Earnings Call: Q2 2020

Jul 10, 2020

Okay. Welcome, everybody. Let me first turn you to page number 3, which contains the agenda in the presentation. The agenda for today is a brief overview of the development in our market The results for the second quarter and how Bolton and our industry is affected by the COVID nineteen situation. And finally, some words about the focus for this year. So if you turn to page 4, Both the nature supplier of fasteners, primarily to the automotive industry, we don't just supply the hardware to many of our customers. We're a partner for product development support, innovation, procurement, and logistics. As you can see in this slide, Buildin has a broad customer base with light vehicle producers as the largest customer group. Britain's 3 largest customers are Ford, JLR, and Volvo Cars. When acquiring PSM in the first quarter, we added a number of automotive customers, primarily Tier 1 suppliers, but also customers outside of the auto industry. To be an approved supplier to this many customers, this is strength. Customers value the way we cooperate with them and recognize us for our service. Dilton has many customers with potential for future growth. Next slide, please. Page 5. Our geographical footprint is another uniqueness that makes us stand out. None of our competition has this coverage. We balance between in house production and outsourced production, and we can thereby be flexible and cost efficient. A major part of our production is in house. Fulton already today has a lean and well positioned operation with a global presence. Including PSM, we have about 1685 employees We offer local production in Europe, US, China, Taiwan, and Russia, which is unique in our competitive set. Through the acquisition of PSM, we have an even more comprehensive geographical coverage than before. Next slide please. In February, before the real breakout of the pandemic we presented our revised strategy, which we call stronger 24 and the way we will go about reaching our new targets. It's through a number of building blocks visible on this slide. To start with, we have our strong position with the unique nested taken both into what it is today. We have growth momentum both organically through the contracts. We're currently ramping up as well as the new contracts that we've recently won and non organically through the acquisition of PSN. We aim for sales reaching SEK5 billion in 2024. Our margin expansion will come through the obvious synergies with PSM, improved exposure to customers in North America and China also together with PSM. And accelerated effort to improve efficiencies in production and distribution and through launching new technology with a value add for customers. And we aim for EBIT margins above 8% in 2024. You also have a strong financial position. This is something we really want to emphasize in contrary to many other industrial companies whose balance sheet been hit hard by the corona crisis. Both don't stand strong when the market recovers. I want to underline that the global downturn has not eroded the validity of our strategy. Our position is strong. We stand by our targets, and we stand stay committed to all of the building blocks and the strategies to get there. So now some words about the market development. If you turn to page 8, please. Looking to shorter perspective, the industry forecasting company, LMC Automotive estimates a downturn in production of vehicles this year. Which is, of course, consequence of the COVID 19 situation. LMC predicts that light the global light vehicle production will decrease by approximately 20% in 2020 compared to 2019. On a full year basis. The corresponding estimates for heavy commercial vehicles is a decrease of approximately 27%. Translated into built in's current automotive customer mix, this would mean a drop of approximately 21%. In the first half of twenty twenty, Western European light vehicle sales have dropped about 40% compared to the first half in twenty nineteen. However, in June, we saw a relative rebound and Western European light vehicle sales dropped about 25% versus June of 2019, which is an improvement over the prior month. Turning to, page 9. Looking in the longer perspective and LMC Automotive estimates a bounce back of production on cars in the years to come with an increase of 16% in 2021. 8% in 2022. Based on these estimates, it seems like volumes missed in 2020 will create somewhat pent up demand. Looking at the same thing for heavy commercial vehicles, the estimate is an increase of production of around 16% in 202113 percent in 2022. Talking about the second quarter then. If you turn to page 11. We'll look at the short summary of the events in this quarter. Throughout the quarter, of course, we've continued to mitigate the effect of COVID-nineteen. The board withdrew its proposal of dividend to shareholders and we've implemented short term layoffs builtans Unit in Poland signed an agreement for fossil free electricity for the external energy supply from, July 1st. Moreover, Bolton has acquired a minority stake in, Tension Camp Systems. And after the end of quarter 2, Bilton was awarded a new FSP contract worth approximately 1,000,000 on an annual basis full pace. It's, of course, a great achievement to receive a substantial contract like this at this difficult time. It really shows the competitiveness of our concept and offer. We've also made a few changes to the group management and we'll go into more detail on these events in the following slides. So if you turn to page 12 then, The effects of COVID nineteen have had a serious impact on the global automotive industry as everyone knows. During the second quarter. And this applies also to built in. The income production in Europe and the U. Came to a virtual standstill at the beginning of the quarter. Although there has been a departure recovery and in China volumes are now essentially back to pre pandemic levels. Measures have been taken and operational adaptations made on a market in purchasing and production. The company is focused on production planning and reducing lead times and the value chain. At the company's units in Europe and North America various kinds of working hour reductions and photos were in place for at the most 1200 employees. The combination of the mentioned value chain actions minimize CapEx activities, and withdrawn dividend as all contributed to protect cash flows. Page 13. On June 26, built an acquired 27% of the shares tension cam systems AB for SEK6 1,000,000. Tension CAM is a Goppenberg based company specializing in the development of sensors for plan force monitoring and screw joints. The company, both individually and together with industrial partners and research institutes conducts research and development in this area and already owns a number of patents. Tensioncams technology is not currently commercialized or industrialized. Built and attention can will deepen their cooperation in the development of wireless Tam Force monitoring for screw joints and the deeper cooperation aims to accelerate the completion of Redeem Concrete Customer Office. The acquisition of the share of attention cameras in line with built in strategy of being a technology leader in fasteners and being able to offer customers unique and sustainable functionality and to facilitate profitable growth even outside of the open loads of industry. To page 14. As mentioned, built in was awarded an FSP contract for supply of fasteners to an automotive manufacturer who are also one of our existing customers. It is clear that the knowledge and experience Bilton has built up over many years as a global manufacturer and FSP supplier to multiple customers was key to this award. The new contract will provide a good platform to deliver innovative and sustainable solutions for the year to come. The contract is transfer is a transfer of an ongoing FSP set up for 2 assembly plants and the annual order value is approximately 1,000,000 on an annual basis at full pace. Deliveries are estimated to start already on 24th July 2020 and extend for a period of 5 years. Startup costs are expected to be around €1,000,000. Turn to page 15, please. I'm looking at the changes we recently made to recruit management. I'm glad to tell you that we recruited Marcus down as the chief commercial officer, which is a newly established position with global responsibility for marketing and sales. As of November 1, 2020. Marcus has experienced from several senior positions at vehicles suppliers, Visteon and Benteler. And most recently, it comes from a fastener supplier Netroof in the Netherlands where he was vice president sales and marketing. Charter increase is today vice president and business controller has been appointed acting CFO until a permanent CFO has been appointed. Helena Vanderstrom has previously announced a resignation, and that was published in a separate press release. On April 1st. Furthermore, Fredrick Beckstrom, formerly Senior Vice President Production at Hilton will take up a newly established position as Chief Operating Officer with immediate effect. In this role, Frederick will in addition to his production responsibilities also be responsible for central material planning. Logistics and distribution. And with that, I hand over to Elena. Okay. Thank you, Andesh. Page 16. On this slide, you can see our financial summary of the second quarter. And the quarter was, of course, very much affected by the COVID 19 effects on our business, and the industry shut down for many weeks. The order intake and sales and profitability have ever, however, improved gradually through the quarter as production for us and our customers started again. And increasing pace. But still, sales and production continue to be at a reduced level compared to before. And the situation going forward is the same for us as, for many of our peers. We are in a situation when it's very difficult predict the development the coming months. But let's look at our sales and order intake. Next slide, please. Page 17. The market declines is reflected in order booking and excise during the quarter. Although, the effects have been partially balanced out by the acquisition of PSM order bookings amounted to 409,000,000 a decrease of 45.6% compared to the corresponding period last year. The prevailing uncertain production situation in automotive industries causing the development. As the next few months are still difficult to predict. In a sense, for the group, amounted to 411 441,000,000, a decrease by 43.5% compared to the same period last year. And as you can see on the down right, grow off on this slide, sales gradually improved during the quarter. Next slide, please. Page 18. Our earning earnings performance was, of course, affected by the loan market activity in the quarter. Our EBIT margin for the 2nd quarter amounted to minus 13.3%. Severely down compared to the comparable quarter last year. And EBIT amounted to minus 59 milliseconds a quarter. Adaptional production to demand during the quarter has affected the company's earnings in the form of under absorption of fixed cost and consequently pressure on margins. Currency effects of minus 11 minutes has had a major impact on the quarter as well. And as the Anders just mentioned, we have implemented actions to reduce costs where a big portion of our employees, one way or another, has been affected by short term layoffs. This has reduced the cost of bill in the quarter by 48 minutes. Next slide, please. Page 19, in a situation like this, we are focused very much on cash management. And we are actively working with our networking capital. The lowest sales volumes have had a negative impact on the profitability of the business. And cash flow from operating activities before change is in working capital amounted to minus 9 clearly affected by the COVID 19 situation. But thanks to Focus efforts, working capital increased and cash flow from the change were amounted to SEK60 1,000,000 during the quarter and contributed to a cash flow from operating activities in total and amounted to positive SEK51 1,000,000. Total inventories decreased compared to last year, and especially our current receivables decreased down 101 compared to a year ago, and our net working capital in total has increased by 110,000,000 by the end of the quarter through the acquisition of this, and cash flow from investing activities amounted to minus SEK 70,000,000. I'm much lower level than before as we have just, as you know, halted operational and property investments during this uncertain time. Sprint 2 of the cash flow for the quarter was positive and amounted to SEK 6,000,000. And our that has reduced since the first quarter and amounted to 634,000,000 at the end of the quarter. Next slide, please. Page 20. Our key indicators has been heavily affected on a lower profitability level and lower capital turnover times. Due to the COVID 19 situation. We have a return on capital employed of 0.2% or 2.1% adjusted for allocation risk acquisition. Adjustable lease liabilities, our net debt to EBITDA ratio is at the 2.3 at the end of the quarter. And the equity ratio ended up in a level of 54.4 percent at the end of the quarter, still on a very solid level. Looks like this. Page 21. Our financing of operations are still also in a very good shape. Our main financing on May through Sanske Handelsbanken and 2 to 750 milliseconds. And during the quarter, settle an additional financing agreement with Danske Bank with credits totaling to €12,000,000. This financing will support our Polish Operations and final documentation will be finished the next few weeks. 2 overall, a gold covenants linked to the financial agreements have been met so far this year. On this slide, you can see our financial targets as well as some guidelines regarding the relevant key figures for Bluestone. And normally, we can come up on these, key figures on the quarterly presentations. But as we have mentioned earlier, in this presentation, our businesses in a very special situation. Making further detailed comments may be not so relevant for this quarter since it's compared with the rolling 12 month sales. But of course, we're trying to improve the key figures as soon as we have returned a more normalized level. And I will therefore hand over to Anders again and what is more relevant. I'll focus going forward. Please on this. Thank you, Leila. And I would like to turn your attention to page 24 in the presentation. And this slide is setup at of it is very familiar to those of you who follow our, our quarterly conferences. And this shows the backlog of orders taken, but not yet implemented into production. As of now, Bilton has an expected annual sales growth of just over 1,000,000 at full pace in 2022 compared to 2019. The timing of this backlog has become more uncertain due to the current situation in the industry, but it's a good buffer and the sign of strength when the industry returns to normal. We predict a stronger organic growth for Hilton versus the market and we have a strong position and we'll go through these times with a focus on health, cash flow, profitability, and growth. And finally, page 25, a few words about our focus for the rest situation that we're in a responsible way for all our stakeholders. We have implemented significant actions to mitigate current situation in the industry with rigorous cost and cash flow control. As important, we are prepared for a swift ramp up when the signs of recovery are there. Our customers are ramping up now, but it's too early to tell when volumes will be back to normal. Moreover, we're focusing on delivering on our synergy plans with PSN, which we have done from day 1 after the transaction. We've already started to coordinate our operations in the U. S. To move to a joint greenfield building in Ohio. And on certain times like these, opportunities of different kinds arise, and we'll be ready to evaluate and act on those as we see them. We're in a product focused business and will step up our innovation activities in order to provide both functionality and sustainability. And you're seeing proof of that earlier, and we'll continue to take steps in that direction. And again, we stay committed to execute on our stronger 24th strategy. This concludes the actual presentation. I think we're ready for Q And A. Thank session. There'll be a brief pause whilst any questions of being registered. Our first question comes from Kenneth Hall Kenneth, floor is now open to you. Yes, thank you. So a couple of questions. First, on this FSP orders that you got from an existing customer. I was under the impression that once you have such an order and and you are delivering on it, it's quite a hassle for your customers to change supplier. So I thought that kind of business was very, very, call it, secure. But obviously one of your competitor lost a couple of contracts to you. So can you talk a little bit around what costs the competitor to lose the business? Well, I'm I'm not gonna not going to give feedback to our competition, but you're right, Kenneth, it's, it's a high threshold to to change an FSP supplier. And obviously, our customer in this case went through a lot of hassle as you expressed it to do this. And it was a very deliberate choice they made. And I think more than anything else, the best witness, about the, how satisfied they've been with the services we've provided to them over the years. And then, you know, what what really were the downsides of the existing relationship? I I I don't wanna comment on that. Okay. So you don't see a risk that you lose at SP, what do you have with these customers or other customers at the moment? And there's always a risk. But as you correctly expressed it, it's, there's a lot of hassle to do it. And once you have an FSP contract for platform or an assembly client or whatever the contract states, then the threshold is very high. It's yours to lose, so to say. And as long as you perform correctly and then you're competitive, chances are very, very high, you're going to keep it. Okay. Then you talked a little bit about your customers and that the, our production is gradually improving. Can you talk a little bit about the trends you see. And also one thing that worries me a bit is that maybe a car producer had an order book when they decided to close down the production for COVID-nineteen reasons. And then when they started up again, started by delivering on that order book. But what happens then are order books strong enough for sort of car production to keep trending higher? Or could you shed some lights on what you hear from your customers, please? Well, Kenneth, I I I think you you there there's an element of of truth in what you said. They had a an order book when they closed the plant for for COVID reasons. And, of course, they had they could pick that up when when, turns were ready to, to open up again. We we we see, however, the car register are coming back up again as well. And that's a good sign, in Europe, the statistics available in Europe, as you probably have seen as well. But I think that the future here is is so dependent on what happens with with the actual COVID nineteen situation, are we going to have another round of of this disease or is this going to improve from here? And it's nothing that any of us can can predict We just need to be paying attention and being flexible. Adapt to the situation. That's all we can do. I mean, sooner or later, this market will come back. I'm not so sure, but, if we would take 1 month, 2 months, or 6 months or a year, I don't know that. And and they were all on the same boat. So in terms of sort of production rates compared to the normal, I believe that in the beginning with car plans open up, they were running at maybe 10% to 20% capacity utilization, just to test systems and so on. So the current rate, is that significantly higher? Is it more like 40, 50%? Or where do you see that at the moment? Mean, I'm not after, exact numbers here, just a feeling. It varies by customer very much. And you're right. When when when clients were opening up, they they were running at around, you know, 20% of their capacity. I'd say it's a spread now. It's any anywhere between that and 90% today. Depending on which customer you look at. The primary concern is probably in the U. S. Where they still have a shortage parts from, primarily from Mexico because Mexico is hard hit by by by the deceased and many suppliers in Mexico are shot still. We're not as dependent on that though. As you know, we're still very European centric and in Europe. The plant reopenings have been more successful than those in North America. Okay. And then, finally, looking at the financial situation, I tend to look at the net debt to EBITDA and it reached 4 times now with the poor results in Q2. Do you see that it could go even higher in coming quarters. And and do you see that that it's, that it might course, covenant to be doped in the in the 3rd or 4th quarter, and and a little bit, how how does the bank view this and and also your customers? Is it does everyone look at that as a temporary thing? And and rest assured that you are working hard with the cash flows and so on? Or can you speak a little bit around that, please? Yes. Absolutely. And of course, as we have mentioned, we are of course focusing on the cash flow, and that is of highly importance in this kind of situation. So we are monitoring the, the, net working capital and the cash collection in connection with us, and that is, very much in our focus. But as you also can see, as we have also succeeded to actually increase our financial agreement this year quarter. So we have actually added on, as 1,000,000 credit facility through Danske Bank, to the situation, to to the existing agreement with the Transke Bank. And so we are prepared. And of course, the situation with the EBITDA, it will follow us for 12 months. Rolling. So that will be a part of the the the reporting, but we have an agreement in place for that. Where we are security in this perspective. And you don't hear any sort of worries from your customers that, that balance sheet are too weak, but that should go for most other supplies as well, I guess. I would say that we still have a quite good a strong financial position given the situation. And there's I think it's very it's a strength to actually be able to to settle this kind of agreement in this state situation. So I think that gives comfort to the customer as well. So we are ready to to to support the the when the volumes is coming back. Thank you. Thank you. Thank you. Our next question comes from Matt Liz Kepler Cheuvreux. Matt, the floor is now open to you. Yes. Hi. Thank you. Well, I have a couple of questions. First, I mean, you indicated that production run rate are coming up. And I guess, could you say something about how you will use furloughs going forward? Is it a flexible situation that you should, yes, if you could shed some light there? The furlough schemes and the government support is it looks different from country to country. But I'd say we have a good, very good handle on it and, and in almost every country where we are, where we have an industrial presence, we, the the the the schemes are fairly flexible. So we we have made sure that in our agreements, for instance, in Sweden, I mean, basically, you need to have a union agreement in the bottom of that whole setup. And we've made sure that we have the flexibility we need so we can call in people, as we need to increase production. So, I think what you're getting at is if there's if there's gonna be a situation where we have a a a capacity constraint and and, no, we're not gonna have a capacity constraint because of this. So we'll we'll use it, opportunistically, for lack of a better word, to to adopt to, to the situation. Yes, thank you. And the 3rd quarter, I guess it's normally a holiday quarter. Is there any sort of different in that sense? No. Not really. It's a holiday quarter in in, in many countries. Yes. And and normally sales and production is somewhat lower. During during these months, but, in terms of ferno, that had does not have an impact. Yeah. And, the the customers you have, they are also sort of well, in promoting the holiday as, as normal as the inquiries, the sort of attempt up to producing the backlogs that wasn't, delivered previously during the year. Well, it depends. So every plant has has a different strategy, I would say. When we look to customer base and how they're using the summer shutdowns to some some are actually, backing off on on on the and they're actually producing more than they would in a normal, normal quarter 3. And some are producing less and depends on sort of what their order book looks like. And, if if they want to produce at reduced pace or if they want to shut down and then produce at full pace because that's a very different from plan to plan. As you mentioned, you have been able to release quite a lot of working capital and And, inventories also have been both have come down. Is there a sort of, Well, you need to increase production to be able to supply the current demand or is it still sufficient, inventories and so on. I also mean, the customers have have you seen customers sort of reducing their their investors to some extent? Maybe the Well, there you go. Yeah. I was just just explaining about that. Right. We haven't seen customers, changing their behaviors on inventories. We're we're delivering with the same, same type of notice as we always have. The only thing you can say about the customers is that as a usually what usually happens in these uncertain times is that their production planning and their call off planning seems to be a bit more erratic than normal. We can see that being more stabilized now. Which is a good sign, I have to say. In terms of our own inventory, yes, your observation is correct. We've reduced inventory and that something that we've done over the last year or a little more than a year, as we're bringing efficiencies and improvements into our own processes, both our production planning processes and our lead times with the supply base, etcetera. We're making improvements and that comes out partly as inventory reduction, which is something we've referred to previously as well. But we do have enough inventory to react to, to the variations in the customer base. Okay. And one about, I mean, you had a customer mix in both light vehicles and heavier vehicles Is there any difference there in the sort of market sentiment? Can you say something about that? I'd say there is more difference between single customers than there is between the dynamics of those two markets. Okay. And finally, just about at the three contracts. How will you, book the order in the third quarter. And also, I mean, it's, contractor and existing customer and how much more sales have you been able to sort of gaps there in this contract compared to the previous order you have there. Not sure. I'll send you a question. I would say the order value as such at full pace is what we have published, right? And it's a substantial one. I mean, this is big, even for being an SSP order. And then, of course, the market situation and the recovery rate is going to have an impact on how quickly we get up to full pace. So that's a general market dynamics that comes into play. But but maybe to clarify, since the contract was announced after the q 2 after the end of June, it's not included in the order intake that we have reported. Correct. Yeah. So during the third quarter, you will only sort of book the call of orders that you receive. You won't sort of book the 60,000,000 you hear the contract in the 3rd quarter, but that's Yeah. Yes. And and then as we we report the order intake, yeah, and the order book and for 100 days, it will just reflect that period then, and the order that is coming in for that period, to the bill delivered. So the pace will come in for in during the third quarter. Yes, that is correct. Okay, great. And what about the sort of how much more have you received from this existing customer compared to the old contract you had? But that is the FSB contract of 1,000,000 annually, but now, of course, we have a COVID-nineteen situation. So it's a little bit less, maybe in the pace, when we start it up, but but that is what will come in, during the third quarter. So it's a sort of, I mean, it's an existing contract, but existing customer, but it's all new. This this is all new, the 60,000,000. Yes. It's all new. Is that it on? Yeah. So you increased the delivery value the contract value to this existing customer, yes, that's correct. Thank you So would you be brief for us to register any other questions? Our next question comes from Kenneth Tong. The floor is now open to you. Just to follow-up on the peawaters. You also mentioned in the presentation that there are many opportunities in strange times like this. Do you see opportunities for, getting even more FSP orders? And what would you be able to actually do that if there were something coming up. I mean, both from a sort of management and and logistics situation, also from a financial situation. Actually, yes, we can. When there's turmoil in the industry, you know, that that always, and I I tend to always look at that as an opportunity. And and, we're we're paying attention. And and, yes, we we we're ready. As soon as we have ramped up this contract, which, as you know, is is a short term thing. And, we'll be very, very quickly in a steady state with the new big contract just because we have to, and we're ready to take on the next if there is one. Thank you. It appears to be no other questions. So I will hand back to the speakers for any other remarks. Alright. I thank you all for listening and calling in. I just want before we we hang up to, to draw your attention to that this is the last, quarterly call for Helena. I think you've, for those of you who attended these calls regularly over the years, you'd turned your familiar with her voice. And, and, I just want to thank Elena for her distinguished and long time service to the company and that cannot be overestimated. The impact she's had on what booked it is today. So thank you, Elena. Thank you for that, Amish. And I wish you all best luck. I would follow you going forward as well. Yeah. Thank you. And she would like somewhere. Yeah. She would like somebody.