Earnings Call: Q1 2020

Apr 23, 2020

Hello, and welcome to the Bolton Q1 Report 2020. Throughout the Today, I'm pleased to present the CEO, Anders Nystrom, and the CFO, Helena Leonardstrom. Please go ahead with your meeting. Okay. Welcome, everybody. This is Sandish Nystrom speaking. The agenda for today will be a brief overview of Bolton, the development in our markets. The result for the first quarter and of course some words about, how those demand are industries affected by the COVID-nineteen us, we are a partner for product development support, innovation, procurement, and logistics. As you can see in this slide, Boston has a broad customer base with light vehicle producers as the largest customer group. Britain's 3 largest customers are Ford, JLR, and mobile cards. When acquiring PSM during the first quarter, we added automotive customers, primarily Tier 1 suppliers, but also customers outside the industry. To be an approved supplier to this many customers is a strength. Customers value the way we cooperate with them and recognize us for our service. Fluten has many customers with potential for further growth. Next page, please. Page 5. Our geographical footprint is another uniqueness that makes us stand out. None of our competition has this coverage. We balance our production between approximately 40% outsourced production. And 60% in house production, and we can thereby be flexible and cost efficient. Fulton already today has a lean and well positioned operation of the global presence. Including PSM, we have about 1750 employees We offer local production in Europe, U. S, China, Taiwan, and Russia, which is unique in our competitive sets. Through the acquisition of PSM, we have an even more comprehensive geographical coverage than before. So flipping to the next page market development. We'll go to page 7. As you all know, the situation in the automotive industry has been quite dramatic in the past year and not at least in the last few months. During 2019, Wilson kept market share and a slightly decreasing overall market. It was a turbulent year for the industry as a consequence of new regulations the political climate influencing the terms of trade in many countries and the uncertainty surrounding Brexit. In early 2020, the COVID 19 situation has had a large and gradually increasing impact. In February, car production stopped in China. At the end of the quarter, production in China began to recover, but it's not yet back to previous levels. In March, many customers closed their production units in Europe and North America. Some customers in Europe have restarted in April. And we, of course, follow the situation closely, and we're ready to ramp up production in line with customer demand. Next slide, please. Looking at a shorter perspective, the industry forecasting company, LMC Automotive estimates a downturn in production of vehicles this year. A consequence of the COVID 19 situation and very much changed forecast since a couple of months ago. LMC now predicts a 13.4% lower global production during 2020 for light vehicles. For Q1, LMC statistics show a 38% drop in global volumes for light vehicles. Or heavy commercial vehicles that full year prediction is 27% lower volumes translated into Brooklyn's customer mix this would mean 15% lower volumes in 2020. H9 Looking in the longer perspective, LMC estimates a bounce back of production of cars in the years to come. With an increase of 13% in 202120 6% in 2022. Based on these estimates, it seems like volumes missed in 2020 will create a pent up demand. Looking at the same thing for heavy commercial vehicles, they estimate an increase in production of around 20% in 2021 and 10% 2022. Now let's look at the 1st quarter. H11. Let's do a short summary of this eventful quarter then. We presented a renewed strategy and new financial targets at our Capital Markets Day in February, where we also showed our newly launched product concept with Bufo E, a new energy efficient product family with 50% less energy consumption in the production phase. We completed the acquisition of PSM at the end of February, which means we consolidated PSM for 1 month in the quarter. January, we saw the first signs of COVID 19 effects in China and the gradual spread to Europe and Worldwide, which we're all familiar with. Subsequently, both have taken action to mitigate effects due to COVID 19. The board has withdrawn its proposal of dividend to shareholders and we've implemented short term layoffs of employees and investments have been deferred. It's trials We formally completed the PSM acquisition on February 28, we see a lot of advantages and synergies between PSM and the old Bookton group. Both of them, we get a broader customer base in important growth markets like China and North America. In addition, both in strong position with open doors of PSM in Europe. And provision PSM adds to the group's production capacity and product offering. We see synergy potential, both in terms of revenue and cost. On and all, we expect this acquisition to contribute positively to both those development and earnings. Page 13, previously mentioned the stronger 24 strategy, which was presented in our Capital Markets Day in February. And the course of strategy is nothing without also delivering tangible financial results. We are revising our targets to aim for growth to approximately SEK5 1,000,000,000 in 2024, which means a CAGR of 10%. We believe that we can increase profitability and aim for an EBIT of 8% and Laurel CE of 15%. Although 2020 will be extremely challenging, we do not deviate from our strategy and our ambitious goals. Page 14, as we've communicated during March, most automotive players have been hit by the effects of COVID-nineteen, and Bolton is now exception. To mitigate the effect, we've implemented cost reductions throughout the organization. We've made short term layoffs for approximately 1200 our employees, and that corresponds to over 70% of our workforce. Management has cut its salaries voluntarily by 10% over the next few months, and we're looking into further measures to keep costs down. We also focus very much on cash management and cash flow improvement measures. We've set strict investment restrictions for an example, and for example, we planned the property investments in Poland of about SEK 250,000,000 to SEK 300,000,000 to SEK 300,000,000 to SEK 300,000,000 to SEK 300,000,000 to be postponed. As earlier mentioned, the dividend proposal has also been withdrawn. And then to further review the numbers for quarter 1, I leave the word to, Elena. Okay. Thank you, Andres. And then we flip to page 15. On this slide, you can see our financial summary of the first quarter. And the quarter included a good start with continued ramp up of new contracts during January, but then we were hit by COVID-nineteen. Plus in China, already in February and further on in March, we can see a close down among most customers in Europe and North America. The situation going forward is the same for us, like for for many of our peers. We are in situation, but it's very difficult to predict the development of common months. A place to look at our sales and order intake. Please, next slide. Page 16. Some more comments than on net beds and order intake. The market decline is reflected in our order bookings. And next day is during the quarter. All the effects have been partially balanced out by the acquisition of DSM. Despite the weak March, both as net sales were almost unchanged during the quarter and amounted to SEK 821,000,000. Order bookings was down 6.1 percent in the quarter and amounted to SEK 608 1,000,000. However, the development is a bit uncertain to predict going forward as the consequence of the situation in the automotive industry. We see some early signs of customers restarting production again, but uncertainty is still at the high level. Next slide, please. Page 17, earnings development. Our earnings performance was, of course, affected by the low market activity in March. Our EBIT margin for the first quarter amounted to 5.2% down by 1.9% compared to comparable quarter last year. EBIT amounted to $43,000,000 2nd quarter. Adoption to the production to the demand during the quarters of that the company's earnings in the form of under absorption of fixed costs and consequently put pressure on margins. And as Anders just mentioned, We have implemented actions to reduce costs where a big portion of our employees one way or another has been a by the short long term layoffs. And this will reduce its cost levels in coming quarter. However, we will be prepared with the shortest note possible to terminate layoff programs to start production when the situation improves. Next slide, please. Page 18 and cash flow. In a situation like these, we focus very much on cash management, and we are actively working with our working capital. And this quarterly cash flow from operating activities before changes in working capital amounted and has mainly been affected by the operational results and cash flow from after the changes in working capital amounted to 63,000,000. And at the end of the quarter, working capital increased by SEK 121,000,000 through the acquisition of DSM. And cash flow run on investing activities amounted to minus 71,000,000, where the acquisition of shares were the dominant park with 60,000,000 We have, as you know, forfeit operational and property investments during the uncertain time. In total, the cash for the quarter was positive and amounted to 76 NYSEK. And the company is mainly financed through a financing agreement with a total credit of SEK 716 1,000,000. And during the quarter, the company reduced the last option to extend the financing agreements, which now will still end until June 2024, with more or less unchanged charge, are adapted to the new conditions following the acquisition of DSM. Next slide, please. Page 19 key indicators. We have a return on capital employed of 3.9 percent or 5.9 percent adjusted for allocation, restructuring, acquisition. Adjusted release liabilities, our net debt and debt to EBITDA is at 1.7 at the end of the quarter. And the equity ratio ended up at the level of 51.5 percent at the end of the quarter, affected by the acquisition of DSM still on a very solid level. Next slide, please. Page 20 on financial guidelines. And on this slide, we gave you some short and last, regarding some key figures for us, and these guidelines are not the precautions as financial targets. Our guidance for the average net working capital in relation to 12 month sales is about 20 to 25% depending on the growth pace. At the end of March, the net working capital has increased by SEK 121,000,000 with the acquisition of DSM. Therefore, with this main reason for the high level of 29.9% in the end of the quarter, and the gain of our capital expenditures as a percentage of 12 month sales are between 2% 3% for maintenance of equipment and additional to core to 2% for the capacity depending on the market development. At the end of the March, there are a level of 6.3%, but As mentioned before, the CapEx plan is ongoing now, which, will have effect on this key ratio going forward. And the guide of our depreciation as a percentage of 12 month sales is between 4% 5% considering IFRS 16. At the end of the March, we are in line with our guidelines. And the guidance for our tax rate is 24% to 28%. Of a 12 months ruling was out before tax. At the end of March, the average tax rate was 66.6%. And the high tax rate is due to loss carry forward not being balanced for some of both these units where our taxable services have been not being yet recovered. Excluded for this, we are in a level of 26.9%. However, the tax rate will vary from quarter to quarter. And now back to Hamblish again. Thank you, Elena. And, we're going to look at our focus areas in 2020. So if you turn to page 22, please. It is absolutely core to us that we handle the current situation that we're in, in a responsible way for all our stakeholders. We've implemented significant actions to mitigate the current situation with rigorous cost and cash flow control. As important, we're prepared for a swift ramp up and the signs of recoveries there. We see some early signs of customers ramping up but it's much too early to predict when we'll return to normal levels. Moreover, we're focusing on delivering on our synergy times with DSM, which we've done from day 1 after the transaction. In uncertain times, like these opportunities also arise and we'll be ready to evaluate and act on those opportunities as appropriate. We're in a product focused business and we'll step up our innovation activities in order to provide both functionality and sustainability. You've seen proof of that in the first quarter with the launch of U4E. Finally, we'll deliver on our new strategy stronger 24 which we're extremely excited about. And most of you are familiar with the logic of this slide already, and, This is showing the backlog of orders that are taken, but not yet implemented into production. As of now, this order backlog amounts to around 1,000,000 on a yearly basis in full production. The timing of this backlog has become more uncertain due to the current situation in the industry, but it's a good buffer and a sign of strength when the industry returns to normal. We predict a stronger built in growth versus the market. We have a strong position in our market and will endures through this time will focus on health, growth, profitability, and cash flow. And this concludes the presentation and we're ready for questions and answers. Session. And our first question comes from the line of Matt Solis of Kepler Cheuvreux. Please go ahead. Your line is open. Yeah. Hi. A couple of questions. You can hear me, yeah. Yeah. Yeah. Looking at the sales performance, I guess, the PSM acquisition, contribute to some, but, could you indicate how how much? Yes. We we informed about that in the interim report, and it's, amounted to SEK33 1,000,000. And it's just, related to March. Yeah. And, yeah, and and, the organic growth. Well, do you should it be included or or exclude that one with you? That'd be good. That would be a good organic growth. Yes. And then, just about this, the order intake for the quarter is it seems that it's too early to say it's just a good guidance for the 2nd quarter phase. It's it's it's remains to be seen, I guess. How things develop, during the next couple of weeks? Well, that's correct, Max. Or is it the how much of that transfers into that will actually manifests itself in invoicing is, highly dependent on the industry's capability to recover. And there are many factors that are coming play there, as you know, it's, the access to to a personnel. It's, the vulnerability of the supply chain of our customers as well as the, the demand situation on the market. So it remains to be seen. The DSM, that have a Georgia federation market, I guess, and the Chinese production and so on. Have you seen, the exposure to to Asia's daughter now. And it seems that, car producers in that area also for renting up more than in Europe, What what's the what impact could we see there compared to previously? How you looked a year ago, I mean? Well, You're right. I mean, China is is, maybe 6 6 weeks ahead of Europe in terms of the COVID 19 situation, and, and they are ramping up production again. That they started already in the end of, of quarter 1. And I'd say, you know, I would estimate that the car industry is back up to at least 90% production right now. And we see that coming through in both our facilities in China, both in Tianjin and in Wuxi. Good. You you implemented a lot of measures to to to balance decline me in Europe and so on, but, how, how, what kind of leverage do you have there? Should we expect you to sort of, well, present the loss in the second quarter? Or will you be able with the house maybe all of Asia to keep above the 0. I think you should expect that the on the absorption will continue with the given the market situation as it is. Yeah. I don't think I can give you more guidelines than that. Good. And finally, you've mentioned the opportunities that could arise in this, kind of market situation. And well, should we expect to see more of, more of the same? I mean, more of what are the more PSMs out there that could be added to your, to your, or do you see other other opportunities as well? Or is it more like, statement you make, in this situation that you like to be prepared for the Kingstep 2, well, it's difficult to see right now, but it could arise opportunities. Opportunities it arrives, and then they can come in many shapes and forms, and, I mean, we never know what happens to, to the automotive supply chain once, production start ramping up many of our competition will probably have, have issues, and to what extent we can, we can help our customers to get through that. Remains to be seen. But we're, my philosophy is always, you know, in a crisis situation, there's always opportunity and you have to look for it and you have be quick to grasp it. And, and what shapes and forms it will come with? Let's see. Yeah. Our next question comes from the line of Kenneth Tull of Carnegie. Yes. Thank you. So a couple of questions to follow Mark's questions. Are you getting signs from the OEMs that they want to restart plants or is it more what we see in media? It's a mixed picture, but surely there are customers that are ramping up And in fact, there are a couple that, that started their assembly plants this week. So cars are actually being produced as we speak. But it is a slower and they have to adapt to the availability of both components and personnel and the demand course. So it's not, it's not a digital thing. It's, it's a slow ramp up and, and the the restart dates of our customers that they spread widely, across your depending on which region they are and what situations they're in. So it is happening. Yes. But, of the the 133, core assembly plants in Europe, there's a wide set of dates. Okay. And then of your sales, I mean, we'll always talk about car production and so on. But do you have any part of your sales that goes more to off the market? Or is that Yeah. So, so, basically, if the core plants, if it's in the stand still, do you still have some sales? Right. It's not like being in the bumper fascia business or the headlight or taillight or glass business, where you have sort of a big portion of your sales going into the aftermarket that that's not where we are. So let me say that marginal at best. Okay. And then, Max also discussed that the, situation in Asia is more, on the recovery note and so on. But, are you seeing PSM also taking cost measures in, in the US and then maybe in, in Asia as well. Absolutely. We're equally doing that across the board. Okay. And then finally, do you feel that your customers are concerned about balance sheet among its suppliers? I'm sure they are. They they haven't explicitly asked us any questions, about that. Have bigger fish to fry right now, and, and, they, they will come as, as the supply base needs to start building working capital. There would be issues in supply base for sure, but of the industry. But, right now, it's not the center of their attention. So, so it's more, do you think it's those kind of discussions that could lead to market share shifts and so on? Or do you think that, car producers will try to step in and help financing a working capital build out for? In some cases, they will have to. Because they can shift production between suppliers that quickly. But it would surprise me if if there won't be sort of a, a shift to, to, the market shares in the business once the dust settles on this. Okay. That's all for me. Thank you. And our next question comes from the line of Matt Lies of Kepler Cheuvreux. Please go ahead. Your line is open. Yeah. Hi. Thank you again. While you're coming back to CapEx there, you, you mentioned you put your Polish, say, investment. On hold for a while and, I guess, what kind of implication will that have on your CapEx this year and maybe also next? And and what will the total amount of CapEx? So what should be estimated to be this year and next Yeah. As we say, we monitor the cash management for time being, and we need to of course, look into the development going forward. But, for the time being, we have said that we will postpone that So of course, it wouldn't be much reduced. We'll just do the absolutely necessary investments during this year. And then we it's postponed, for for, when we can see another kind of development and situation. And the CapEx level, if it's in line in the first quarter or for the full year, it should be? Yes. It will be very reduced. Yeah. Yes. The work we take decision and then, and necessary requirements and, and, investments. And the delay that it doesn't affect your business opportunities, do you have, sufficient capacity to to handle the normal market situation? Anyway, is that right? Yes. We do. And, and, as I think we mentioned before, the, the, the first step of the investment in Poland, that we planned is not, not explicitly a capacity investment. It's an insourcing opportunity that, that, just for ourselves to control and integrate more of the secondary operations. And it's, it's not necessary to fulfill the customer obligations, at this point. No. Okay. Good. And and the then we have to file, just have a deal about the 2024 target there also, I mean, things are happen since you launched it, but I get through things will go back to normal, in the meantime. And then, it seems that the oil price is confident about seeing those opportunities. And, and, it's I mean, it's probably a mix of synergies that both, based on costs and, and integration there with the PSM, but do you need any more step change, things to happen, new full service contracts or maybe an acquisition or something like that, if you could add some, some of flavor, maybe. Well, I think we mentioned on the Capital Markets Day that the growth to, to 5,000,000,000, will surely be a mix of organic and on organic growth. The exec proportions between those two, we, we, we haven't specified, and, and, and we won't. But, of course, we're looking for additional business opportunities, which we always are. And, and, even though the industry is in the state it is in right now due to COVID-nineteen, the, that the new vehicle programs are still being developed and sourcing opportunities are, are still around the corner, and we're working closely with our customers to, to win more business. It's not necessarily affected by the situation we're in. We're not seeing those organic opportunities slip away from us in any way, at least not yet. And there are no further questions at this time. Thank you very much for your time and for, your attention, everyone. This now concludes our call. Thank you for attending participants. You may disconnect your lines.