexing right now. The reality is a big challenge. Continue to take margins. I'm pleased in how we well manage the inflation in the quarter and offsetting the cost pressure. We continue doing so also in the future. That's the plan. Of course, continue improving our cash flow and to gradually reducing our net debt level. Finally, before I leave over the word here for Q&A session, I have on slide 16, two other updates. The first one I've already announced in a press release, in that effect, we will have a new CFO joining in mid-August.
Pär Ihrskog, that have experience from SKF Group and as CEO from Embellence Group, who will join in mid-August. Of course, thanks also to Frederick for being acting in the meantime for Pär joining us in mid-August. Secondly, just for your information, we will have a Capital Market Day that will take place in Q4 2023. For more information about our capital markets day will come in August, including date, venue, and agenda details will be shared then in August after the during summer holidays. That was it for today. Now I will gladly hand over the word now for Q&A session, so please.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. Kindly introduce yourself followed by your question. Your line is open now.
Hello, this is Johan from DNB. You mentioned some segments are performing well, and pandemic winners are performing worse. Are there any segments in between that are kind of flattish or slightly declining, and which are these, would you say?
Yes, you can say that there are also some in between. If you take, for example, construction, you can say in all in all, if you look at that segment, it is in between. We have a few, you can say, other segments in construction that are doing halfway right now, with building and so on, but others are keeping up well. All in all, construction is, you can say, flattish, in development. That is one industry I can mention, for example. Of course we have industries that are in between and also electric industrial engineering is also, you can say, halfway in between the ones that are performing extremely well and the ones that are struggling right now.
We have a few in between, of course.
Okay. That's interesting. Just a quick follow-up. You mentioned that TIMCO saw a construction recovery. It's a gradual improvement in the U.K. during Q2?
Yes, it is a gradually improvement in the quarter. They have a better demand in the quarter. We have a better demand and also been managing internally well, when it comes to the margin and also the cash flow. A good development in the quarter for TIMCO. Of course, in that segment, there's still uncertainty in the construction segment. The still has been market, but a good development in the quarter.
Okay, very good. A final question. I'm glad to see the cash flow continuing in a strong manner. Is it possible in broad terms to estimate, like, how long you would have left before you would be back or when you aim to be back at normal inventory levels?
That is a good question, what it means with normal inventory levels as well. Actually, because how we look at it from a cash flow point of view and also the inventory point of view, we take it in two steps. That we are doing right now, is taking down our inventory from the high level that we had to have during the pandemic and when the supply chain was had big constraints. We're doing that, you can say, journey right now, and that's progressing very well. Then we have the second part that is to actually gradually improve the way we're working with the inventory and how we manage our capital.
That will be ongoing for many quarters, so to say, and, to gradually improve that, because we don't see the level that we had from before pandemic as the, level we want to be. I think we can do more than that. We see this in two stages. Then exactly how or whatever that will be, that will, the market, to be fair, will decide, depending on the demand and, also of course, how we can improve internally, how we work with our efficiency and, work internally within the company to be efficient when it comes to inventory. I hope that answers your question.
Yes, that answers it very well. Thank you, and that was all from me for now.
Thank you.
Thank you. The next line is open now. Please introduce yourself and followed by your question. Thank you.
Hi.
Hi.
Robert from Carnegie.
Hi, Robert.
Good morning. Hi. Can I ask a question on, I mean, this negative organic close to 5% in the quarter, for two? Was there a trend throughout Q2, you know, where it may seem different, or were they not expecting that?
You asked about the trend there in the, in the quarter. No, we can't say there was any specific trend in the quarter. It's more linked to the different industrial segments and how they are performing. No, no specific trend in the, in the quarter.
Okay, good. On that again, I mean, on pricing, raw materials and freight costs are down, I guess, salaries are up, but you still have, pricing still a contributor to organic growth with volumes, dropping more than the price tag?
Yes, the price is still a contributor, it's getting less every day. As you know, we had the major price increases in 2021 and even more 2022. Those are becoming less impacted on our numbers every day. That is how it looks like.
All right. On those, cash flows, I mean, I guess it's, yeah, it's very different, it depends a bit, but, the working capital is, I mean, year to date, you've, decreased, inventories by, say, SEK 400 million, and so 10% to date, SEK 800 million of inventories. There's some reason why we can't release those, or could we release more of them?
I hardly heard you now, but you asking about if we get even better cash flow. What have you said?
Yeah, I mean, the inventory, the decrease year-to-date is about SEK 400 million, and 2022, it's like SEK 800 million of added inventory. Can we to release those SEK 800 million or more? How should we think about that?
Yeah, and that's ... My answer is back to what I said to Johan, in his question as well. We still have work to do to still continue improving the inventory situation. The answer is yes to that. How much that will be? That depends on the demand in the market, in the coming quarters, but also how well actually we can manage to do this as well. So far, we are doing good. We're doing better than our plans that we set up in Q3 around this. We are on the right track better than expected. Our aim is then to continue on this improvement also in the coming quarters.
Right. Thanks.
Thank you.
Thank you. If there's no further questions at this time, I'll hand it back over to your host for closing remarks. Thank you.
Okay. thanks a lot everyone for joining, and I wish you a nice day ahead. Thank you.