Earnings Call: Q4 2019

Feb 6, 2020

Hello, and welcome to Bolton's 2019 Q4 presentation. My name is Kevin Woodesert, Senior Vice President, Corporate Communications. Presenting the report are Boulton's President and CEO, Anders Nystrom, and our Executive Vice President and CFO, Hirena Van Derstrom. After the presentation, it will be possible for you to ask questions, both on the web as well as in the telephone conference. If we turn to the next slide, before we go into the earnings call, I would like to remind you of our Capital Markets Day on 20 of februaryinstock.com. You find the invitation on our website, bolton.com, or you can send me an email, and I will forward it to you. Now, let's start the presentation. Please go ahead, Anders. Thank you, Camilla, and welcome, everybody. The agenda for today will be a brief overview of Bolton, the development, no market, the result for the fourth quarter and some words about our acquisition of PSM as well as finally some comments about our future. So we dive into it. Flipping to page 4 in the presentation. Some words about Bolton and our position. It's now almost exactly 1 year since I took up the position of CEO of Hilton. And it's been a very exciting year indeed, where we worked hard to lap out the future of the company. The result of this work is starting to become visible now in the expansion of our business through the contracted acquisition of PSN. And we'll give you some more insight into our strategic direction during the Capital Markets Day in Stockholm on 20th February. And I'll encourage you all to attend. Bolton already has a lean and well positioned operation with a global presence. We have about 1400 very competent employees, all read professionals in their trade. We offer local content in Europe, U. S, China and Russia, which is unique in our competitive set. Through the acquisition of PSM, we'll add to our geographical presence and become more of a global company. We balance our production between approximately 40% outsourcing and 60% in house production. And can thereby be flexible and cost efficient. Go to page 5. Bilton has many customers with potential for further growth. When consolidation and need for strong FSP suppliers will be required to assemble cars and engines the most cost efficient and sustainable way. Our customers focus on sustainability improvements every day and it increases every day. And we will play an even more important role in that perspective in the future. The automotive customers market is dominated by the light vehicle segment. The same goes for bolt on And we also have sales to heavy commercial vehicle manufacturers as well as to the suppliers of the vehicle industry. Both those 3 largest customers are Ford, Jaguar Land Rover and Volvo Cars. So we flip to page 7. It comes as no surprise to anyone that the automotive market in many aspects is undergoing a structural change. This change is influenced by several long term trends Some of them such as sustainability and electrification are today involved in all our customer dialogues. More over these trends in combination with digitalization and new legislation makes the industry more complex and suppliers like Bunta need to pay close attention to that development. We need to help our customers to become more effective and more sustainable. And luckily, we'll then have the capabilities to do this so we can always improve further. And as everyone knows change always means opportunity. Page 8 some words about the market in the short term view. In 2019, the light vehicle market amounted to about 95,000,000 units. The largest markets of China followed by the U. S. And Western Europe. 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. The fourth quarter was no exception with lower volumes, especially in the Chinese market. We maintained our market shares in 2019. And going forward, we will focus on growing globally. New tax regulations linked to CO2 emissions introduced in a number of European countries during 2020 also add to some uncertainty. Looking into the first quarter, we all read the news daily regarding the coronavirus and how this affects different businesses around the world in China and Worldwide. Of course, we follow and monitor this situation very closely. For built on the ramp up of new contracts has compensated for a somewhat hesitant market in quarter 4. Page 9, looking in the longer perspective, the industry forecasting company automotive estimates a gradual improvement of production of vehicles in the years to come. LMC forecasts a global increase of 1.1% for 2020 compared to 2019 for light vehicles and the decrease of 7.3% for heavy commercial vehicles in 2020. Weighted for built in exposure, the global market impact for both the decrease of 0.1%. I'll return to page 10. We'd like to underline that we have a good pipeline of 1 contracts. This is important to know. On this updated slide, you can see the different ramp up contracts in in what phase of implementation they are. During 2019, cellular contracts went into full pace and newer contracts have entered into ramp up phase. Which have balanced the effect of market volatility and modern shifts. Still, we have 1,000,000 of new contracts signed and didn't that did not go into production yet. This will support built in growth even further in the used to come. You can also see that 2 of our last three major business wins were for electric vehicles. Turning to page 12. Before moving into quarter 4 figures, let us give you a quick recap of what happened in 2019. All in all, 2019 was a 1 1000000 clouded by shrinking market and postpone new vehicle launches, all caused by factors that we previously mentioned. In the midst of this, we carried through on a number of actions to make Wilton stronger. We transferred China production successfully from the old plant in Beijing to a new facility in Tianjin with a grand opening in November. We also completed the purchase of land in Poland. In quarter 3, we initiated a restructuring of our German operations and balanced manning to demand for the product supplied from our Bear account plant. During quarter 2, we initiated the right sizing of our inventory levels, which had accumulated during the slowdown. This means lower production rates, but thus under absorption of fixed costs. This was necessary. Finally, just before Christmas, we announced the agreement for an acquisition of PSM as a strategic move to accelerate growth and provide scaling regions outside of Europe. These actions put Bolton in a much stronger position and more ready for growth and earnings in 2020 and beyond. Turn to page 13. The PSM deal is a milestone for Bolton since it has been many years since we did an acquisition last. PsM is a global supplier of fasteners with distribution centers in 22 Countries. The customer base is mainly the auto industry, but PSIM also delivered to consumer electronics companies and home appliances industry. PSM turnover is approximately SEK400 1,000,000 and about 50% of its sales in Asia Pacific and 30% in the U. S. EBITDA margin was last year 14% and the company has about 350 employees with production in China, Taiwan and the UK. On page 14, We feel absolutely comfortable that we've acquired PSM on a decent price level. And we see a lot of advantages and synergies between PSM and the current built in group. Milton will get a broader customer base in important growth markets like China and North America. In addition, built in strong position will open doors for PSM in Europe. And for built in PSM adds to the group's production capacity and product offer We see synergies both in terms to be to build this development and earnings. And now over to Helena for, the financial development during the quarter. Thank you, Anders. We are happy to report a bounce back to growth again in the 4th quarter. Our sales were up 5 that new contracts are starting to ramp up. This is also visible in our order intake that was up 13.6% compared to last year. Our earnings were affected by the events Anders just mentioned and our EBIT ended up at 27,000,000 sec. Adjusted for acquisition cost and relocation in China. EBIT was over, however, 42,000,000 corresponding EBIT margin of 5.4%. Our full year earnings per share dropped quite substantially as a consequence of efficiency gains measures taken However, the board still suggested an unchanged dividend of 4 Swedish crowns a share divided into two payments. Page 16. Some more comments on net sales and order intake. Sales would have for the quarter were up 5% and adjusted for currency, the sales were up 1.6%. And the overall market demand effectively negatively, as our contracted business has now started to ramp up in a higher pace than in 43. And looking at our order intake, it was up 13.6%, which is a true sign on the ramp up effect. And this is of course a good sign. However, the uncertainty about the economic situation, the outcome of Brexit, and the effects of coronavirus make the development and the incoming ones quite difficult to predict. Page 17. Now some more comments about earnings performance. Our EBIT margin for the 4th quarter amounted to 3.5% compared to 6.4%. Comparable quarter last year. And the earn 11,000,000 in quarter 4 are explained by the relocation and acquisition cost of SEK 15,000,000 in total. An adjusted for these amounts, EBIT amounted to 42 minutes, or 5.4% EBIT margin. And this means that our underlying profitability has improved compared to earlier levels this year, but we are still away to do before reaching 2018 levels. Page 18. The quarterly cash flow from operating activities before changes in working capital amounted to SEK 34,000,000 and has mainly been by the operational results, including cost for acquisition and relocation. Additionally with this, we had a positive cash flow effect from change of working capital SEK64 1,000,000. And the main reason is changing the stock by SEK 25,000,000 during the quarter Cash flow from investing activities amounted to minus SEK50 1,000,000 and we have a higher investment level as announced earlier And during the quarter, we have finalized the purchase of land in Poland and the investment connected to relocation in China. Our investments in efficiency continues as we aim to become the industry's most cost effective fastest manufacturer. In total, the cash flow for the quarter was positive and amounted to 25 milliseconds. Page 19. They have a return on capital employed of 5.5 percent. The higher investment level have an impact as well as the margin development. And also our return on equities impacted by this and a amount of 3.5%. Capital turnover times was also below 11 compared to full year 2018. And their equity ratio ended up in a level of 55.2 percent in the end of the quarter. Effective of the year can stay on a very solid level. Page 9, page 26. Sorry. On this slide, we continue to give you some short guidelines regarding some key figures for both of them. And as always, these guidelines are not to be considered as financial targets. Have reached an important capital in relation to 12 month sales amounted to 25.5 percent, which is above our guidance, past review since 4 to 3 and activities are still ongoing to reduce that level in other. Capital expenditures as a percentage of 21 month sales were in a level of 7.1% And that is an evidence of that we invest in our future growth activities. And these investments will, however, improve Bolton's production efficiency even further. Depreciation of 3.3% or 12% in 12 months sales, excluding the IFRS 16 financial lease, is now not in line with our guidelines. At our average tax rate was 41.7 percent during 12 months, which is above our guidelines And the high tax rate is mainly caused by the relocation and negative result in China for the period, which has an overall impact on tax calculation for the group. Excluding for that, we are in the level of 26.3 percent. And the tax rate will have vary from quarter to quarter going forward. Page 21, Financial Tongues. K. This perspective, we are looking at the figures excluding the items that can affect their compatibility. And our rule in 12 months sales are down by approximately 1 was 1.2%, but with our pipeline contracts, we are in a good position to continue to take market shares going forward and PSM will also add tariff, of course. And our profitability was an adjusted operating margin of 4.8% on a rolling 12 months basis. Is affected by a stock effort, short term, relocation, restructuring, and acquisition. Adjusted return on capital employed of 8.1 percent is lower than our target due to a lower ability, heavily higher investment level. And if we also adjust for IFRS 16, we end up in 8.5%. And today, the board also suggests an unchanged dividend of 4 Swedish grants to share divided into 2 payments in May, in October. Oh, back to Ann Michigan. Thank you, Angela. And that means that we flip to page 23. To look at what's in focus for 2020. Of course, delivering on our synergy plan with PSN will be a prime focus from day 1 after the transaction. Executing on the ramp up plans for new contract as well as winning new business is a priority. We also have a number of initiatives both small and large with the aim to improve our efficiency and productivity. And these would of course always be in focus. As we are now taking title to the land intended for expansion in Poland, we'll make sure that that goes to plan. And we're in a product focused business. So we'll step up our innovation activities in order to provide both functionality and sustainability to our customers. This concludes our presentation, and we're ready for Questions? 0 and then one on your phone keypad now in order to enter the queue and then after I announce you, just ask that question. And if you find that question has been answered before to return to speak, just press 0 and then 2 to cancel. And I'll be brief pause while the questions are being registered. Okay. Our first question is from the phone is from Matt's list at Kepler Cheuvreux. Please go ahead, Matt. Your line is now open. Yes. Hi. Thank you. A couple of questions. First, I guess, I'm a bit excited about this TSM acquisition. And if you just could, well, give some flavor there regarding, well, why there is a profitability difference, as you see it's between you and that acquisition. And also, if you could say something there about it will take down, they produce their own partners or while trading and starting with those 2. Okay. Well, the difference between both in PSM in product range is quite where we have some overlap in our in our product portfolio and, but most of it is actually complementary, which makes PSM a very interesting value proposition for us. You could, you could say, if we look at strictly at the product range, PSM are in in M6 and and and down and some internal thread as well as external and and the built in is basically in them 6 and tops. So there's there's a very good complimentary complementary product range that will benefit us going forward. And also from a geographical standpoint, there is a difference. I mean, the strength really where PSM is strong is in China, where we are still in the early stages, where we are dominant in Europe is where PSM has the least amount of sales. And in North America, we sort of more or less double our our sales in North America by the acquisition. So it's a perfect match actually. And the difference in profitability there, is that due to the bulk difference in geographical exposure? Well, well, that's difficult to tell because it's, it's a very different custom, they're in a very different customer segment. Primarily, I mean, they have not that much OEM direct business where our business is dominated by by OEM customers. So they have a much more diverse customer base and there may be an explanation in that. The geographical differences may also have BNX net contributed to that, but it's difficult to tell us. Okay. Good. Then coming back to the report, I mean, you've mentioned the ramp up of the remaining full service contracts. It's 1,000,000 do you also indicate in the when you say so that the other contracts are fully ramped up now or are they in sort of a ramp up phase still that will sort of continue to contribute to your pulp top line? Some of them that the one that was in ramp up phase previous year, they are now fully implemented in figures 2019. And now you can see that we have moved one of this that was red colored before that was not yet started. Now they have started to be implemented by 20% and 30% of the value, but still have 17% 80% to go. And then you have still have some of the contract has not yet been started. You can say that the 20,000,000 that was moved into production is now in our run rate Okay. So well, the 1,000,000 is sort of a well, a good estimate for the how much the full service contracts will contribute in the next few years? In the coming years. Yes. 47,000,000. Yep. Yeah. 47,000,000. Yep. Good then if you definitely indicate you have sort of internet and savings and measures. And if you compare to the run rates in 2019 to 2020, what's the difference there? If you are in ballpark figure? Repeat the question also. Yes. I mean, you've implemented some savings pressures in 2019. Could you just indicate what run rate is if you sort of make a comparison? Are you talking about the restructuring program or Yes. How much you have sort of reduced the cost states? That's why I mentioned in the as we mentioned in the press release, we took the cost for taking the restructuring in Germany, and and that will be approximately 25,000,000,000 in full year and coming from from this very start. And finally, just about the tax rate. I guess it was quite high in the fourth quarter there, but you indicate that it will be reduced going forward when you, well, due to China and so on, but should we expect it to be quite high in the 1st couple of quarters of this year as well? I would say this is a little bit depending on the the the outcome of the the quarter and the prediction of the coronavirus and such a thing. So I think you bear that in mind and and then to your best judgment, I would say. Okay. Thank you. Okay. Before going to the next line, which is Kenneth Toll at Carnegie. If anyone else has any questions on the phones, please press 0 and then 1. Now. And can I move to you? Thank you. I was thinking about this, this acquisition of PSM. Does it interfere with your joint venture in the US that you have already? No, I wouldn't say so. I mean, the, we have a purpose in understanding what that JV is, is 4 and, no, that's nothing that's threatening or contradicting that. It's, it's rather complimentary, I would say. Good. Then also on the CapEx side, you made some, quite a lot of investments last year. You still have the Polish project ongoing. That's how much CapEx do you have left to do that is not related to maintenance cap of the things you decided. It's Poland, but are there more things than Poland? No, I would say that the main and FX going forward. It's, of course, the maintenance one that you mentioned, but then it is the property and the the added value investment in Poland, the surface treatment line, that we have in mind going forward. So how how much how much is it in Poland in Tulsa? Actually, I've announced this is, approximately €1,000,000 for the stress test treatment. And then we are now we have ended up being a little bit higher level in regarding the property as we mentioned before, and we have not totally done with our negotiations. So I need to come back with that exactly the figures, but it's about a little bit more than SEK 200,000,000, I would say. SEK 200,000,000. Yes. Okay. Yes, also the, one thing that I got wrong last year was the timing of these new contracts that they were being ramped up. Last year, I thought that you would benefit already in the beginning of the year from the new contract that you were delivering on. But it was very limited effects and maybe you have some effects here in the fourth quarter. So I was wondering on the contracts that you have still left both the The green ones with 17%, 80% that you have left to ramp up and also then the red ones when will they start to give meaningful contribution? Is it already from the first quarter of 20 2020 or is it more backend loaded? I think it is quite noticeable now with our order intake that came in, with a 13.6% that these are now in our in our schedules. And then I'm talking about the green one. So these you can definitely see from from now and or not ongoing. But the red one will come a little bit different timing during the year. But you can partly take that into consideration as well. Okay. But the red ones are more sort of Q3, Q4 rather than Q2? It's a it's a little bit different timing for them actually. Okay. Then, But I think the most important ones is the green one. Yeah. The the the biggest one. Yes. Then, the timing before, between the orders that you report in the report and when that turns into revenues for you, is that 1 quarter or What we are we are measuring, the backup of orders for 100 days. And when they are visible within that, they they are shown as a ordering bank. Okay. Okay. Great. That's all for me. Okay. At this stage, no questions from the phones. Are there any questions via the web? No. We don't have any questions from the web. In that case, may I please pass the call back to you for any closing comments. Okay. I hope you, you found, this session informative. And, I just want to, again, before we hang up to win a commercial for the Capital Markets Day in Stockholm on the 20th February, mentioned that three times now during this broadcast. And you're more than welcome to attend and I think you will find that very interesting. So thanks for listening. This now concludes today's session.