Hello, and welcome to Bulten's 2019 Q2 presentation. My name is Kamilla Oresvärd, Senior Vice President, Corporate Communications. Presenting the report are Bulten's President and CEO, Anders Nyström, and our Executive Vice President and CFO, Helena Wennerström. 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, Anders.
Thank you. The agenda for today will be first a brief overview of Bulten, the development in our market, the result for the second quarter, then some comments about the future. If we go to page three. Bulten 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. Page four. As can be seen in this slide, Bulten has a broad customer base. Car makers makes up the largest customer group. Bulten's three largest customers are Ford, Jaguar Land Rover, and Volvo Cars. Page five. Being one of the leading fastener providers in our industry, we're also proud to be the peer leader in environmental impact reduction.
This is in line with Bulten's strategy and increasingly important for all the stakeholders of Bulten. For example, car makers 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 and production permit concessions. In June, Bulten received an award from EcoVadis for its sustainability work. Bulten has reached Gold Medal Level in EcoVadis sustainability ranking. EcoVadis is used by some of our customers as their third party assessor of sustainability. This is a very official award. Go on to page six. That's market development. Going over to page seven. As we comment in our report earlier today, the demand has continued to weaken also in the second quarter of 2019.
In Europe, car sales have stabilized somewhat in the last two months, but still the European market is down 3.5% 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 regulations caused car sales to accelerate in the first half of 2018 and slow down in the second half of 2018. Obviously, the second quarter of 2019 was matched against a tough comparable quarter. Also, concerns about Brexit has had an impact, especially in the U.K. In the second quarter, raw material prices have remained at the same high level as in the last two quarters. Page eight. Car production statistics are the relevant ones for Bulten, LMC Automotive is forecasting a 1.1% reduction in light vehicle production for the full year 2019 compared to 2018.
Heavy commercial vehicles is forecasted to grow 1.6% with Bulten's customer mix. That means a forecasted market reduction of 0.7%. As Bulten has contracts not yet in production, we believe that we still have opportunities for gaining market 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 2020 and 2021. Also, according to LMC Automotive, the development in China during the first five months resulted in a sales decline of about 13%, which also affects the suppliers' production in Europe. Go on to page eight. Sorry, nine. Market shares. Some words about our market and position.
Bulten'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 five percentage points from 60% to 65%. Then over to Helena for the second quarter financials.
Okay. Thank you, Anders. We go to page 11.
Bulten shows its sales of SEK 781 million in a quarter, down 3.5% compared to the same quarter last year, our EBIT amounted to SEK 21 million, a clear drop from previous earning levels. As we communicated in press release already last week, this is due to lower production rate and effect of 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 of SEK 6 million in a quarter. Adjusted for that, EBIT amounted to SEK 27 million. The order bookings of SEK 752 million reflected a slower demand late in the quarter, as well as a slower ramp-up of our new contracts.
On the positive side, Bulten continues to win contracts in the first half year, one FSP of EUR 30 million in a new value and several smaller contracts with a total annual value of EUR 2 million. As Anders mentioned earlier, Bulten achieved a gold medal level from EcoVadis for our sustainability work. Going to page 12. Some comments on the net sales and order intake. Sales for the quarter were down 3.5%. Adjusted for currency, the sales were down 5.8%. The market has been weaker, as we have mentioned before. Also important to note that the second quarter last year was exceptionally strong, boosted by the forthcoming WLTP regulations Anders mentioned earlier. Our newer contracts 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. Also a strong comparable quarter. Page 13. Now back to our earnings performance. Our EBIT margin for the second quarter amounted to 2.7% compared to 7.1% comparable quarter last year. The earnings levels are explained by a lower production rate. According to plan, this has resulted in a reduction of inventories. Also a lower utilization on the production unit capacity and thus an under absorption of fixed costs. This affected earnings by approximately SEK 25 million during the second quarter. The operating margin, excluding for relocation cost in China and margin currency effects, ended up at 3.3%. Looking at the year to date, operating margin, when excluding currency and relocation costs, it came in at 5.2%. Page 14. Some add-on comments about our inventory efforts the last quarter.
As you can see in the graph, our inventory in relation to sales gradually increased from third quarter 2017 to first quarter 2019. This is partly due to create high readiness for our 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 take down the inventory. We have managed to do so during the second quarter with approximately SEK 50 million. Given current condition, the production rate will continue to be lower at the beginning of third quarter.
We have a higher investment level as an effect of relocation in China, as well as preparing for coming contract volumes of in total EUR 67 million in full pace 2021 if you compare to 2018. Our investment in efficiency continues as we aim to become the industry's most cost effective fastener manufacturer. Cash flow from financing activities was affected by paid out dividend. Our balance sheet and financial position remains strong. We have a net debt by the end of the quarter of SEK 595 million or SEK 347 million excluding all lease liabilities. Page 16. Much about the key indicators. We have a return on capital employed of 9%, mainly affected by the profitability level, tied-up working capital. The higher investment level, but also by the effect of implementing our new accounting principles, IFRS 16.
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, our return on equity is impacted by this and amounts to 7.6%. Capital turnover times was down to 1.6 times and 1.7 times adjusted for IFRS 16 financial lease. 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 guidelines regarding some key figures for Bulten, but as always, these guidelines are not to be considered financial targets. The average net working capital in relation to 12-month sales amounted to 26.9%, which is above our guidelines, and activities are ongoing to reduce that level.
Capital expenditures as percentage of 12-month sales, we are in a level of 5.7%. An evidence of that we invest in future growth activities. These investments will, however, improve Bulten's production efficiency even further. Depreciation of 3.1% of 12-month sales, excluding IFRS 16 effects, is in line with our guidelines. Our average tax rate was 28.3% rolling 12 months, which is slightly above our guidelines. However, the tax rate will vary from quarter to quarter. No increments on both our financial key ratios in relation to the targets. In this perspective, we are looking at the figures excluding the IFRS 16 financial lease and relocation costs in China. Our rolling 12-month sales are down by approximately 3%, and it is about in line with the market. With our pipeline of contracts, we are in a good position to continue to take market share going forward.
Our profitability with an adjusted operating margin of 5.6% on a rolling 12-month basis is affected by our inventory efforts, short-term, and the volatile market. Adjusted return on capital employed of 9.9% is lower than our target due to a lower profitability level, tied up working capital, and a high investment level. Our paid dividend is once again better than our financial target. Now back to Anders again.
Thank you, Helena. Some final remarks about 2019. This quarter has been impacted by our efforts to balance inventory by lowering our production, and these efforts will continue in the beginning of quarter three. Even though we had a somewhat weaker market in the last few months, Bulten has a good pipeline of won contracts as we previously said. We will continue to secure efficient production. Our plans for Poland remain, even though they are 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, and we continue to promote innovation and sustainability to build on our already strong corporate culture. We'll continue to build the strengths of Bulten.
Turning to page 21, last but not least, we would like to underline that we have good pipeline of won contracts. This is important to know. In addition to the EUR 13 million of new FSP business that we won this year and previously communicated, we have also won an additional EUR 2 million of various smaller contracts, which brings us up to a total of EUR 67 million worth of business to be ramped up. We can also see that two 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 of contracts. This concludes the presentation, and we are ready to take Q&As.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad and you will enter a queue. After you are announced, you can ask your question. Our first question comes from the line of Kenneth Toll. Please go ahead.
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 will last for? Do you think it is half of the quarter or even more, or maybe the full third quarter?
Hi, Kenneth. It is not the full quarter, for sure. It is the beginning of the quarter. I do not want to define that in number of weeks. We are still adjusting our inventory. It will continue for the beginning of the quarter. That is what I can say right now.
Okay. 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 fourth quarter, or do we have to wait until next year?
The ramp-up of the new contracts really are impacted by the general weakening of the market. It's very much in line with that. The vehicles are introduced and will be ramped up, and you very rarely see 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's in line with the market.
Okay.
The volumes will come.
You think it would have a more noticeable effect in the third or the fourth quarter?
We don't give forecasts for the quarter, but the ramp-up will be during the second half of this year.
It would be fair to assume that the effect would be higher in Q4 than in Q3?
No, the ramp-ups take place in the second half of the year.
Okay. 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. Still taking that into account, I think you're at 2.1 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 change anything?
No. Helena here. As we have also mentioned, we have used the extension option, and we have prolonged the existing financial agreement of 760 million SEK. We have still quite good headroom in that perspective. If you adjust for the net debt of SEK 595 with all the financial leases, you have quite some amount left there. I don't see any problems with that, actually.
There are no covenants that are based on net debt to EBITDA, including the IFRS 16 effects that you are getting close to or anything like that?
We have good headroom in that perspective.
Okay. Yeah, thank you. That's all for me.
Okay, thank you.
Thank you.
The next question comes from the line of Mats Liss from Kepler Cheuvreux. Please go ahead.
Yeah, hi, Mats Liss, Kepler Cheuvreux. Do you hear me well?
Yes. A little bit low.
Yeah, I try to speak up a bit. Well, just coming back to the demand situation here, you mentioned the slowdown towards the end of the first quarter, second quarter, sorry, end of the second quarter, that trend has continued into the third quarter. I guess you also indicate that Well, you will continue to reduce inventories. I just wondered, should we expect the same amount of underabsorbed fixed cost in the third quarter or could we give some favor there?
Well, the slowdown has actually happened ever since mid last year, the slowdown has been a long process. We have taken the responsible decisions, and taken the hit on underproduction in order to rightsize our inventory. That was absolutely necessary to do. We're not completely done with that. What I can tell you, Mats, is that it will continue for part of quarter three. I'm not going to quantify that.
Okay, great. Just about, you also mentioned some savings measures that you plan to implement or have implemented. Could you say something about those?
Of course, apart from always working with improving our efficiencies, we also want to rightsize our cost base to the market. Those are activities that we are undertaking. Not prepared to specify those at this point, but we'll come back in due time.
Good. Well, coming back to Poland there, you have some negotiations going on to start building capacity there. Could you say something about when you expect those negotiations to be finalized?
As we said before, these are negotiations that are taking place with a number of authorities and governmental representatives in Poland. They are ongoing. They are still delayed, not concluded. The good thing is we're not under time pressure.
Great. I guess, this additional capacity, do you need that to be able to deliver on your backlog of contract?
Actually, as I said, we are not under time pressure to do that, which means that we do have the capacity that we see we need in the foreseeable future. As it is now, we do not need it immediately, and we do not see that we are rushing as a truck to do this in any sense.
Good. Well, finally, just about the tax rate there, it was a bit above the target, I guess. You mentioned there it differs between the quarters, should we expect full year to end up within the 24%-28% target?
We are in a little bit higher tax rate as it is right now, I think you can calculate with a bit higher than you have done previously then.
Okay.
Still within the range, but in the higher levels in the guidelines, I would say.
Yeah. Okay. Thank you.
Thank you.
Thank you.
Just as a reminder, if you do wish to ask a question, please press zero one on your telephone keypad now. We have a follow-up question from the line of Kenneth Toll from Carnegie. Please go ahead.
One thing I'm wondering a little bit about is concerning 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. 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. How do you balance the capacity and the manning you need in a couple of quarters and the inventories you need, versus the short-term outlook?
When it comes to the employees and the manning, we have that under tight control. Surely we won't do anything stupid in that sense. We're keeping the sort of midterm ahead of us when we're planning our manning and our resources. When it comes to the inventories, this is a split picture, as you probably remember 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 inventories to be prepared for an uncontrolled Brexit. Then we have the necessity to reduce the overall inventory. These are sort of forces that work in different directions and this is what we need to juggle in our daily planning of our both material intake and production.
When you see the SEK 50 million of inventory reduction, that is the net of all of that. Behind it is also the buildup of for instance, the Chinese safety stock. We do have to manage a number of different elements in our inventory and net will take it down, but we're not going to do that sort of as a peanut butter approach, but 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. Overall, we're right sizing it.
Mm-hmm.
That's your question?
Yeah. Also when it comes to costs 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.
Mm-hmm. Okay. Thank you.
We have another follow-up question from the line of Mats Liss from Please go ahead.
Yeah, hi, just a well, quick one here on about the U.S. and, well, John French you have there with the Ramco. Is there something you can say about that and the outlook in a couple of years there for potential deliveries then so
Well, right now we're localizing production of our first reorder, which is ramping up and has been ramping up for the last few months in the U.S. 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 be able to execute that. I think that's about all I can tell you right now.
Yeah. Great. Just one about the mix there and the inventory correction. I guess that all about light vehicles or mostly that produce, but is there any sort of difference there between the heavy commercial vehicles and the light vehicles?
Not sure I understood your question.
I mean 85% is the light vehicles, from top of my head, I guess. Well, the balance is sort of more heavy vehicles, and is there any sort of favor or difference there between the need of making the inventory correction?
Okay. You mean the effect in the stock regarding heavy commercial vehicles and light vehicles?
Yeah. If you can sort of give some indication there.
No, it's in the average, I would say.
Okay. Thank you.
Yeah.
If there are no further questions, I'll hand back to the speakers.
Okay, if there are no more questions, thanks everyone for listening in.
We wish you a very nice summer.
Have a good summer.