Earnings Call: Q2 2019

Jul 10, 2019

Hello, and welcome to Boulton's 2019 Q2 presentation. My name is Camilla Ursa, Senior Vice President, Corporate Communications. Presenting the report of the as president and CEO, Envisionistrum, and our Executive Vice President and CEO, Enzo Helene Vonstrom. After the presentation, it will be possible for you to ask questions, both on the web as well as in the telephone conference. Thank you. The agenda for today would be, first, a brief overview of Bolton. The development in our market result for the second quarter and then some comments about future. So if we go to page 3, Boulton has a lean and well positioned operation with a global presence. There are not many in our industry actually that can offer local content in both Europe, U. S, China, and Russia. We balance our production between approximately 40% outsourcing and 60% in house production and can thereby be flexible and cost efficient. H4. As can be seen in this slide, Bolton has a broad customer base. Carmakers makes up the largest customer group. Bilton's 3 largest customers are Ford, Jaguar Land Rover, and Volvo Karts. Page 5. Being one of the leading investment providers in our industry, we're also proud to be the peer leader in environmental impact reduction. This is in line with Bolton's strategy and increasingly important for all the stakeholders of Fulton. For example, carmakers are increasing their focus on full value chain sustainability. Young talents choosing their employees more carefully and want their employers to mind the planet and work with integrity on those matters. And rigorous requirements from authorities in production permit concessions. In June, booked and received an award from Ecologis for its sustainability work. Hilton has reached, gold medal level in Eco Water Sustainability ranking. And Ekoa is is used by some of our customers for as the 3rd party assessor of of sustainability. So this is a very official award. Going to page 6 as market development, going over to page 7. As we comment in our report earlier today, the demand has continued to weaken also in second quarter of 2019. In Europe, car sales have stabilized somewhat in the last 2 months, but still European market is down 3 a half percent year to date. Other key markets, for example, China has continued to decrease. This is due to several factors. In Europe, the introduction of the new WLTP emission regulation cause car sales to accelerate in the first half of twenty eighteen and slow down in the second half of twenty eighteen. Obviously, the second quarter of 2019 was matched against a tough comparable quarter. Also concerns about Brexit has had an impact, especially in the UK. In the second quarter, raw material prices have remained at the same high level as in the last two quarters. Page 8 car production statistics are the relevant ones for for built in and, LMC Automotive is forecasting a 1.1 reduction, 1.1% reduction in light vehicle production for the full year of 2019 compared to 'eighteen. Heavy commercial vehicles is forecasted to grow 1.6% with Wilton's customer mix. That means a forecasted market reduction of 0.7%. As Bolton has contracts not yet in production, we believe that we still have opportunities for gaining mark share in the midterm perspective. In the longer perspective, LMC Automotive estimates a bounce back for production of light vehicles in Europe in the years to come with an increase of 3.3% in 2020 and 2.6% in 2021. Similarly for heavy commercial vehicles, they estimate an increase of production of 4.1% for both 20202021. Also according to LMC Automotive, the development in China during the 1st 5 months resulted in a sales decline of about 13%, which also affects the supplier's production in Europe. On to page 8, Sorry. 9. Market shares. Somewhere it's about our market and position. Wilton's market share, as has previously been communicated. Is around 18% judging the 2018 number in Europe. We defended our position as a leading FSP supplier well and we increased our market share last year with 5 percentage points from 60% to 65. And then over to Elena for the second quarter financials. Okay. Thank you, English. You go to page 11. But this shows a sales of 781,000,000 in the quarter, down 3.5% compared to the same quarter last year. And our EBIT amounted to SEK 21,000,000, a clear drop from previous earning levels. And as we communicated in the press release already last week, This is due to lower production rate and effective volumes, but mainly by our efforts to reduce the inventory. More about that in just a minute. Moreover, we had relocation costs related to the move of production in China or 6,000,000 in the quarter. Adjusted for that, EBIT amounted to SEK27 1,000,000. And the order bookings of SEK752 1,000,000 reflected a slower demand late in the quarter as well as a slower ramp up of our new contracts. On the positive side, we can continue to win contracts in the 1st half year. 1 FSP of €30,000,000 in an annual value. And several smaller contracts with a total annual value of €2,000,000. And as Andreas mentioned earlier, put in key is a good metal level from equobody borrow sustainability bar. Going to page 12, some comments on the next day as an order intake. Sales for the quarter were down 3.5%. And adjusted for currency, the sales were down 5.8%. The market has been weaker, as we have mentioned before, but also important to note that the second quarter last year was exceptionally strong. Boosted by the forthcoming VLTP regulations that we mentioned earlier. Also, our newer contract have had a slower ramp up than expected pace in the second quarter. Looking at our order intake, it was down 12%. This is the result of weaker market, especially towards the end of the quarter, but also a strong comparable quarter. Page 13. Come back to our earnings performance on our EBIT margin for the 2nd quarter amounted 2.7% compared to 7.1% comparable quarter last year. And the earnings levels are explained by a lower production rate. According to plan, this has resulted in a reduction of the inventories, but also lower utilization on the production unit capacity. And that's, under absorption of fixed costs. This affected earnings by approximately 25,000,000 sec during the second quarter. To operating margin, excluding facilitation costs in China and margin, currency effects, ended up at 3.3%. And looking looking at the year to date, operating margin, when excluding currency and relocation costs, it came in at 5.2%. Page 14. So now I don't comment on about our inventory efforts the last quarter. And as you can see in the graph, our inventory in relation to sales gradually increased from third quarter 2017 to first quarter 2019. And this is partly due to create high readiness for our new, ramp up on new contracts and the last few quarter also in combination with a slower market and our preparation for the relocation in China and Brexit. In the Q1 report, we flagged for our efforts to keep take down the inventory, and he has managed to do so during the second quarter with approximately 15 milliseconds. And given current condition, the production rate will continue to be lower at the beginning of our quarter. Page 15. The cash flow has been affected mainly by the operational results and working capital impacting cash flow was almost neutral, even though we released capital from lowered inventory. Current liabilities and receivables neutralize this effect. They have a higher investment level as an effect of relocation in China, as well as preparing for common contractor volumes of in total 6 €67,000,000 in full case 2021 if you compare to 2018. And our investment in efficiency continues as we aim to become the industry's most cost effective fostering manufacturer. Cash flow from financing activities was affected by paid out dividend. Our balance sheet and financial position remains strong, and we have a net debt the end of the quarter of 595 milliseconds, or 347 milliseconds, excluding all lease liabilities. Page 16. Some bars above the key indicators. They have a return in capital employed of 9 percent, mainly affected by the profitability level, product booking capital, and the higher investment level. But also by the effect of implementing our new accounting principles, IFRS 16. And if we exclude IFRS 16 financial lease, we end up at 9.5%. And if you also adjust for relocation costs, we end up at 9.9%. Also, a return on equity is impacted by days and amounts to 7.6%. Capital to move times was down to 1.6 times and 1.7 times adjusted for IFRS 16 financial lease. And this is lower compared to the full year 2018, mainly due to the same reason as earlier mentioned. Page 17. On this slide, we continue to give you some short guidance for donors on key figures for both of them. Such as always that these guidance are not to be considered financial targets. The average net working capital in relation to 20 month sales amounted to 26.9%, which is above our guidance and activities are ongoing to reduce that level. Capital expenditures as a percentage of 12 month sales, we are in the level of 5.7% and evidence of that we invest in future growth activities. And these investments will, however, improve Britain's production efficiency even further. Depreciation of 3.1% of 12 month sales, excluding IFRS 16 effects, is in line with our guidelines. And our average tax rate was 28.3 percent rolling 12 month, which is slightly above our guidance. But, however, the tax rate will vary from quarter to quarter. Nothing comments on both our financial key ratios. In relation to the targets. And in this perspective, we are looking at the figures excluding our address, financial lease and relocation costs in China. Our rolling 12 month sales are down by approximately 3%. And at least above the line, with the market. But with our pipeline contracts, we're in a good position to continue to take market share going forward. Our profitability with an adjusted operating margin of 5.6 percent on a rolling 12 months pay is is affected by our inventory efforts, short term, and the volatile market. Adjusted return on an employed of 9.9 percent is lower than our target due to a lower profitability level, tied up working capital, and a higher investment level. Our pay dividend is once again better than our financial target, and now back to on this again. Thank you, Elena. Some final remarks about 2019. This quarter has been impacted by our efforts to balance inventory by, lower in house production and These efforts will continue in the beginning of quarter 3. Even though we had somewhat weaker market in the last few months, but then has a good pipeline of 1 contracts as we previously said. We will continue to secure efficient production. Our plans for Poland remain, even though they're still delayed. The relocation in China develops according to plan. Our establishment in the U. S. Also continues As always, we aim for new FSP contracts during the year. We continue to promote innovation and sustainability to build on our already strong corporate culture. We'll continue to build the strengths of Brooklyn. Turning to page 21, last but not least, we'd like to underline that we have good pipeline of 1 contracts, and this is important to know. In addition to the million of new FSP business that we won this year and previously communicated, we've also won an additional 1,000,000 or various smaller contracts, which brings us up to a total of 1,000,000 worth of business to be ramped up. You can also see that 2 of our last three business wins were for electric vehicles. Changes in demands will of course impact this, the macroeconomic effects positive and negative will impact, ramp up the contracts. And this concludes the presentation and ready to take Q And A. Thank Our first question comes from the line of Kenneth Toll. Please go ahead. Yes, thank you. Some questions. First, on the lower production that you are planning for the beginning of Q3, I was wondering, how long do you think that lower production rates would last for? Do you think it's half of the quarter or even more or maybe the full third quarter? Hi, Kenneth. It is not the full quarter, for sure. It's the beginning of the quarter. And, I don't want to define that in number of weeks, but, we, we are still adjusting our inventory and it will continue for the beginning of the quarter. That's, that's what I can say right now. Okay. Then these new contracts that are a bit delayed and volumes are not coming through really What are the plans for those contracts now? When do you see higher volumes? Is it in the third quarter or 4th quarter, or do we have to wait until next year? Well, the, the ramp up of the new contracts really are impacted by the general weakening of the market. So it's very much in line with that. They did the vehicles are introduced and will will be ramped up. And and, you very rarely see that that new vehicles are being canceled on the back of a weaker market. It's just that the ramp up is a bit slower. And it it's it's in line with the market. So audience will come. Mhmm. And and you think it will have a more note effect in the 3rd or 4th quarter? We don't give forecast for the quarter, but the ramp up will be during the second half of this year. So it would be fair to assume that the effect would be higher in Q4 than in Q3? Well, the ramp ups take place in the second half of the year. Okay. And then finally, when we look at your balance sheet, the net debt to EBITDA is coming up now. Most of the effect comes from this IFRS 16 accounting change, but still taking that into account. I think you are at 2 spot one times now. And you have quite high CapEx plans for several projects going forward. Do you see the weakening of those ratios as a problem for your CapEx plans? Or would you consider saying something? No. That's, Heliana here then. As we have also mentioned, we have used, extension option, and we have, performed the existing financing agreement of 750,000,000 there. So we are still quite good headroom in that in that perspective. If you adjust to for the next step to 5.99 with the order that financially exists, you are quite some amount left there. So I don't see any problems with that, actually. And there are no covenants that are based on the, net debt to EBITDA including the IFRS 16 effect that you are getting close to or anything like that? We have good headroom in that perspective. Okay. Thank you. That's all for me. Okay. Thank you. And the next question comes from the line of Matt's List from Kepler Cheuvreux. Yes. A little bit low, but Yes. I'll try to speak up a bit. Well, just coming back to the, well, demand situation here. You mentioned the slowdown towards the end of the first quarter, second quarter, sorry, end of the second quarter and that turned out continued into the third quarter. And I guess you also indicate that there are some, well, will continue to reduce inventories. And I just wondered, should we expect the same amount of under absorbed fixed cost in the third quarter? Or could you give some flavor there? Where was the slowdown has has actually happened ever since, mid last year? So the slowdown has been a long process. And then we have taking the responsible decisions, and taking the hit on on under production in order to right size our our inventory. I was absolutely necessary to do. We're not completely done with that. So what I can tell you about is that it will continue for part of quarter 3. I'm not going to quantify that. Okay, great. And then just about, well, you also mentioned some savings measures that you plan to internet. Or have you implemented, could you say something about those? Yes, of course, we apart from always working with, improving our efficiencies, we, we also want to right size our cost base to, to the market. So, those are activities that we are undertaking, not prepared to specify those at this point, but we'll come back in due time. Them, well, coming back to Poland there, and you have some negotiations going on to, well, start building capacity there. Could you say something about when you expect those negotiation to be finalized? As we said before, these are negotiations that are taking place with a number of authorities and, you know, governmental representatives in Poland, they are ongoing. They are still delayed, not concluded. But the good thing is we're not on the time pressure. Great. And I guess well, this additional capacity, are you sort of, well, do you need that to be able to deliver on your backlog of the contract? Actually, as I said, we're not on a time pressure to do that. Which means that we we do have the capacity that we see we need in, in the, the foreseeable future. So As there is no, we don't know, we don't need it immediately. And, we, we don't see that we're losing that we're that we're rushing us to do up to do this in any sense. Good. And, well, finally, just about the tax rate that you, well, it was a bit above the target, I guess, but, and you mentioned there that it's the first between the quarters. But should we expect the full year to end up, within the, well, 24% to 28% target? We are in a little bit higher, you know, tax rate as it is right now. So I think you can calculate with a bit higher than you have done previously done. Okay. But still within the range, but in the higher levels in the guidelines, I would say. Thank you. And we have a follow-up question from the line Kenneth Toe from Carnegie. Please go ahead. One thing I'm wondering a little bit about is concern both the inventories and the cost efficiencies, demand is lower now, but at the same time, you have, new contracts that are being ramped up and maybe demand recovers a bit as well as we go into 2020 or so. So is there a risk that you sort of take down inventories too much now and you have to rebuild inventories again early next year and also on the cost side that you might sort of reduce employees and then you have to take them back again. So how do you balance sort of the capacity and the manning you need in a couple of quarters and the inventories you need versus the short thermal approach? When it comes to the employees and the manning, we have that under type control. So surely we won't do anything stupid in that sense. We're keeping the sort of midterm ahead of us when we're planning planning our our manning and, and our resources. When it comes to the, the inventories, this is a split picture. As you probably remember from, from previous reports, we've been building stock in China in order to get prepared for our relocation, which is happening right now. We also have had building inventory to be prepared for, for, an uncontrolled Brexit. And then we have the necessity to reduce the overall inventory. So these are, are sort of, forces that work in different directions. And this is what we need to juggle in our daily planning of our, our both material intake and and production. But when you see the the 50,000,000 of of the inventory reduction that is the net of all of that. And behind it is also the build up of, of, for instance, the the Chinese safety stock. So we are we we do have to manage a number of different elements in our inventory. And, net net, we'll take it down, but we're not going to do that sort of as a peanut butter approach, but we're, we're doing it in a very pointed way so that we have inventory where we need to have it and the part numbers that we need to have it And, but overall, we're right sizing it. That's a good question. Yes. And also when it comes to cost and adapting the cost level, I guess it's most about manning, right? In the short term, of course, that's what you can affect. We have another follow-up question from the line of Matt Stays from Chevron. Please go ahead. Yes. Hi. Just a quick one here on the U. S. And Well, joint venture, you have that with the Ramco. Is there something you can say about that, and then the outlook in a couple of years there for potential deliveries. Well, right now, we we have, we're we're we're localizing production of, our first real order, which is, ramping up and have been, has been ramping up for the last few months in the US. Of course, as a next step, we're looking for the next contract and the next contract and building a sales organization in North America to, to be able to execute that So I think that's about all I can tell you right now. Great. And, well, and, and just one more about the mix theory and the inventory correction. I guess that, all about light vehicles or mostly, but could you, if there are any sort of difference there between or heavy heavy commercial vehicles and, and the light vehicles. Not sure. I understood your question. I mean, I mean, 85 percentage sites to vehicles. From top of my head, I guess. And while the balance is sort of more heavy vehicles, And, is there any sort of favor or difference there between the need of making inventory correction? Okay. You mean the the effect in the stock regarding, yeah, heavy commercial vehicles and light vehicles? Yeah. Yeah. If you can sort of give give some indication there. No. The it's in a rush, I would say. Okay. Thank you. After no further questions, I'll hand back to the speakers. Okay. If there are no more questions, and thanks everyone for listening in. And we wish you a very nice summer.