Earnings Call: Q3 2019

Oct 24, 2019

Hello, and welcome to Burton's 2019 Q3 presentation. My name is Kimila Wilson, Senior Vice President Corporate Communications. Presenting the report, our bulletin President and CEO, Anders Nystrom, and our Executive Vice President and CFO, Heliana Van Nystrom. After the presentation, it will be possible for you to ask questions, both on the web as well as in the telephone conference. Please go ahead, Thomas. Thank you. Coming up. The agenda for today would be, brief overview of Bolton. Development in our market, the result for the 3rd quarter and some comments about the future. So now if you turn to page 3, Milton has Jolene and well positioned operation with a global presence. We can offer local content in Europe, US, China, and Russia, which is unique in our competitive sector. We balance our production between approximately 40% outsourcing, 60% in house production, and can thereby be flexible and cost efficient, page 4. Blooten has many customers with potential for further growth when consolidation and need for strong FSP suppliers will be required to assembly cars and engines the most cost efficient way. Cars are the main fasteners market within automotive, and it's also true for both. But it's 3 largest customers are Ford, jLR and Volvo cars. Now some words about the market development. And if you turn to page 6, as we commented on our report today, the demand has continued to be weak also in the third quarter of 2019. In Europe, the market is down 1.3% year to date. In China, the decline has been greater, but in Europe, also it's it's impacting European suppliers as well. As some suppliers are still exported odds, out of Europe into China. This is due to several factors, the economic situation, and also concerns about Brexit and especially in the UK where, there's been a lot of uncertainty around that. And also the general Uncertainties European Economy. Turn to page 7. If you have a look at production of cars in Europe during quarter 3, the most relevant statistics for Buildium, LMC reports a clear drop. This is, of course, a result of lower sales, but also a result of lower export of cars to other continents out of Europe. Further WLTP emission regulations in several European countries and the uncertainty for Brexit also effects. And MC Automotive is reporting a forecast for the full year of 2019 for light vehicle production in Europe for minus 2.3%. Heavy commercial vehicles is forecasted to grow 0.6 percent, which with Bolton's mix, forecasted market decline, of 1.9%. The LMC forecast has been lowered since the quarter 2 report with influence from Brexit. I see our reports for the European light vehicle sales, that it will be down -1.6 percent for the 1st 9 months. In September, they also reported, that the demand for new passenger cars increased by 14.5% compared with the same month a year ago. And this is the result of a very weak September last year. Turn to page 8. Production, of course, as we said, is the relevant statistics for Wilton. In the longer perspective, LMC Automotive estimates are bounced back for production of light vehicles in Europe in years to come. With an increase of 1.6% in 2020 2.3% in 2021. Similarly for heavy commercial vehicles, they estimate an increase of production of 1.1% for 2020 and 5.4%. In 2021. So switching to H9 some words about our market and position. Wilto's market share was 18% during 2018 in Europe We have defended our position as a leading FSP supplier very well and increased our market share with 5 percentage points from 60 to 65 percent in 2018. Now over to Heliana for the financials. Thank you, Umesh. Page 11 operational highlights. Printing shows it says a 780,000,000 sec in the quarter, down 2.6% compared to the same quarter last year. And our EBIT amounted to minus 8 milliseconds, a clear drop from previous earning levels. But as we are communicating a press release, a preview screen. This is due to relocation costs related to the move of production in China and by the restructuring in Bakami in Germany. Adjusted for these, we have an adjusted EBITDA of 19,000,000. Moreover, we have also a lower production rate an effective audience, but mainly by our efforts to reduce stock, which had a negative impact on earnings during the quarter by approximately 18 minutes. We will explain this more in detail in a couple of minutes. In August, clearly, Pakistan was pointed to be the new senior vice president production, and he will take out the position on December 1st and be a member of the executive management team. And Frederick succeeds Gjurgenevelling, who will retire on the, October 31 2019. Page 12. No comments on the net sales and order intake. Sales for the quarter were down 0.6%. Adjusted for currency, this sales were down 2.8%. Also, our newer contracts have had a slower ramp up than expected in pace Q3. Looking at our order intake, it was up 7.3%. However, the uncertainty about the economic situation and the outcome of Brexit makes the development incoming loans difficult to predict. This could also affect the production rate for the fourth quarter and ongoing adoptions are being made in both purchasing and production. Page 13. Now back to our earnings performance. Our EBIT margin for the 3rd quarter amounted to minus 1% compared to 5.2% comparable quarter last year. And the earning levels are explained by the restructuring requirements impacted by the company earnings by 20,000,000 Moreover, we had a relocation cost of SEK7 1,000,000 related to the move of production in China. But it is also explained by a lower production rate. According to plan, this has resulted in the reduction of stock, but also lower utilization of the production unit's capacity and thus, and an undoped option of fixed costs. Production of production to the demand impacted the company's balance during the third quarter by up approximately 18 units. Thank you. The operating margin excluded for relocation, restructuring cost ended up at 2.8%. And we're look looking at the year to date, operating margin adjusted for the restructuring relocation cost, it came in at 4.6%. Page 14. Not some add on comments about our stock efforts the last quarter. As you can see in the graph, our stock in relation to say a gradual increase from Q3 2017 to Q1 2019. And this is partly due to create high readiness for ramp of new contracts. And the last few quarters also in combination with a slower market and our preparation for relocation in China and Brexit. And the first Q1 report in 2019, we flagged for our efforts to take down the stock level. And to release working capital, and we have managed to do so during the second quarter with approximately SEK50 1,000,000 And during the q 3, we have managed to keep the stock level on the same level as q 2. Volume reduction at short notice have encountered in the impact of stock reduction measures to some extent. Page 15. The quarterly cash flow from operating activities before changes in working amounted to 38,000,000 back, and that's mainly been affected by operational results, including relocation and restructuring costs, and a higher paid tax. The quarterly cash flow from operating activities of the changes in working capital amounted to SEK140 1,000,000 And that's mainly addition to the operating result being affected by a positive effect of change in working capital with 76,000,000, and the main reason is changing in current receivables. Cash flow from investing activities amounted to -84,000,000. And we have a higher investment level as announced earlier, and our investments in efficiency continues as we aim to become the in riskmost cost effective process manufacturer. The cash flow for the quarter amounted to to minus 27,000,000. Page 16, we have a return of capital employed of 6.4%. Mainly affected by the profitability level and the higher investment level, but also by the effect of implementing new accounting principles IFRS 16. And if you exclude the financial lease accordingly, we end up at 7 6.7 percent, 8 6.8%. And if we're also adjusting for restructuring and relocation cost, we end up at 8.7%. Our reported on return on equity amounts to 4.8% and capital turnover times was down to one point six times. Which is lower compared to the full year 2018, mainly due to the same reason as earlier mentioned. Page 17. In this slide, we continue to give you some short guidance regarding some key figures for Wilton. And as always, these guidelines are not to be considered financial targets. Average net working capital in relation to 12 month sales amounted to 26.6. Which is above our guidance and activities are ongoing to reduce that level. If it is to expenditures of percent showed 12 months sales were at a level of 7.3 percent. And evidence of that we invest in future growth activities And this investment will, however, improve Bolton's production efficiency even further. Depreciation of 3.2 percent for 12 month sales. Excluding IFRS 16 financial lease is somewhat in line with our guidance. And our average tax rate was 35.3 percent ruling 12 months, which is above our guidance, and the high tax rate is caused by relocation caused a negative result in China for the period. And these circumstances have an overall impact on the tax calculation for the schools. However, the tax rate will vary from quarter to quarter. Page 18. And I also comments about our key financial key ratios in relation to our financial targets. In this perspective, we are looking at the figures excluding our lease liabilities and restructuring relocation cost. Our rolling 12 month sales are down by approximately 2.4%. But with our pipeline or contracts, we are in a good position to continue to take market shares going forward. Our profitability with an adjusted operating margin of 5.1 percent on a rolling 12 month basis. It's affected by our stock efforts, short term, and a volatile market. Adjusted return on capital employed of 8.7 percent is lower than our target due to lower profitability level and a higher investment level. Now back to Anders again. Thank you, Irina. Some final remarks about our focus agenda. For the rest of 2019. This quarter has been impacted by our efforts to balance inventory by lower in house production. Restructuring in Baucoma and relocation in China. The east efforts will continue in the beginning of quarter 4. Even though we had somewhat weaker market last 2 months, excuse me, both on us and a good pipeline on one contracts, which we have pointed out before. We'll continue to secure sorry. We continue to secure efficient production, and this goes by Camry, Germany, as well as our plants in Poland. Where we remain developing the the land that we have purchased and we're in the final stages of of finalizing that deal. The relocation in China develops according to plan. As always, we we, aim to win new FSP contracts and we continue to provoke promote innovation and sustainability. And to build on our already strong corporate culture. And lastly, on page 21, most of you have been on these calls before we recognize this this slide. We wanna underline that the pipeline of one contract is still there. It's important to know. And you can also see that 2 of our last three business wins are for for electric vehicles, changes in demand driven by macroeconomic effects, positive, and negative, will have an impact on this, but the contracts are there. This concludes our presentation, and we're ready for questions and answers. Thank 2. Was 1 if you wish to ask a question. And we have a question from the line of Matt's list from Kepler Sugar. Please go ahead, Matt. Your line's open. Yeah. Hi. Thank you. Just looking at, well, potential under absorption here in the 4th quarter under of costs, should we expect that to be at a similar level as in the third quarter? We'd be order intake, being improved from from a previous quarter last year. I'm not expecting that that would be anywhere near. Good. You know, this this was my question. I get it. Given the backlog of, FSP contracts you have, could you give some, I mean, you have you've pointed at them at the last side there, but, and I guess most of them will be fully operating here in the next couple years. Do you see any delays or potential delays there given the slow? Growth and and uncertainty, affecting the, car industry currency. As we pointed out before, Mats, we were to have delays in the ramp up of, of these contracts that were taken before. We we see them coming on stream. And I think that that when when you also see the order intake, it's a confirmation of these previously taken contracts being on stream to actually ramp up. Whether there will be further delays as you you work asking, you know, delays are by, by its nature, oftentimes surprises, but it is important to point out that when when we see the increased order intake, it comes from these contracts. So that's what's coming on screen now. Yep. Good. Then I guess electric vehicle sees a very interesting sentiment for you longer term and previously have indicated that the electric vehicles increased the demand for past and do you sort of have the similar picture now, or given that you have, received a couple of of contracts, on electric vehicles. As we we said before, the electrification is is coming in in two stages. Firstly, you have hybridization, which basically adds a power train to the vehicle. So there's a combustion engine and an electrical power train, and that, of course, is is a great opportunity for us. And and that's a big volume right now. Everybody's sort of, offering hybrid variants of of their current vehicle platforms. When it comes to pure electrical vehicles, they are still very immature in their concepts. The first ones that we see, that we've also won contracts for certainly contain more fasteners than, a classic combustion engine platform. So that can be confirmed. Now we what we need to do is to closely follow the technical development of the coming electrical vehicles to to understand sort of if that's still the case and what they look like and what requirements will be on our products, and we're working closely with the customers to to stay on top of that. Yeah. Fine. Yeah. And then maybe a bit while I follow-up there regarding you mentioned that the orders were proving air and should we take that as an indication that you will sort of run production at the higher rate during the fourth quarter and and maybe not close down so much for their holidays and so on. Or is it too early to to say? Well, the the the order intake will will, of course, have an impact on our production as well as the sales. Now we know that that the market is still volatile we know that there will be, factory close downs in in November, in anticipation of Brexit. And, it's a holiday season that's coming up, which is probably the most volatile, of the whole year. So, we don't know until we get there, but indications are good. And finally, you mentioned Brexit there, and I guess, while Ford has quite substantial in the factory there in the UK and, or is it anything you can do to prepare for a while, maybe a hard Brexit? We we have prepared for for quite some time and and part of the the ramp up of the inventory that you saw, already in end of last year and beginning of this year. Were actually due to being prepared for Brexit. So we're taking a number of actions in order to be prepared not only on the inventory side, but also on the administrative side. So we know that we can handle any customs clearance documentation and things like that. Okay. Thank you very much. And there cur and there are currently no further questions registered on the telephone Okay. Thank you. Alright. Donna would say thank you. Thank you, and, apologize for my voice today. It's Alexis, but, thanks for your patience. And this now concludes the conference