Earnings Call: Q1 2021

Apr 20, 2021

Good day, and thank you for standing by. Welcome to the BUFFO's Q1 Earnings Release Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jurgen Rosengren, CEO of BUFAB. Please go ahead. Thank you, operator. Good morning, everybody, and welcome to this Q1 conference call for BESF. My name is Jorgen Rosenblum. I'm BESF's CEO and I'm joined in this conference by Markus Soderberg, who is Bizhov's CFO, and we'll be taking you through today's material and information together. And like The operator said, towards the end, there will be an opportunity for everybody to ask a question if you have one. We'll be referring throughout Throughout this conference call, we'll be referring to a material which is available on www.ver.com. And I'll start off with the 3rd page of our material, and it has a beautiful title. It's called Continued Strong Growth and Significantly Improved Profitability. And that is also a good summary of our Q1 in 2021. It was, To be sure, a very challenging quarter operationally, we've had lots of Work to do with, generally speaking, quite strange supply chain situation, which exists today globally. And we're struggling also with increasing costs for components and increasing costs for freight. But nevertheless, we have I have the pleasure to record an all time high results in the quarter for sales, all time high operating profits And all time high operating all time high earnings per share as well. And there are two reasons for this. The first one is that sales is up. It's up quite dramatically actually. As reported, only 8%, which is, of course, good in itself. But there are a negative currency effect of minus 6% due to the strong Swedish quota primarily. May I ask very, very strong underlying organic growth of 14%. It should be noted in the context though that the Q1 of 2020 was We still were quite proud of this organic growth. It is driven partly by good underlying growth in all segments actually, But also by us gaining market share also in all segments. And this is a trend, of course, as Our long term investors know that we've had for many years, but still it's very pleasant to see that even in the COVID situation, we managed to gain market share. On top of that, we've had in the quarter a very low cost, as we'll be seeing in a moment. And the combination of strong sales and low cost, That combination delivers up a very, very solid profit improvement, actually operating profit improvement of 40% And also an improvement of the net sales of the net profits by 38%. If we have to single out actually, most Most of our subsidiaries did extremely well, but if we have to single out 1 or 2, we would like to mention our newest acquisitions acquired in the end of 2019, both of which contributed very well. In the beginning of this quarter, we've launched a new strategy for sustainable leadership, which is valid until 2025. And in connection with Yes. We also launched new financial targets for the next 4, 5 years. And as you can see in a moment, we've made a good start towards those financial targets for this quarter. And very importantly, in this quarter, we committed both onto the science based Targets initiative is an initiative that's backed by the United Nations, and our commitment to it constitutes a very, very dramatic An ambitious improvement ambition improvements when it comes to sustainability, but it's not a topic that Very near and dear to us, but also quite important for our customers, our staff and our owners. So an eventful quarter all in all. And now I would like to turn over the Forward to Markus Soderberg, our CFO, who will be taking you through the financial highlights for the group. Thank you very much, Jorgen. Let's turn to a page called Financial Headlights for Gorgen, as Jorgen said. As you can see, and as Jorgen I already mentioned, we had a really good month when quarter when it comes to net sales. Net sales increased with 8%, where 14% was actually organic a negative impact of currency effect of about 6%. Net sales was good, as said, but the order intake was actually even stronger, as you can see, 12%. Gross profit margin increased with about just more than 1%, driven mainly By purchase savings during 2020, the end of 2020, but also due to increased volumes, of course. Operating expenses came in very low, 15.5 percent of net sales, driven by efficiency gains, of course, Also higher volumes, but a good operational leverage made the operating profit increase with 40%, 177 €1,000,000,000 Not only the operating profit increased with above 40%, but also the earnings per share increased with above 38%, so a good development all the way down to the bottom row, you can say. If you look at the lower left corner, We have the EBITDA bridge. And as you can see, currencies had a negative impact of about SEK 11,000,000. Strong volume increase had a positive impact About SEK55 million, cost, pricemix and other, added about SEK13 million and acquisitions, Meaning, namely, the revaluation of additional consideration in connection with the acquisition of Sibendi has a negative impact of about SEK 6 €1,000,000, leaving us with an EBITDA of SEK177 1,000,000. If you turn page, you will see Another page called Financial Development of the Group. You have 2 graphs, one showing our quarterly net sales growth. And as you can see, we have been having growth For many quarters back in time, except for the very weak quarter the Q2 of 2020. But as you can see, we have had both good organic growth and also good total growth, meaning mainly also acquired growth, so Well above our target of 10%. And in the month, as said, good organic growth of 14%, But a total growth of about 8%. If you look at the right graph, you also here see The rolling trend, 12 month trend of net sales and EBITDA, and as you can see since the Q2 or actually the Q3 of 2020, we have been taking a big leap upwards when it comes to profitability. And explanations to that is, of course, increased volumes, but also heavily increased efficiency gains And good result development from the cost saving program that we launched back in 2019, but increased in mid-twenty 20. So really good development when it comes to the results and the EBITDA. If you turn page 2, the page showing segment north, You can see that also segment North had really good quarter growth, total growth of about 8%, organic growth was 10%, And as you can see, also a good order intake. The gross profit margin increased significantly, mainly driven by purchasing, but also due to high volumes, especially in the producing companies or the manufacturing companies. Also here, you see that we have decreased the operating Expenses in comparison to net sales, so good cost savings and efficiency gains, meaning good operational leverage, Also causing the EBITDA in absolute figures to increase with about 30%, leaving us with an operating margin of 12.2%, more than 2 percentage points higher than the comparable quarter. If you turn page 2, segment West, You can see that also segment West had a good development net sales wise. Total growth was about 4%, Heavily impacted by negative currency effect. The organic growth rate was actually 11%, and also here good order intake of the total. Gross profit margin also increased here with about a percentage point, also due to cost savings, but also purchase savings, but also due to Hi, volumes, of course. Operating expenses also here going definitely in the correct in the right direction, significantly lower operating expenses in comparison to net sales, About 16%, meaning good operational leverage, also causing the operating profit to increase with more than 50% to SEK35 1,000,000, leaving us with an operating margin of about 11.1%. If you turn page to segment East, Also, East had a really good development net sales wise, up total growth with 14%, but the organic growth was actually more than 28%, of course, driven by a weak comparison should definitely be mentioned, especially in Asia. Gross profit increased Slightly. Also here purchase savings and rather higher volumes. Operating expense expenses down Not only in percentage of net debt, but also in absolute figures, leaving us with a really good development EBITDA wise half more than 44% And outstanding operating margin of about 18.1%. So a fantastic development in segment EAF during the quarter. Finally, the last segment, segment U. K, North America. As you can see also, U. K, North America had a good development net sales while Up about 8% in total and organic growth rate was actually 17%. Also here, the order intake was considerably stronger than net sales. Gross profit, quite stable, slightly up. We see purchase savings also In segment, U. K, North America, and of course, higher volume causing the gross profit margin to grow up slightly. Operating expenses down not only in percentage of net debt, but also in absolute figures, meaning very good operational leverage also here, leaving us with an EBITDA profit operating profit that increased by 41%, leaving us with an operating profit margin of about 14%, so If we turn page to the one We're having strong cash flow, Fuse's active acquisition strategy. And if you look at the first graph on the left, you see it's actually showing our operating cash flow and cash conversion during the last quarters. And as you can see, we have been having really good cash conversion more or less during all of 2020, at least since the Q2, went down slightly during this quarter, mainly due to the very high growth rates that we have seen, meaning that we have tied up more money into net working capital, at least in absolute figures, even though we are slightly more effective when it comes to net working capital compared to net sales, so to say so. But anyway, good cash conversion. And this is also the explanation to the next graph. If you look at the right, as you can see, it's showing our net debt versus EBITDA, The multiple of that. And as you can see, we were up on a very high level back in the end of 2019 and the beginning of 2020, Due to very good cash flow, reducing mainly net working capital together with good Measures taken when it comes to cost control led us to a very good development In the net debt and EBITDA after volumes came back during the end of 2020 and now in the beginning of 2021. So we are now a significantly stronger company financial wise than we were 1 year ago. So very good development, which we are very proud of. Thanks, Marcus. So lots of numbers there, but actually all of them good. And that is one of the aspects of this All the results that we're especially proud of is that the improvement is so broad across all of our operating segments. In fact, all the operating segments Improve their sales or improve their profits and also improve their margin. On the next page, which is entitled EBITDA Bridge, You can see that of the how the results this year, Q1 was built up. And if we talked about last year's EBITDA in the Q1, which was SEK106 1,000,000 and the result of which we were quite proud of at the time, We've had unfortunately negative currency effect, again tied to the strong SEK 3 of about SEK 11,000,000 negative. But the strong volume adds SEK 55,000,000 to the profit and very good cost control. So despite the strong volume, we are still SEK 13,000,000 bevron costs, and that's a total SEK 68,000,000, so a strong positive. There is a strong small negative this quarter from acquisitions, but that is actually also good news because it pertains to a revaluation Of the earnout accruals that we have for some of our acquisitions, And we're making this revaluation upwards, which then results in negative results effect because those acquisitions have developed much stronger than we thought So in total, 100 and 6 minuteus 11 plus 55 plus 13 minuteus 6 equals 177, which is again then our best ever quarterly result in terms of by a fast margin. Now the second table in this chart or on this page Shows quite clearly also that the improvement was spread evenly across our segments. So segments North, the largest segment contributed 16 to profit improvement, whereas West, East and UK, North America all contributed slightly above SEK 10,000,000, resulting then again in about a SEK 50,000,000 On the next page, we turn to something that I know investors are very interested in, and that's our Acquisition strategy. We have made 9 acquisitions in the last since we were noted on the Stockholm Stock Exchange in 2014. And we have over the years that we've made in business made about 50 of them, acquisitions. In the last few years, we've added about 500 employees and about SEK 2,000,000,000 of sales. Now a year ago, there was not so much demand from investors for us to make new investments in acquisitions because at the time, our Net debt to EBITDA was quite large and there was uncertainty related to COVID. But now we feel we have a very good situation where it's quite possible for us to make acquisitions with a much Stronger balance sheet and also the effect of vaccines start to kick in easier to go out and meet acquisition candidates. We like to actually meet and Get to know the acquisition candidates that we have in our pipeline quite well before making acquisitions because part of our acquisition strategy is to only acquire very good companies. And we've been actually strengthened in that by the fact that the last two acquisitions we made have been so super good. So we're a bit picky, but now at least we have the wherewithal to make And for the interest reader, you can go to our investors website and there you can partake of the material, which we presented on our Capital Markets There in March this year. And there, you will learn more about the plans that we have to grow, to improve our business, To keep investing in our business to generate a sustainable advantage relative to our competitors, so we can continue to take market share and also to continue with our acquisition strategy. In connection with this new strategy, we also launched new financial targets. And They are more ambitious than the ones we had before. We aim now to grow 10% a year, Every year until 2025, although it can vary a bit up and down, we have raised the ambition level with regard to Profitability, I'm satisfied that we will reach a sustainable 12% EBITDA margin by 2023, latest, As we will continue to show to our investors a strong dividend growth by continuing to Give out profits in the range 30% to 60% of earnings per share. I mentioned sustainability, and that's also one of the key words of our new strategy. And on the next page, you can see some of the important first steps that we have taken on a long journey because this is a long term Challenge that not only we, but every company on the planet is here as well. But it's nevertheless good to see how in 2020 we delivered good So you can see on this page that our total emissions in scope 1 and 2 of Carbon dioxide equivalents decreased by 30% last year. And the Emissions per sales per seck sales also decreased by about 30%. We increased a portion of our sourced energy, sourced electricity, Which comes from renewable sources from 69% to 74%, so by 5 percentage points. And we also paid more tax, And that maybe is not something that is lived up so often in this context, but it is important. It's an important part of our sustainability strategy to contribute to the societies where we are We're active and part of that is, of course, paying tax. The profits mean a possibility to pay tax and to contribute equity to society. So Tax contributions to the site increased impact by 26% last year, which is more or less also the profit increase we had. So to summarize the situation we're in, in the Q1, we had an operationally quite challenging Q1, But we also recorded all time high sales and profits and also, in fact, a very, very strong margin. Our balance sheet is now much stronger, And the demand improvement that underpins this was followed across all segments and also coupled with increased market share in all segments. And the profit is also further driven by the less improved efficiency. On the ground, we do see very same supply chains, and we do see also increasing costs for components and for freight. And that also influences the outlook because we see that we have to battle with that also going forward, and that means that we do have to increase the prices to our customers. But on the other hand, the outlook for demand remains favorable as we see it now at least and results in very, very low inventory levels throughout the industry, Which of course is good for demand. And most important though, we're in a much stronger position today than we were 1 year ago And even more stronger than we were 2 years ago and so on. And in particular, we would like to highlight that we are a more efficient company now. We are a more flexible company now, And we have stronger customer relations now than we did 1 year ago, thanks to the long term investments that we've made in our organization, in our systems, in digitization and in acquisitions also. For this year, the priorities are to continue to ensure in a very tough situation High quality deliveries to our customers to keep them supply simpletons. We need to start recruiting And strengthening organization to face this higher demand picture that we're seeing now and also to be able to continue to Benefit from the sales opportunities we see, and we do need to move the cost increases that are now prevalent in our industry Onwards to the customers and have them help pay for that. And that concludes our prepared comments. So operator, if you can hear me then, now is a good time to open up for questions from the audience here. And your first question comes from Robert Reddin. Please go ahead. Your line is open. Yes. Hi. Robert Reddin from Carnegie. Yes. A couple of questions, if I may. So one is on that organic growth. You're right in the report that the organic growth was particularly strong in March As comparisons were impacted by COVID maybe, but could you say something about the daily or weekly sales development? Did it improve in March? Or was this Just that the comparisons were easier in March, what's an improving trend last quarter in demand? Or is maybe the question? There was Slightly improving trend in the quarter, but not extremely noticeable. So we had a solid Sales development throughout the quarter, I guess, you could say. March was influenced partly because it's it was one working day more. But also, as you say, The comparison was weaker in March because we started to see last year and towards the tail end of March, especially last week, 7 days, something like that, the first effect the COVID pandemic, especially in Asia, which then influenced our operations in China in particular. So we saw a solid Trend, but March was especially good due to those effects. What is, however, Encouraging, I think, is also the order intake, which continued strong throughout the quarter and maybe even accelerated a bit. So we're I have to say, we're unusually bullish on the demand trend. Sounds great. Yes. And then another maybe Thijs, this includes the cost inflation, the raw materials and the price costs and so on moving higher. So you have to raise prices. Is there any contribution from prices in Q1? Or is the 14% just volume? And on prices, when do you Expect to see a contribution to organic growth on price hikes through the second half of the year or Yes. Let me just add something that I should have mentioned with regard to your earlier question, Robert, and good morning, by the way. The Well, what is also encouraging for demand, I think, is the low demand the low inventory levels we see throughout the supply chain. It's quite clear that most of our customers have no inventory at all And we have no inventory or we have at least a much lower inventory than we usually do. And our suppliers have no inventory. And apart from some shifts being stuck in the Svelte canal, there is also low inventory in the freight chain. So That, of course, underpins our belief in the strong demand going forward. With regard to price, I think, Marcus, we can say that there weren't there were not any Contributions from prices, that's not correct, in the Q1 to growth? Yes, I would say so, definitely. But we did improve, of course, our operating margin sorry, our Gross margin, as you can see in the quarter, partly because of leverage, but also partly because of the cost savings that we did last year, which now are and filtering through our P and L. So the challenge now is to meet the cost increases which we see now with price increases in the same timing during the rest of the year. Right. You wrote something about the large price increases, So maybe is there any indication on what that range could be in terms of numbers? Yes. There's plenty of indication on that. So that's a very hot discussion that we're having now with our customers, exactly what is a good level there. So I'm not going to go out here and give you a percentage because then we're negotiating with ourselves. But it's quite clear that we're going to have to Ask for and get significant price increases from each of our customers. All right, perfect. And then final question on M and A or maybe in the management, is an FXEBITDA. So on the Grof has the lowest it's been since Q1 now at 2015, the relationship. So I guess, how do you see the M and A pipeline? Is it improving? Or is the market pickup so strong that valuations have pushed higher? How do you see the M and A pipeline developing? I guess we can answer what we usually do answer, and that is we don't make such a high number of small acquisitions as some of our peers in the industry. And therefore, It's hard to make statistics out of our M and A pipeline. We have, we think, a good M and A pipeline, but it's hard for us to tell whether it's Influenced by this or that short term trend, most of the acquisitions we made we have made in the past and or intend to make in the future are preceded by Long discussions with the previous owners, with the management team, and have more to do with that than with the short term trends. So I really don't know the answer to your question. It's my answer. We can certainly afford it. I mean, when we had that situation in 2015, Then that's when we restarted our acquisition strategy. Since then, we've made 10 acquisitions. And of course, we intend to make acquisitions also going forward. All right. Super. That's all my questions. Sounds super. Thank you so much. Thanks, Robert. Thank you. We have no further questions at this time. And there still seem to be no further questions. I would now like to hand you back to Mr. Rosengren. Please go ahead, sir. Thank you. So then I would like to thank everybody who attended for your continued interest in Verfab and wish you a very pleasant day. And thank you and goodbye. This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.