Hello, and welcome to the Bulten Q1 report 2020. Throughout the call, all participants will be in listen -only mode, and afterwards there will be a question-and-answer session. Today, I'm pleased to present the CEO, Anders Nyström, and the CFO, Helena Wennerström. Please go ahead with your meeting.
Okay. Welcome everybody. This is Anders Nyström speaking. The agenda for today will be a brief overview of Bulten, the development in our markets, the result for the first quarter, and of course, some words about how Bulten and our industry is affected by the COVID-19 situation. We are a partner for product development support, innovation, procurement, and logistics. As you can see in this slide, Bulten has a broad customer base with light vehicle producers as the largest customer group. Bulten's three largest customers are Ford, JLR, and Volvo Cars. 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. Bulten has many customers with potential for further growth. Next page, please.
Page five. 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. We can thereby be flexible and cost efficient. Bulten already today has a lean and well-positioned operation with a global presence. Including PSM, we have about 1,750 employees. We offer local production in Europe, U.S., 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. Flipping to the next page, market development. We can go to page seven. 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 two months. During 2019, Bulten kept its market share in 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. Slide eight.
Looking in 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, 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. For heavy commercial vehicles, the full year prediction is 27% lower volumes. Translated into Bulten's customer mix, this would mean 15% lower volumes in 2020. Page nine. 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 2021 and 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% in 2022. Let's look at the first quarter. Go to page 11. 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, BUFOe, 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 one month in the quarter. In 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, Bulten has taken action to mitigate effects due to COVID-19. The board has withdrawn its proposal of dividend to shareholders; we've implemented short-term layoffs of employees and investments are being deferred. Page 12. We formally completed the PSM acquisition on February 28th. We see a lot of advantages and synergies between PSM and the old Bulten group. Bulten will get a broader customer base in important growth markets like China and North America. In addition, Bulten's strong position will open doors for PSM in Europe. For Bulten, PSM adds to the group's production capacity and product offering. We see synergy potential both in terms of revenue and costs. All in all, we expect this acquisition to contribute positively to Bulten's development and earnings. Page 13. I previously mentioned the Stronger 24 strategy, which was presented in our capital markets day in February.
Of course, the strategy is nothing without also delivering tangible financial results. We are revising our targets to aim for a growth to approximately SEK 5 billion in 2024, which means a CAGR of 10%. We believe that we can increase profitability and aim for an EBIT of 8% and ROCE of 15%. Although 2020 will be extremely challenging, we do not deviate from our strategy and our ambitious goals. Page 14. As we communicated during March, most automotive players have been hit by the effects of COVID-19, and Bulten is no exception. To mitigate the effects, we've implemented cost reductions throughout the organization. We've made short-term layoffs for approximately 1,200 of 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 have set strict investment restrictions, for example, we planned the property investment in Poland of about SEK 250 million-SEK 300 million to be postponed. As earlier mentioned, the dividend proposal has also been withdrawn. To further review the numbers for quarter one, I leave the word to Helena.
Okay. Thank you, Anders. We flip to page 15. On this slide, you can see our financial summary of the first quarter, the quarter included a good start with continued ramp-up of new contracts during January. We were hit by COVID-19, first in China, followed in February, and further on in March, we could see a close down among most customers in Europe and North America. The situation going forward is the same for us, like for many of our peers. We are in a situation where it's very difficult to predict the development of coming months. Let's look at our sales and order intake, please. Next slide. Page 16. Some more comments then on net sales and order intake.
The market decline is reflected in our order bookings and net sales during the quarter, although the effects have been partially balanced out by the acquisition of PSM. Despite the weak March, Bulten's net sales were almost unchanged during the quarter and amounted to SEK 821 million. Order bookings was down 6.1% in the quarter and amounted to SEK 688 million. The development is a bit uncertain to predict going forward as a consequence of the situation in the automotive industry. We see some early signs of customers restarting production again, but uncertainty is still at a 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. The EBIT amounted to SEK 43 million in the quarter.
Adaption to production to the demand during the quarter has affected the company's earnings in the form of under absorption of fixed costs and consequently put pressure on margins. As 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 the short-term layoffs. This will reduce these cost levels in coming quarter. However, we will be prepared with the shortest notice possible to terminate layoff programs to start production when the situation improves. Next slide, please. Page 18 in cash flow. In a situation like this, we focus very much on cash management, and we are actively working with our working capital. This quarterly cash flow from operating activities before changes in working capital amounted to SEK 47 million and has mainly been affected by the operational results.
Cash flow after the change in working capital amounted to SEK 63 million. At the end of the quarter, working capital increased by SEK 121 million through the acquisition of PSM. Cash flow from investing activities amounted to SEK -71 million, where the acquisition of shares was the dominant part with SEK 60 million. We have, as you know, halted operational and property investment during the uncertain time. In total, the cash flow for the quarter was positive and amounted to SEK 76 million. The company is mainly financed through a financing agreement with a total credit of SEK 716 million. During the quarter, the company used the last option to extend the financing agreement, which now runs until June 2024, with more or less unchanged terms, but adapted to the new conditions following the acquisition of PSM. Next slide, please. Page 19, key indicators.
We have a return on capital employed of 3.9% or 5.9% adjusted for relocation, restructuring, and acquisition. Adjusted for lease liabilities, our net debt to EBITDA is at 1.7x at the end of the quarter, and the equity ratio ended up at the level of 51.5% at the end of the quarter, affected by the acquisition of PSM, but still on a very solid level. Next slide, please. Page 20, on financial guidelines. On this slide, we give you some short guidelines regarding some key figures for us, and these guidelines are not to be considered as financial targets. Our guidelines for the average net working capital in relation to 12-month sales is about 20%-25%, depending on the growth pace. At the end of March, the net working capital has increased by SEK 121 million with the acquisition of PSM.
With this main reason for the high level of 29.9% in the end of the quarter. The guideline for capital expenditures as a percentage of 12-month sales are between 2% and 3% for maintenance of equipment, an additional [0.4% - 2%] for the capacity, depending on the market development. At the end of the March, we are in a level of 6.3%, as mentioned before, the CapEx plan is on hold now, which will have effect on this key ratio going forward. The guideline for depreciation as a percentage of 12-month sales is between 4% and 5% considering the IFRS 16. At the end of the March, we are in line with our guidelines. The guideline for our tax rate is 24% - 28%. Over 12 months rolling 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 carryforward not being balanced for some of Bulten's units where taxable services have not been yet recorded. Excluded to this, we are in a level of 26.9%. However, the tax rate will vary from quarter to quarter. Now back to Anders again.
Thank you, Helena. We're going to look at our focus areas in 2020. If you turn to page 22, please. It is absolutely core to us that we handle the current situation that we're 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 when the signs of recovery is 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 plans with PSM, which we've done from day one 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 BUFO e. Finally, we'll deliver on our new strategy, Stronger 24, which we're extremely excited about. Next page, please. Most of you are familiar with the logic of this slide already. 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 EUR 47 million 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 Bulten growth versus the market.
We have a strong position in our market that will endure through this time. We're focused on health, growth, profitability, and cash flow. This concludes the presentation, and we're ready for questions and answers.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press zero one on your telephone keypads. You can cancel your question by pressing zero two. There will now be a brief pause while any questions are being registered
Our first question comes from the line of Mats Liss of Kepler Cheuvreux. Please go ahead. Your line is open.
Yeah. Hi. Couple of questions. You can hear me, yeah?
Yes.
Yeah. Looking at the sales performance there, I guess, the PSM acquisition contributed somewhat. Could you indicate how much?
Yes, we informed about that in the interim report, and it amounted to SEK 33 million, and it's just related to March.
Yeah. The organic growth, well, should it be included or do you exclude that one?
Include the organic growth, yes.
Good. Just about the order intake for the quarter. It seems that it's too early to say if that's a good guidance for the second quarter sales. It remains to be seen, I guess, how things develop during the next couple of weeks.
That's correct, Mats. Of course, how much of that will actually manifest itself in invoicing is highly dependent on the industry's capability to recover, and there are many factors that come into play there, as you know. The access to personnel, it's the vulnerability of the supply chain of our customers, as well as the demand situation on the market. It remains to be seen.
Yeah. Good. The PSM have a larger exposure to the Asian market, I guess, than the Chinese production and so on. Have you seen the exposure to Asia is larger now? It seems that car producers in that area are sort of ramping up more than in Europe.
Yes.
What impact could we see there compared to previously? How you looked a year ago, I mean.
Well, you're right. China is maybe six weeks ahead of Europe in terms of the COVID-19 situation. They are ramping up production again. They started already in the end of quarter one. I would estimate that the car industry is back up to at least 90% production rate now. We see that coming through in both our facilities in China, both in Tianjin and in Wuxi.
Good. You implement a lot of measures to balance the decline in Europe and so forth, but what kind of leverage do you have there? Should we expect you to sort of present a loss in the second quarter? Will you be able with the help maybe of Asia to keep above zero?
I think you should expect that the absorption will continue given the market situation as it is.
Yeah.
I don't think I can give you more guidelines than that.
No.
No.
Good. Finally, you mentioned the opportunities that could arise in this kind of market situation, and should we expect to see more of the same? I mean, more of the PSMs out there that could be added to you, or do you see other opportunities as well? Is it more like a statement you make in this situation that you like to be prepared for the things that you Well, it's difficult to see right now, but it could arise opportunities.
Opportunities could arise. They can come in many shapes and forms. We never know what happens to the automotive supply chain once production starts ramping up. Many of our competition will probably have issues, and to what extent we can help our customers to get through that remains to be seen. My philosophy is always in a crisis situation, there's always opportunity, and you have to look for it, and you have to be quick to grasp it. In what shapes and forms it will come, well, let's see.
Yeah. Okay, good. Thank you.
Our next question comes from the line of Kenneth Toll of Carnegie. Please go ahead.
Yeah.
Your line is now open
Yeah. Thank you. A couple of questions to follow Mats' questions. Are you getting signs from the OEM that they want to restart plants or is it more what we see in media?
No, it's a mixed picture, but surely there are customers that are ramping up. In fact, there are a couple that started their assembly plant this week. New cars are actually being produced as we speak. It is a slow ramp up and they have to adapt to the availability of both components and personnel and the demand, of course. It's not a digital thing. It's a slow ramp up and the restart dates of our customers, they spread widely across Europe, depending on in which region they are and what situation they're in. It is happening, yes. Of the 133 car assembly plants in Europe, there's a wide spread of dates.
Okay. Of your sales, we all always talk about car production and so on, but do you have any part of your sales that goes more to aftermarket? Basically, if the car plants is in standstill, do you still have some sales?
Well, it's not like being in the bumper fascia business or the headlight or taillight or glass business, where you have a big portion of your sales going into the aftermarket. That's not where we are. I would say that's marginal at best.
Okay. Mats also discussed that the situation in Asia is more on the recovery note and so on. Are you seeing PSM also taking cost measures in the U.S. and maybe in Asia as well?
Absolutely. We're equally doing that across the board.
Okay. Finally, do you feel that your customers are concerned about balance sheet among its suppliers?
I'm sure they are. They haven't explicitly asked us any questions about that. They have bigger fish to fry right now, and they will come to that as the supply base needs to start building working capital. There could be issues in supply base for sure, but of the industry. Right now, it's not the center of their attention.
Do you think it builds 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 up or?
In some cases, they will have to, because they can't shift production between suppliers that quickly. It would surprise me if there won't be sort of a shift to the market shares and the business once the dust settles on this.
Okay. That's all for me. Thank you.
Just to remind everyone, if you wish to ask a question, please press zero one on your telephone keypads. Our next question comes from the line of Mats Liss of Kepler Cheuvreux. Please go ahead, your line is open.
Yeah. Hi. Thank you again. Well, just coming back to CapEx there, you mentioned you put your Polish investment on hold for a while, I guess what kind of implication will that have on your CapEx this year and maybe also next year? What will the total amount of CapEx, or what should be estimated to be this year and next?
As we say, we monitor the cash management for time being, and we need to, of course, look into the development going forward. For the time being, we have said that we will postpone that. Of course it will be much reduced. We will just do the absolutely necessary investments during this year.
And then the thing-
The big one is postponed for when we can see another kind of development and situation going on.
The CapEx level, is it in line with the first quarter or for the full year should it be?
Yes, it will be very reduced.
Yeah.
Just the order we taken, the decision and necessary requirements and investments.
The delay, that it doesn't affect your business opportunities, do you have sufficient capacity to handle the normal market situation anyway? Is that right?
Yes, we do. As I think we mentioned before, the first step of the investment in Poland that we planned is not explicitly a capacity investment. It's an insourcing opportunity that just for ourselves to control and integrate more of the secondary operations. It's not necessary to fulfill the customer obligations at this point, no.
Okay, good. Then the final one, just to have an idea about the 2024 target there also. Things have happened into your launch date, but I guess things will go back to normal in the meantime. It seems that you are quite confident about seeing those opportunities, and it's probably a mix of synergies, both base and cost, and integration there with the PSM. Do you need any more step change things to happen, new BUFOe contracts or maybe an acquisition or something like that? If you could add some more flavor, maybe.
Well, I think we mentioned on the capital markets day that the growth to 5 billion will surely be a mix of organic and inorganic growth. The exact proportions between those two, we haven't specified, and we won't. Of course, we're looking for additional business opportunities, which we always are. Even though the industry is in the state it is in right now due to COVID-19, the new vehicle programs are still being developed, and sourcing opportunities are still around the corner. We're working closely with our customers 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.
Okay. Thank you.
There are no further questions at this time. Please go ahead, speakers.
We thank you for this time.
Yep. 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.