Earnings Call: Q2 2021

Jul 13, 2021

Good day and thank you for standing by. Welcome to the BUFUB's Q2 Earnings Release Conference Call. At this time, all participants are in a listen only. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to speaker today, Jorgen Rosengren, the CEO. Please go ahead, sir. Thank you, operator, and good morning, ladies and gentlemen, and welcome to the earnings call for Buford for the Q2 of 20 1, a pleasure to have you with us. With me today is Bufab's CFO, Marco Soderberg, And he will shortly take over and take you through some of the financials for the quarter, but just some preliminary comments from my side. And Indeed, throughout the call, we'll be referring to a follow-up presentation, which is available on our Investor Relations tab on bufab.com. And we start on the page entitled all time high results in challenging environment, and that's because we're going to talk about an all time high results despite a challenging environment. Buford recorded, again, I am forced to say, the best ever Sales and operating profit in the single quarter and the Q2 of 2021. And why is that? Well, an important factor is that we continue to see very good demand throughout the quarter. And in fact, we saw a slight acceleration of the demand Over the quarter. Demand was spread over all segments and markets. And in fact, it's a sign of a really Strong development of the entire manufacturing industry worldwide as most of you will have been able to see in other media over the past month. But for our benefit, it meant that all of our segments attract all business. And in fact, most companies and most single customers It showed very high demand. And as I just said, we don't see any signs of slowdown yet. There can be a slowdown further out because we don't have very long visibility, but the visibility we do have Does not show any signs of slowdown. As a matter of fact, instead, the order intake increased during the quarter and exceeded the sales in the quarter, which means, Of course, that we built that we extend our order book. And that is unusual for the Q2 where the Order intake usually is not up to the sales level. But as I also said, we are facing some operational challenges. The Manufacturing industry is facing challenges and therefore, Buford is facing challenges. And those are of 2 kinds. Firstly, most of our customers are finding it's really difficult To get a hold of the components that they need for their manufacturing operations, everybody is right now about shortages of semiconductors, But the problem is much, much broader than that. In fact, there are shortages in almost every commodity area that a manufacturer needs to produce any kind of finished manufactured goods. And those shortages also Great bottleneck for or not both caused by and create further bottlenecks upstream in both manufacturing but also in freight. And that leads to supply issues, which in turn demand from us that we and our customers that we change our plans, that we change our forecast, Change production schedules, which internally leads to yet more work and yet more shortages as one model is shifted out from another model on the production line, then everybody It also leads to cost increases. As you've seen on the raw material agencies, the Hey, Christian. So raw materials are experiencing good times now, but also the prices of components have soared And the prices of freight have slowed, especially, of course, when it comes to container sea freight from Asia to Europe or from Asia to North America, Extremely tight there. And our challenge then, of course, becomes to move those cost increases over to our customers, which we'll speak more about in a moment. It also mean operationally for us that our staff who work mainly with supply, with The sourcing with quality insurance and so on, that they are quite strained also because they are having to deal with all these Changes and all this uncertainty regarding the supply situation and are first to be in constant contact with our customers and with our suppliers to make ends Need to speak. But I have so far managed that very well, and that is why Bufab, in this challenging environment, manages still To number 1 and most importantly, keep our customers supplied and content. Most of our customers have experienced supply issues, but in very, very few cases Is that due to Bufubs? But also from a financial point of view, we've And it was generating 40% growth relative to admittedly a weak quarter in 2nd quarter in 2020, But it's also strong growth sequentially. It's also strong growth relative to 2019, and it's also an all time high sales number. And that, plus a stable gross margin, plus very low A very tight cost control has led to an all time high operating results, which is just north of double last year's operating results And also on operating margin for the first half of twenty twenty one, which we have not seen in at least a decade. Finally, we had significant strength in our balance sheet. Now I spoke before about the supply Challenges that our customers are facing and the fact that we have caused very few supply problems for our customers. And that is something that we believe strengthens the case for our business model as a whole. So for the case for what we call then supply chain partnership to take over the key parts, sourcing, logistics and quality assurance from our customers. And we also believe that Specifically strengthens Bufab's customer relations significantly and that will That bodes well for growth also in the future. Finally, on a more organizational point, this is my last As I said, we did a similar job in a different industry, where I will start on the 1st October. The recruitment for a replacement for myself is ongoing. It's going well and it's now in final stages. So hopefully, it will be concluded quite soon. But the new CEO, the incoming CEO is unlikely to be available on October 1, and therefore, the Board has now appointed The Head of Buford's segment, North Johnson calls you on Zynchrest to be the acting CEO from September 1 on, And you will hold that position until our permanent CEO has taken off. And that process is Design to and will also lead to a smooth handover and the focus on operations, not organization in the whole face of team So that we can continue to serve our customers well and not think about that administrative aspect of things. So those were my preliminary remarks on the quarter. Before we go further, maybe we'll take a look at the numbers. And then I'm turning the word over to Buford's excellent CFO, Markus Soderberg. And the second page, which is called financial highlights. Good. Go ahead, Markus. Thank you very much, Jurgen. So taking a look at the financial highlights for the group. Let's start with the order intake. As you can see, the order intake Came in considerably higher than net sales, so strong order intake. Net sales in itself rose by 40% In total, out of those 40%, about minus 4% came from negative currency impact and 44% came from organic growth. The underlying demand was significantly higher in all of the segments in comparison with the weak demand in the comparative quarter in the wake of the pandemic. But it was not only higher compared to the comparable quarter, but also Even then higher than the same quarter in 2019 and also higher than the Q1 of 2021. Gross margin, as you can see, increased to 27.4%. The higher gross margin was Mainly comes from significantly higher volumes in more or less all of the reporting units throughout the group, But also due to the fact that we have been able to push price increases when it comes to raw materials and transport costs Over to customers in a successful way. Compared to the Q1 of 2021, the gross margin declined just somewhat. If you look at the operating expenses, The proportion of operating expenses declined to a very low level of 14.5% out of net sales. And the recent release is mainly due to a positive operational leverage on increased volumes and good cost control Despite the major operational challenges that Jorgen just talked about that has affected us in the quarter, The cost savings program that was completed at year end continues to deliver strong results, and we're also seeing positive effects from the long term productivity work That has been ongoing for a while, for example, digitalization initiatives, etcetera. But as the societies in most markets starts to open up now, the group has once again accelerated the pace of recruiting people for the purpose of securing a long term growth going forward. When it comes to cost, there's Just two things to kind of mention. One is that UK North America recognized the government support in form of a forgiven loan In the quarter, lowering the cost was about SEK10 1,000,000. And also, we have a negative impact in segment north Of SEK7 million due to revaluation of additional consideration due to the acquisition of H. Potendix has developed stronger than thought in the first place. All in all, this leaves us with a considerably higher operating profit That amounts to SEK 185,000,000 up approximately 100% compared to previous year, also corresponding to an operating Margin of 12.9 percent. Much of the results also fall down all the way down to earnings per share, which increased with An impressive 156 percent to 3.18 percent. If you take a look on the lower left growth lower left part Of the slide, you can see the EBITDA bridge. And you can see that currencies had a negative impact of about SEK 6,000,000 in EBITDA. Volumes, due to really strong growth, have a strong contribution of $142,000,000 a year. Cost Decreases plus price mix and other had a negative impact of total SEK 36,000,000 and acquisitions due to revaluation of those Additional consideration just mentioned had a negative impact of $7,000,000 By that, we turn to the next page, shown 2 graphs, 1 showing quarterly net sales growth, 1 net sales in Avisa development. And as you can see in the left graph, We have now seen growth for about 4 consecutive quarters and of course a very strong organic growth I've just mentioned. If you look at the right part of the slide, you can see that we are continuing. The blue dotted line which shows net sales Continues to go in the right direction and it's bumping up due to a very strong quarter. Even more important is the result And as said, due to increased operating margins during the last couple of quarters, driven by increased volumes and good operational Leverage, it's climbed up considerably higher than the blue dotted line, meaning an increased Margin, so to say this is of course very nice to see. If we turn to the next page that shows segment north that we just comment It shows you on each of the segments. Segment saw a strong demand in the quarter coming from all companies, but especially from Denmark. Strong organic growth, about 38%, somewhat improved or Strong improvement in gross margin, mainly driven by higher volumes and price increases. And when it comes to higher volumes, of course, that is reflected in all of The companies, but especially the manufacturing units. Higher costs Due to exceptionally low cost in 2020, together with those additional SEK7 1,000,000 revaluated Additional consideration, I just said. All in all, much of the increased volumes fall down to EBITDA, which increased About 66% to 66,000,000 which corresponds to an EBITDA margin of 10.8%. If we turn to the next page, which shows segment rest, we can say that segment Also, so strong demand in the quarter, also here in all of the companies, but especially strong growth in the operations in Nederland. Also here, improved gross margin due to high volumes and successful work with price increases to customers. Very low cost level also here due to high volumes, but also through productivity gains and Contributions from the cost savings program. All in all, the segment nearly doubled the EBITDA or the operating profit to SEK 32,000,000 which corresponds to an operating margin of 10.5%. Segment Eats, also Eats had a strong demand in the quarter, Comes from all countries and most customers. Lower gross margin, mainly due to some price pressure and higher commodity and freight costs. They are realizing price increases as well, but haven't been able to offset the negative impact in this individual quarter. Substantially lower costs due to productivity increases and high volumes. Strong improvement also then on operating profit and margin. Going forward, focus will be on sales and to handle the strained supply chain and to focus on price adjustments to customers. And at last, segment U. K, North America, if you turn page. In U. K, North America, they also saw a Strong demand in the quarter, especially in the RV segment, recreational vehicles in North America and in the U. K. Market in general. Improved gross margin due to very high volumes compared to 2020 and also due to successful I can take this to customers. Considerably lower cost as you can see, But driven by good cost controls, but also as said earlier, a substantial impact Due to the forgiven government alone that I mentioned in the beginning. All in all, due to good operational leverage, etcetera, this leads to a very strong increase In EBITDA, as you can see, 180 percent up to SEK 64,000,000 or so, corresponding to a very strong operating Margin of 18%. Going forward, focus will be on continue taking margin shares and to handle The challenges with the very strained supply chain. With that said, I leave the word over to you, Jorgen, to talk a bit about The cash flow and our balance sheet. Yes. So our balance sheet, of course, is important for various reasons, Strategically because it helps us it is what helps us realize our acquisition strategy. Now if every number in the quarterly report was good, except one, I guess the cash flow is the one number that BFF has been slightly lower than last year, but we're actually relatively content with that also. BFF, as you know, has a strong balance sheet, but most of the assets on the balance sheet, most of the net assets Or in fact, net working capital. And the net working capital, of course, with the sales And now we've enjoyed a period of sequentially strong organic growth, and therefore, we're now also building up working capital, Which adds into our cash flow a bit during the Q2. So the cash flow was lower by Sometimes a million is behind the corresponding number in 2020. Accumulated bill, we have Good catch over the past 4 quarters. And if truth be told, we would probably like to have a little bit more inventory than we actually have on our hands right now. So it's a good sign that we are now able to build upper end of the 3rd M because that makes it easier to continue to serve our customers with Even more efficiency going forward. If we turn our heads to the balance sheet, though, the situation looks very well indeed. Our main KPI in that respect is the KPI net debt divided by EBITDA. For the net debt is the end of End of period reported net debt and the EBITDA is the last 4 quarter rolling number. And there, a little over a year ago, when we had just completed 2 acquisitions and we're also seeing The corona pandemic first effects rolling in. We had a situation with high leverage, which in fact approached 4, as you can see in this graph on the page called relatively low cash flow caused by strong organic growth. But since then, we've enjoyed very steep improvement in our leverage. So we've gone in 1, 2, 3, 4, 5, 6 quarters from 4 to well below 2 as a result of a strong cash flow and also as a result, of course, of our very strong profit improvement in the same period. And that means that our balance sheet now can support, of course, further acquisitions, which is also our strategy. And it's also good then to see that we've had in the past couple of months a marked increase in the Acquisition activity in our pipeline, which is needed because, as you know, we're quite picky when it comes to acquisitions. And let me then turn to that So if you go to the sorry, I forgot. We also need to speak about the EBITDA bridge. I'll I'll just summarize then the quarterly results first before we speak about the future. As you can see in this bridge, our EBITDA was 92% last year and is 185% this year. And most of the difference there is made up of Volume, of course, because we had a very strong volume increase relative to last year's Q2. But as you can see, we have managed to absorb that volume without Adding anywhere near the same amount to the cost line, and that means that is what accounts for the profit increase. The second quarter being a bit unusual, I guess it's also worthwhile to speak about the first half of the year, For that, too, as you can see, we've gone from 92,000,000 to 185,000,000, so no longer twice there, too. No, no. Now I'm talking nonsense. I apologize. You can also see on this page the bridge between last year's 2nd quarter results and this year's Q2 results by region. And there you can see very clearly that the Contribution to our profit increase has come from all regions, from all our segments, in fact, from all our business units and like I said before, many of our companies, Which is very gratifying in itself. Now let's turn back to acquisitions. On the next page called consolidator in a fragmented market, You can see the 9 acquisitions that we have made in the past 6, 7 years, and Both have been quite fortunate. They've added quite a bit to ourselves, about SEK 2,000,000,000, And they contributed also close to 600 of the 1300 solutions that are currently employed by BuffHub. But they've also contributed very strongly to profit. And even more importantly, they've contributed strongly to making this a better company and a better partner for our customers and a better partner for And also, in fact, it has made it easier to recruit really talented people by having a position strategy in place. So it's something we're going to continue with. We have a pipeline. We always have a pipeline. Right now, the pipeline is, if anything, attractive stronger than it usually is. And like I just said, we also have a high activity level in many of the cases in the pipeline. And therefore, it's really good to see that we now also have the balance sheet If we decide to do so, and we're going to decide to do so every time When, but only when we feel that the company in question is a strong addition to Buford, which is well managed, It has growth synergies with BuffHub and that we can conclude deal with, which is a win win for both parties, right, for us and for the sellers. We've been very picky in the past with making acquisitions, and we feel that that has paid off in the quality of the acquisitions we have made and their contribution to our developments. And then I guess it's time for a summary. So the Q2 was operationally challenging. It's true due to the picture of operational challenges that prevails in the manufacturing industry worldwide. That puts pressure on Supply and it's a bit special on component cost. But we managed to navigate those things in a good way, keeping our customer supply, keeping our Gross margin stable, keeping our cost exceptionally low, and thereby we've managed to deliver an all time high Sales and operating profit and good momentum going forward. We also get started somewhat by the cost issue with the Components and transfer costs going up so much and continue to go up going during the quarter. So there are challenges, of course, to come to move those Over to our customers and what is ongoing to that effect. But it's the alphabet is rosier when you look at the demand picture because there we Very strong order intake and no signs of slowing down. Of course, there is uncertainty on the horizon, but so far it's quite promising. Most importantly, we're in a significantly stronger position today than we were 1 year ago. And that goes to efficiency, But also to the fact that we've been able to navigate these rather rocky last 4 quarters up and down very flexibly, Both with regard to supplying our customers and with regard to managing our internal cost base as sales are fluctuated. And we believe, as I said before, that has significantly strengthened our customer relations. Going forward, our borrowers are number 1 and always Customer first, to make sure that we deliver to our customers despite the challenges we're facing, we need to start recruiting again and strengthening our team To meet the stronger demand picture and also to capitalize on the sales opportunities we see, we do need to increase prices and we will increase prices to all of our customers To meet higher cost levels, I think, and we're aiming to, where we can, accelerate our acquisition agenda. But again, Only where we can do so without compromising quality of the acquisition. And that's what we conclude the prepared comments we have. So Operator, if you could now instruct the call participants on how to place a question if they have one, that would be nice. Thank you. Please standby while we compile the Q and A roster. There are no further questions at this time. Please continue. Okay. Thank you, operator. Then I conclude that everything was super clear. And as there are no questions, we have nothing to add. And I would like Thank everybody for participating in this call today. Thank you very much, and wish all of you a nice summer, and stay tuned for further updates in the Q3. Thank you so much and goodbye. This concludes our conference for today. Thank you for participating. You may now disconnect.