Earnings Call: Q2 2021

Jul 13, 2021

Welcome to the Bufab's Q2 earnings release conference call. I would now like to hand the conference over to the speaker today, Jörgen Rosengren, the CEO. Please go ahead, sir. Thank you, operator, and good morning, ladies and gentlemen. Welcome to this earnings call for Bufab for the second quarter of 2021. Pleasure to have you with us. With me today is Bufab CFO, Marcus Söderberg, He will shortly take over and take you through some of the financials for the quarter. Just some preliminary comments from my side. Indeed, as throughout the call, we will be referring to a PowerPoint presentation, which is available on our investor relations tab on bufab.com. We start on the page entitled All-time High Results in challenging environment. That is because we are going to talk about an all-time high result despite a challenging environment. Bufab recorded, again, I am forced to say, the best ever sales and operating profit in a single quarter in the second quarter of 2021. Why is that? Well, an important factor is that we continued to see very good demand throughout the quarter. In fact, we saw a slight acceleration of the demand over the quarter. Demand was spread over all segments and markets, and in fact, is 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. For our benefit, it meant that all of our segments, in fact, all businesses, most companies and most single customers show very high demand. 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 a 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 extend our order book. That is unusual for the second quarter where the order intake usually is not up to the sales level. As I also said, we are facing some operational challenges. The manufacturing industry is facing challenges, and therefore Bufab is facing challenges, and those are of two kinds. Firstly, most of our customers are finding it really difficult to get a hold of the components that they need for their manufacturing operations. Everybody has read now about the 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 good. Those shortages also are both caused by and create further bottlenecks upstream in both manufacturing but also in freight. That leads to supply issues, which in turn demand from us and our customers that we change our plans, that we change our forecasts, change the production schedules, which in turn leads to yet more work and yet more shortages. As one model is shifted out for another model on the production line, then everybody upstream has to change everything. It also leads to cost increases, as you've seen on the raw material indices. The makers and sellers of raw materials are experiencing good times now. Also the prices of components have soared, and the prices of freight have soared, especially, of course, when it comes to container sea freight from Asia to Europe or from Asia to North America. Extremely tight there. Our challenge, of course, becomes to move those cost increases over to our customers, which we'll speak more about in a moment. It also means operationally for us that our staff who work mainly with supply, with sourcing, with quality assurance 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 forced to be in constant contact with our customers and with our suppliers to make ends meet, so to speak. 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 few cases is that due to Bufab. Also from a financial point of view, we've been able to generate a 40% growth relative to admittedly a weak second quarter in 2020. It's also strong growth sequentially. It's also strong growth relative to 2019, and it's also an all-time high sales number. That, plus a stable growth margin, plus very tight cost control, has led to an all-time high operating result, which is just north of double last year's operating result, and also an operating margin for the first half of 2021, which we have not seen in at least a decade. Finally, we have two different strengths in our balance sheets. 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. That is something that we believe strengthens the case for our business model as a whole. For the case for what we call them supply chain partnerships, to take over the C-parts, sourcing, logistics, and quality assurance from our customers. We also believe that it specifically strengthens Bufab customer relations significantly, and that bodes well for growth goals in the future. Finally, on a more organizational point, this is my last quarter report, as I've accepted a similar job in a different industry, where I will start on the 1st of October. 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. The incoming CEO is unlikely to be available on October 1st, and therefore the board has now appointed the head of Bufab Segment North, a gentleman called Johan Lindqvist, to be the acting CEO from September 1st and on. He will hold that position until a permanent CEO has taken off. That process is designed to, and will also lead to, a smooth handover, and a focus on operations, not organization in the whole Bufab team, so that we can continue to serve our customers well and not think about that administrative aspect of things. Those are my preliminary remarks on the quarter. Before we go further, maybe we'll take a look at the numbers, and there I'm turning the word over to Bufab excellent CFO, Marcus Söderberg. The second page, which is called Financial Highlights. Good. Go ahead, Marcus. Thank you very much, Johan. Taking a look at 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. 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. It was not only higher compared to their comparable quarter, but also even higher than the same quarter in 2019 and also higher than the first quarter of 2021. Gross margin, as you can see, increased to 27.4%. The high gross margin mainly comes from significantly higher volumes in more or less all of the reporting units throughout the Group. 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 first quarter 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% of net sales. The reason for this is mainly due to a positive operational leverage on increased volumes and good cost control, despite the major operational challenges that Johan Lindqvist just talked about that has affected us in the quarter. The cost-saving program that was completed at year-end continued 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, et cetera. As the society in most markets starts to open up now, the group has once again accelerated the pace of recruiting people for the purpose of securing long-term growth going forward. When it comes to cost, there's just 2 things to mention. One is that you can in North America recognize the government support in the form of a forgiven loan in the quarter, lowering the cost with about SEK 10 million. Also, we have a negative impact in Segment North of SEK 7 million due to revaluation of additional consideration due to the acquisition of HT Bendix 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 million, up approximately 100% compared to previous year. Also corresponding to an operating margin of 12.9. Much of the results also fall down all the way down to earnings per share, which increased with an impressive 156% to SEK 3.18. If you take a look on the lower left part of the slide, you can see the EBITDA bridge. You can see that currencies had a negative impact of about SEK 6 million on EBITDA. Volumes, due to really strong growth, had a strong contribution of SEK 142 million. Cost decreases plus price mix and other had a negative impact of total SEK 36 million, and acquisitions due to revaluation of those additional considerations I just mentioned had a negative impact of SEK 7 million. By that, we turn to the next page showing two graphs, one showing quarterly net sales growth, one net sales and EBITDA development. As you can see in the left graph, we are now seeing growth for about four consecutive quarters, and of course, a very strong organic growth as just mentioned. If you look at the right part of the slide, you can see that the blue dotted line that 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 development that's due to increased operating margins during the last couple of quarters, driven by increased volumes and good operational leverage, which climbs up considerably higher than the blue dotted line, meaning an increased margin. This is, of course, very nice to see. If we turn to the next page that shows Segment North, I will just comment shortly on each of the segments. Segment North saw a strong demand in the quarter coming from all companies, but especially from Denmark. Strong organic growth, about 38%. Strong improvement in gross margin, mainly driven by higher volumes and price increases. 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 SEK 7 million and revaluated additional consideration, as I said. All in all, much of the increased volumes fall down to EBITDA, which increased about 66% to SEK 66 million, which corresponds to an EBITDA margin of 10.8%. If we turn to the next page, which shows Segment West, we can say that Segment West also saw a strong demand in the quarter. Also here in all of the companies, but especially strong growth in the operations in the Netherlands. 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 doubles the EBITDA or the operating profit to SEK 32 million, which corresponds to an operating margin of 10.5%. Segment East. East 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 increase 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 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. At last, Segment UK North America, if you turn page. In Segment UK 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 price increases to customers. Considerably lower cost, as you can see, driven by good cost control, also, as said earlier, a substantial impact due to the forgiven governmental loan that I mentioned in the beginning. All in all, due to good operational leverage, et cetera, this leads to a very strong increase in EBITDA, as you can see, 180% up to SEK 54 million or so, corresponding to a very strong operating margin of 18%. Going forward, focus will be on continuing taking market shares and to handle the challenges with a very strained supply chain. With that said, I leave the word over to you, Johan, to talk a bit about the cash flow and our balance sheet. Yeah, our balance sheet, of course, is important for various reasons, not only strategically, because it is what helps us realize our acquisition strategy. Now, if every number in the quarter report was good, except one, I guess the cash flow is the one number that sticks out as being slightly lower than last year. We're actually relatively content with that also. Bufab, as you know, has a strong balance sheet, but most of the assets on the balance sheet, most of the net assets are, in fact, net working capital. The net working capital, of course, builds with sales. Now we've enjoyed a period of sequentially strong organic growth, and therefore we're now also building up working capital which added into our cash flow we got during the second quarter. The cash flow was lower by some SEK tens of millions than the corresponding number in 2020. Accumulated though, we have a good cash flow in the past 4 quarters, and it truth be told, we would probably like to have a little bit more inventory than we actually have on our hands right now. It's a good sign that we are now able to build up our inventory again, because that makes it easier to continue to serve our customers with even more efficiency going forward. We turn our eyes to the balance sheet, though, the situation looks very rosy indeed. Our main KPI in that respect is the KPI net debt divided by EBITDA, where the net debt is the end of period reported net debt, and the EBITDA is last 4 quarter rolling number. 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 on this graph on the page called relatively low cash flow caused by strong organic growth. Since then, we've enjoyed a very steep improvement in our leverage. We've gone in 6 quarters from close to 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. That means that our balance sheet now can support, of course, further acquisitions, which is also our strategy. 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. Let me then turn to that. If we go to the Sorry, I forgot we also need to speak about the EBITDA bridge. I'll get back to acquisitions in a moment. To summarize then the quarterly results first before we speak about the future. As you can see in this bridge, our EBITDA was SEK 92 last year and is SEK 185 this year. 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 second quarter. As you can see, we've managed to absorb that volume without adding anywhere near the same amount to the cost line. That means that is what accounts for the profit increase. The second quarter being a bit unusual, I guess it also works out to speak about the first half of year. There too, as you can see, we've gone from SEK 92 to SEK 185, so a little over twice there too. No, now I'm talking nonsense, I apologize. You can also see on this page the bridge between last year's second quarter results and this year's second quarter results by region. 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, from most of our companies, which is very gratifying in itself. Now let's turn back to acquisitions. On this page called consolidating a fragmented market, you can see the 9 acquisitions that we have made in the past 6, 7 years. Those have been quite fortunate. They've added quite a bit to our sales, about SEK 2 billion. They contributed also close to 600 of the 1,300 solutions that are currently sold by Bufab. They've also contributed very strongly to profit, and even more importantly, they've contributed strongly to making Bufab a better company and a better partner for our customers and a better partner for our suppliers. Also, in fact, it has made it easier to recruit really talented people by having these acquisition charges in place. 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, a touch stronger than it usually is. Like I just said, we also have a high activity level in many of the cases in the pipeline. Therefore, it's really good to see that we now also have the balance sheet to execute on those things if we decide to do so, and we will decide to do so every time when, but only when, we feel that the company in question is a strong addition to Bufab, which is well managed, has growth synergies with Bufab, and that we can conclude a 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 like that has paid off in the quality of the acquisitions we have made and their contribution to our development. I guess it's time for a summary. The second quarter was operationally challenging, it's true, due to the picture of operational challenges that prevailed in the manufacturing industry worldwide. That puts pressure on supply, and it puts pressure on component costs. We managed to navigate those things in a good way, keeping our customer supply, keeping our growth margin stable, keeping our costs exceptionally low. Thereby we even managed to deliver an all-time high sales, an all-time high operating profit, and a good momentum going forward. We also get crowded somewhat by the cost issue with the C-parts of transfer costs going up so much and continue to go up during the quarter. There our challenge, of course, becomes to move those costs over to our customers, and work is ongoing to that effect. The outlook is rosier when you look at the demand picture, because there we have a very strong order intake and no signs of slowing down. Of course, there is always uncertainty on the horizon, but so far it looks quite promising. Most importantly, we're in a significantly stronger position today than we were 1 year ago. That goes to efficiency, but also to the fact that we've been able to navigate these rather rocky last 12 quarters up and down very flexibly, both with regard to supplying our customers and with regard to managing our internal cost base as sales have fluctuated. We believe, as I said before, that has significantly strengthened our customer relations. Going forward, our priorities 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 strong demand picture and also to capitalize on the sales options that we see. We do need to increase prices, and we will increase prices to all of our customers to meet the higher cost levels we're facing. 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. That's where we conclude the prepared comments we have. Operator, if you could now instruct the call participants on how to pose a question if they have one, that would be nice. Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound or hash key. Please stand by while we compile a queue roster. Once again, for any questions, please press star and number 1 on your telephone keypad. There are no further questions at this time. Please continue. Okay. Thank you, operator. I conclude that everything was super clear, and as there are no questions and we have nothing to add, then I would like to just 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 third quarter. Thank you so much, and goodbye. This concludes our conference for today. Thank you for participating. You may now disconnect.