Welcome to Bulten's 2019 Q1 presentation. My name is Kamilla Oresvärd, Senior Vice President, Corporate Communications. Presenting the report today 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, Kamilla. The agenda for today will be a brief overview of Bulten, the market development, the outcome for the first quarter, and some comments about the future. Let me first give you some quick reflections about my first months with Bulten. I'll go through this reading the presentation. I took on my position as CEO on the 8th of February. I had a good impression of the company already before joining, and that impression is even stronger now, I have to say. The company spirit is quite unique, with a sense of pride among the employees, and this applies to all categories of employees. The occupational pride among people like machine operators and production specialists is the best I've seen outside of Japan. This gives us continuity and preserves our knowhow. Bulten has also a lot of credibility with the customers, and the brand is very strong.
They see that we're adding value to their business, and that we're investing in our future, and that we have a strong financial position. Our FSP concept is obviously an important element in our growth and explains much of our successful track record. We have a very solid foundation to continue to build the company from in the years to come. Before going into the quarter results, let me just take you through some of the basic facts about Bulten. On to page four. Bulten has a lean and well-positioned operation with a global presence. There are actually not many in the industry that can offer local content in both Europe, the U.S., China, and Russia. We have today the largest fastener operation in the industry in a low-cost country, and we're planning to expand that further.
We balance our production between approximately 40% outsourcing and 60% insourced, and we can thereby be flexible and cost efficient. On to page five. As you can see in this slide, Bulten has a broad customer base. The car makers are the largest customer group, and Bulten's three largest customers are Ford, Jaguar Land Rover, and Volvo Cars. On to page five, the first quarter in the market development. On to the next page, that's actually page seven. As we commented in our report today, the industry has continued to be quite volatile, also in the beginning of 2019. In Europe, car sales have decreased each month since December, according to ACEA, as you may see in the top right-hand chart of this slide. This is due to several factors.
The introduction of the new WLTP emission regulations caused car sales to accelerate in the first half of 2018 and then slow down in the second half. Concerns about Brexit has had an impact, especially in the U.K. As you can see in the lower right-hand graph, car sales in many global key markets also has continued down, especially in China. China is an unpredictable market that historically has had bigger swings up and down than other markets. However, in the long term, China has huge potential for Bulten being the largest car market in the world. In the first quarter, raw material prices have remained in the same high level as in quarter four last year, with no further increases announced. On to page eight. Production on cars is really the relevant statistics for Bulten as we look at our sales markets.
LMC Automotive is forecasting a 0.5% reduction in light vehicle production for the full year in 2019 compared to 2018. Heavy commercial vehicles is forecasted to grow by 1.6%. With Bulten's customer mix, that means a forecasted market reduction of 0.2%. As Bulten has contracts not yet in production, we believe that we still have good opportunities for gaining market share during this year, 2019. 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% in 2020 and 2.2% in 2021. Similarly, for heavy commercial vehicles, they estimate an increase of production of 4.1% for both 2020 and 2021. Going to page nine. Some words about our market and position.
Bulten's market share in Europe was 18% during 2018. We have defended our position as the leading FSP supplier quite well. We have increased our market share by five percentage points in Europe from 60%-65% during last year. In page 10, there's an illustration of going forward. On this slide, you can see that the growth that we're projecting is substantiated by actual contracts. This is important to know. Changes in demand driven by macroeconomic effects, positive and negative, will have an impact on this, but the contracts are there. You can also see that two of our last three business wins were for electric vehicles, which is an acknowledgement of our technical position and ability to supply those new vehicle concepts. Now over to Helena for the first quarter.
Thank you, Anders. Now to us about the first quarter and operational highlights. Going to page 12. New accounting principles, IFRS 16, are applied from 1st of January 2019. More about that on next slide. Bulten shows a save of SEK 810 million in the quarter, down 5.1% compared to the same quarter last year. Our EBIT amounted to SEK 58 million. The operating margin was lower compared to comparable quarter last year and effect of lower volumes, restructuring costs and high raw material prices. Still, it ended up at 7.1% and adjusted for restructuring costs in China at 7.3%, which is in line with our conventional target of 7%. We continued to take new contracts during the quarter as we won a new FSP contract from new vehicle program with an annual value of EUR 30 million. Page 13.
As many other companies, Bulten is affected by new accounting principles, plus IFRS 16, as January 1, 2019. Bulten's lease agreements mainly consist of rights of use for premises and equipment. For Bulten, this has minor effects, especially on the income statement, and a major effect is on the balance sheet as well as the key indicators that are related to the balance sheet. There are some comments. Let's go back to the income statement first. The new principles had a slightly positive effect on the EBIT level by 1 million SEK. However, looking at our EBITDA, that was affected by 10 million SEK positively, mostly related to rental contracts. Depreciation, I think, rates with almost the same amount, 10 million SEK. All in all, our earnings before and after tax is almost neutrally affected by new accounting principles. Now back to the balance sheet.
The leased liabilities have affected the net debt by 240 million SEK, totaling 501 million SEK in the end of the quarter, and return on capital employed is negatively impacted by 0.6 percentage points and goes from 11.5%-10.9%. Our equity ratio goes to 58%, and would have been 63% if the old principle was used. Page 14. Some comments on the net sales and order intake. Sales for the quarter were down for 5.1%, and adjusted for currency, the organic growth was 9%. The market has been volatile, as we mentioned before, but as importantly, the exceptionally strong first quarter 2018 that was the ramp-up of contracts. In the first quarter 2019, we were impacted negatively by our customer mix and the fact that none of our new contracts was scheduled to ramp up in the first quarter to offset the market downturn.
Looking at our order intake, it was down 5.9%. This is, of course, also a result of the market volatility and the customer mix as well as strong order intake previous year. Page 15. Now back to our earnings performance. Our EBIT margin for the first quarter amounted to 7.1% compared to 7.8% comparable quarter last year. Now looking at the underlying profitability, which is including currency and restructuring costs related to the relocation of production in China, the difference is much lower, with a margin of 7% in the first quarter of 2019 compared to 7.2% the previous year. This shows good cost control taken into account lower volumes and a higher level of raw material prices compared to a year ago. On the right chart, our earnings on EPS level was down in the quarter for the same reason. Page 16.
The cash flow has been affected mainly by operational results, but we have also turned up some net working capital impacting cash flow. The inventory has increased significantly the last few quarters. More about that on next slide. We have a higher investment level as we are in phase preparing for growth, and our investment in efficiency continues as we aim to become the industry's most cost-effective fastener manufacturer. Our balance sheet and financial position remain strong, and we have a net debt by the end of the quarter at 501 million SEK, or 252 million SEK excluding lease liabilities. Now some add-on comments about our increase in inventory since a year ago.
Our inventory has increased mainly this last few quarters. In the left chart, we can see the reasons explaining the increase compared to a year ago. The main explanations are volume demand, normalization of inventory levels, and the new ramp-up contract, but also preparation for Brexit and relocation in China. With an inventory of SEK 731 million at the end of the quarter, we are now at an inventory level of over 20% of the net sales, as shown in the right chart. Activities are ongoing to normalize and improve the control of inventory level. Page 18. We have a return on capital employed of 10.9%, mainly affected by the profitability level and the high investment level, but also by the fact of implementing the new accounting principles, IFRS 16. If you exclude the lease liabilities, we would end up in 11.5%.
Also, our return on equity is impacted by this and amounts to 9%. Capital turnover times have gone to 1.6 times, which is lower compared to full year 2018, mainly due to the same reason as earlier mentioned. Page 19. On this slide, we continue to give you some forward guidance regarding some key figures for Bulten. As always, this guidance are not to be considered as financial targets. Leverage, net working capital in relation to 12-month sales, amounted to 26.5%, which is above our guidelines. The main reason are due to volume demand, normalization of inventory levels, and the new ramp-up contracts, but also the preparation of Brexit and relocation in China.
Capital expenditures as % of 12-month sales were on a level of 5.2%, an evidence of that we invest in future growth activities. We predict that we would end up with this level in the coming years. More about that in next slide. Depreciation of 3% of 12-month sales, excluding the lease liabilities, is within our range of our guidance. Our average tax rate was 28.3% rolling 12 months, which is slightly above our guidance. However, the tax rate was 25.3% in the quarter, and it really varies from quarter to quarter. Page 20. Just a short review of our investment strategy going forward. Our guidance is to invest 2%-3% of 12-month sales into daily business. On top of that, we will invest more in the years to come, as previously announced.
We will invest in new capacity, value-added production, as well as new production plant in Poland. These investments have, however, been delayed due to negotiations regarding land development in Berlin. The planned [certification mine] in Poland is also delayed for same reason. We have announced the move of our production facility in China from Beijing to Tianjin. More about that on next slide. These investments will improve Bulten's production efficiency even further. In early 2018, we decided to relocate the operation to China from Beijing to Tianjin with associated investment to SEK 25 million. Additional to that, we are also expecting structural costs about SEK 16 million-SEK 20 million during the moving period. The main part during the second and third quarter 2019.
The move has started and will be finalized by the end of 2019. This will strengthen our position in China and will enable further growth opportunities. Now page 22. Some comments about our financial key ratios in relation to finance and financial targets. In this perspective, we are looking at the figures excluding the lease liabilities and restructuring costs in China. Even though our net sales were down in the quarter, our rolling 12-month sales were up over 5%, which is above industry growth. We continue to have a solid profitability with an operating margin 6.5% on a rolling 12-month basis. Even with tough raw material pricing situation and a volatile market has made the environment more challenging. However, the quarter ended at 7.2%, which is in line with our targets.
In return on capital employed of 11.6%, which is lower than our target due to the lower profitability level and a higher investment level. Now back to Anders again.
Thank you, Helena. We turn to page 24 to look at the focus areas of 2019. Even though we have seen a more volatile market in the last few months, Bulten will ramp up previously won contracts to offset the weak market. Our margin development indicates good cost control, and we continue to secure efficient production. We plan to invest in further growth in Poland. Our increased production capacity investment is delayed but still on focus for 2019. Our Chinese relocation is underway. Our establishment in the U.S. also continues. As always, we aim for new FSP contracts during the year. We continue to promote and develop innovation and sustainability work and to build our already strong corporate culture. This concludes our presentation, and we are ready for Q&A.
Ladies and gentlemen, if you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw a question, you might do so by pressing zero two to cancel. There will now be a brief pause while questions are being registered.
Our first question is from Kenneth Toll from Carnegie. Please go ahead. Your line is open.
Yeah, thank you. Can you tell us more a little bit about the timing of those new contracts that you are ramping up during 2019? Do you think they will add more volumes towards the end of the year, or when do they start to kick in? As I understand that there were not huge effects in the first quarter.
That's true. It's not a huge effect in the first or second quarter, actually, and they will start to kick in the second half of 2019.
Okay, great.
Gradually over 2020 and 2021, as you can see in the slide.
Okay. Great. You talk about new FSP contracts that you want to win those, obviously, but are there such contracts up for grabs in 2019?
We have good reason to believe that there are more contracts up for grabs. We are discussing with customers. Yes. Yeah, there's a good chance.
Okay. Are those then existing customers that want to move more to FSP, to that concept instead of the traditional one, or are there new customers that you don't have any business with currently?
In the interest of customer confidentiality, I won't comment on which customers or customer groups that is.
Okay. I'll settle with that. Thank you.
Just as a reminder, if you do wish to ask a question, please press zero one. Our next question is from Mats Liss from Kepler Cheuvreux. Please go ahead. Your line is open.
Yeah. Hey, thank you. Just coming back to the FSP contract there. You mentioned the delay in the Polish capacity build there. Do you need that plan to be finished before you take on more contracts, or do you have sort of available capacity to ramp up the contracts you have on hand?
The answer is actually no. We can contain that within the capacity that we have.
You don't need Poland to
Well, Poland, in its first step, is primarily in efficiency, with moving operations in-house that are currently outsourced. From a capacity standpoint, we don't have the immediate need for the Polish plant now.
Yeah. Maybe if you could update me on why the project is delayed.
Yeah, that's basically, we're engaged in negotiations with local authorities and even national authorities in Poland. As you can appreciate, it's somewhat difficult to control a process where you're negotiating with authorities, and it has taken longer than previously estimated. We are working hard on getting that finalized as quickly as possible.
Well, the problem is you need approval to continue with. Well, you need persons, I mean.
Permits, you mean?
Yeah, no, it's not about permits. It's about purchase of the land.
Yeah. Okay. Is it a pricing issue or something like that? Or is it more like?
No. In the interest of preserving that negotiation and then to preserving our interest in that, I won't comment on the reasons, as you can probably understand.
Yeah. Okay. You mentioned that the FSP contracts there will be ramped up during the second half, and should we expect the second quarter to be above the same level, I guess, indicate the same level with the order intake? Is that something to comment? Will you sort of keep capacity, production capacity at the same level during the second quarter? Do you expect to do that?
Production capacity will be at the same level. Basically, what we have done since the market slowdown is that we have normalized utilization of our production capacity, going away from overtime and basically overutilization of our assets. Yes. The answer is yes.
Okay, good. Yeah. Well, you mentioned that raw material prices have stabilized. You haven't seen any change since last autumn. Have you been able to sort of increase prices as you wish, or are there still potential there to improve going forward?
We do that in line with the contracts that we have. I think it has been explained previously that there is a time lag in settling pricing. We have done that for the most part with our customers. That's been settled. As you say, we don't see any warnings on the horizon when it comes to additional raw material price increases. It's fairly stable right now.
Okay. Great. Thank you. That's all from me.
Our next question is from Kenneth Toll from Carnegie. Please go ahead, your line is open.
Yeah, thank you. Just a question on the balance sheet. Now with these accounting standard changes and so on, your net debt increased quite a bit. You also have some heavy CapEx plans ahead of you, and you're buying back shares. Now, those share buybacks have not been massive, but still, do you think you are able to continue buying back shares going forward?
Absolutely. We're still asking for that in the AGM today. That is in our plans to have that opportunity.
Okay. Thank you.
There seems to be no further questions at this time, I will hand the word back to the speakers for any final comments.
I would just like to say thank you to everyone for spending time with us this afternoon.
Yeah. Thank you.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.