Earnings Call: Q1 2019

Apr 25, 2019

And welcome to Long Term's 2019 Q1 presentation. My name is Camilla Okusz, Senior Vice President, Corpus cations. Presenting them for today are Willdan's President and CEO, Under Tunisian and our Executive Vice President and CFO, Helena Enerstrom. After the presentation, it will be possible for you to ask questions both on the web as well as in a telephone conference. Please go ahead, Ambrish. Thank you, Kamila. The agenda for today will be a brief overview of Bolton. The market development the outcome for the first quarter and some comments about the future. But let me first give you some quick reflections about my 1st month's we've mentioned. I took all my position as CEO on the 8th February. I've had a good impression of the company already before joining, and that impression is even stronger now. I have to say. The company's spirit is quite unique with a sense of pride among the employees in this applies to all categories of employees. The occupational pride among people like machine operators and production specialists is best vaccine outside of Japan. This gives us continuity and preserves or no help. Built brands 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 FSB concept 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 many years to come. Before going into the quarter results, Let me just take you through some of the basic facts about Booking on to page 4. Dolton has a lean and well positioned operation with the global presence. There are actually not many in the 3 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% in source. And we can thereby be flexible and cost efficient. On to page 5, As you can see in this slide, Bilton has a broad customer base. Carmakers are the largest customer group and Wilton's 3 largest customers are Ford, Jaguar Land Rover and Volvo Cars. This is Page 5, the 1st quarter in the market development. And to the next page. That's actually page 7. As we commented in our report today, the industry has continue to be quite volatile also in the beginning of 2019. In Europe, car sales have decreased each month since December according to Ikea, 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 core sales to accelerate in the first half of twenty eighteen and then slow down in the second half. Also concerns about Brexit has had an impact, especially in the U. K. And as you can see in the lower Ipad graph, core sales in many global key markets also has continued down, especially in China. China is an unpredictable market with historically has had bigger swings up and down than other markets. However, in the long term, China has huge potential for Hilton 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 4 last year. With no further increases announced. Into page 8, production on cars is really the relevant statistics for both. And as we look at our sales markets, SMC 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%. Buildson's customer mix, that means a forecasted market reduction of point 2%. As Milton has contracts not yet in production, we believe that we still have good opportunities for gaining market share during this year 2019. And 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 20 and 2.2% in 'twenty one. Similarly, for heavy commercial vehicles, they estimate an increase of production of 4.1% for both 'twenty and 'twenty one. Going to Page 9, some words about our marketing position. Benton's market share in Europe was 18% during 2018. We have defender our position as the leading FSP supplier quite well, And we have increased our market share by 5 percentage points in Europe from 60% to 65% during last year. In page 10, we see the illustration of, going forward. On this slide, you can see that the growth, that we're projecting is substantiated by actual contracts, and this is important to know. Changes in demand driven by macroeconomic effects, positive and negative will have an impact on this, but the contract are there. You can also see that 2 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, Hamblasch. Nothing works about the first quarter and operational highlights. I'm going to page 12, new accounting principles, IFRS 16 are applied from 1st January 2019. More about that on next slide. All these shows are saved. So 810,000,000 in the quarter, down 5.1% compared to the same quarter last year. And our EBIT amounted to SEK58 1,000,000. Lower breaking margin was lower compared to comparable costs of 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 7.8%, which is in line with our financial target of 7%. We continue to take new contracts during the quarter as we run a new SSP contract for new vehicle programs with an annual value of 30,000,000 Page 13, as many other companies, often is affected by new accounting principles, IFRS 16 as 1st January 2019. Both its lease agreements mainly consist of rights of use for premises and equipment as a world class, these have some minor effects, especially on the income statement, and a major effect is on balance sheet as well as the key indicators that are related to the balance sheet. Here's some comments. Let's go back to the income statement first. A new principle had a slightly positive effect on EBIT level by 1,000,000. However, looking at our EBITDA, that is affected by 10,000,000 figures, mostly related to rental contract. Depreciation, I think, will be almost the same amount. So all in all, our earnings before and after tax is almost mutually affected by new accounting principles. Now, back to the balance sheet. The lease liabilities have protected the net debt by 240,000,000 totaling $501,000,000 in the end of the quarter, and return on capital employed is negatively impacted by 0.6% points in those same element of 5 to 10.9%. In our equity ratio, close to fee 8%. I would have been 63% if there were principles used. Page 14. For comparison the net sales and order intake. 6 for the quarter were down 4 5.1% and adjusted for currency, the organic growth of 9%. The market has been volatile, as we mentioned before, but as an as importantly, the exception is strong first quarter 20 that caused the program of the contract. And in the first quarter 2019, we were impacted negative by our customer mix and the fact that none of our new contracts were scheduled to impact 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 take previous year. Page 15. Now back to our earnings performance. Our EBITDA entered 1st quarter amounted to 7.1% compared to 7.8% comparable quarter last year. We're looking at the underlying profitability, which is building accounts and restructuring costs related to the relocation and production in China. The difference is much lower with a margin of 7% in the first quarter of 2019 compared to 7.2% for previous year. This shows good cost control, taking 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 starting in the quarter for the same reason. Page 16. The cash flow has been affected mainly by operation and result, but they've also turned up some in capital impacting cash flow. The inventories have increased significantly in the last few quarters. More about that on its side. We have a higher investment level as we are in phase preparing for growth, and our investments in efficiency continues as we become the industry's most cost effective fastest manufacturer. Our balance sheet and financial remained strong, and they have a net debt by the end of the quarter at SEK501 1,000,000 or SEK 252 1,000,000 excluding lease by it is. [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Nice, and I don't comment that I've also been increasing inventories since a year ago. Our inventories increased mainly this last few quarters and 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 contracts, but also preparation for Brexit and relocation assignments. We did venture of 731 New Year sec. At the end of the quarter, we are now at an inventory level of over 20% of the next day. As shown in the right track. Activities are ongoing to normalize and improve the control of the inventory level. Page 18. We have a return on capital employed of 10.9% mainly affected by the profitability level, and the high investment levels, but also by the fact of implementing new accounting principles, IFRS 16, And if you exclude the lease liabilities, we would end up being 11.5%. Also, our return in equities impacted by this and amounts to 9%. Capital ten times were down to 1.6 times which is lower compared to full year 2018, mainly due to the same reason as Arlene mentioned. Page 19, on this slide, we continue to give you some forward guidance regarding some key figures for bolt on, but as always, these guidance will not be considered financial targets. Leverage net working capital in relation to 21 sales amounted to 26.5%. We faced above our guidance. And the main reason, all due to volume demand, normalization of inventory levels, and the new ramp up contracts, but also the in terms of the percent, an evidence of that we invest in future growth activities, and we predict that we would end up at the release level in the coming days. More about that in next slide. Depreciation of 3% of 12 month sales, excluding the easy identity is within our range of our premiums. And our average tax rate was 28.3% during 20 months. Which is slightly above oil gainers. However, the tax rate was 25.3% in the quarter, and it can really vary from quarter to quarter. Page 20. Let's see what review of our investment strategy is going forward. Our guidance is to invest 2 to 3 percent of 12 month sales into daily business. On top of that, we will invest more in years to come as previously announced We really invest in new capacity, value added production, as well as new production currently program. These investments have, however, been delayed due to regarding land development in Berlin. And the planned sort of treatment, mind, and cooling is also delayed for the same reason. We have announced a note of our production facility in China from the June to 20, but more about that on the next slide. These investments will incur both this production efficiency even further. You know, doctors doesn't 18, we decided to relocate the information to share from the June to June June. We've associated investments to 25 minutes, sir. Additional to that, we are also expecting structural costs about 16 to 20 minutes late during the new week period. And the main part during the second and third quarter of 2019. The load has started. I'm really defining us by the end 2019. And this will strengthen our position in China and will enable further growth opportunities. And then I'll page turn it to you. Some comments about the financial key ratios in the relation to finance, a financial talk And 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 are up over 5%. We placed a industry growth. And we continue to have a solid profitability with an operating margin 6.5% on a rolling 12 month basis. Even with tough, will not be a reality situation, and the Volcan market has not been in line with more challenging. However, the court ended up 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. And now back to Anderson. Thank you, Elena. We'll return to Page 24 to look at the focus areas of 2019. Even though we are seeing a more volatile market in the last few months, Willdan will ramp up previously one 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 our focus for 2019. And our Chinese relocation is underway. Our establishment in the U. S. Also continues. As always, we aim for working to build our already strong corporate culture. And this concludes our presentation, and we're ready for Q And A. You. And our first question is from Kenneth Paul from Carnegie. Please go ahead. Your line is open. So, can you tell us more a little bit about the timing of those new contracts that you are ramping up during 2019? Or are they, 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 1st or second quarter actually, and they will start to kick in, in the second half of 'nineteen. Okay. Great. And then gradually over 2021, as you can see in the, in the slide. Okay. Okay, great. Then in, you talk about new FST contracts that you want to win those, obviously, but or are there such contracts up for grabs in 2019? We have good reason to believe that there are more contracts up perhaps, we are discussing with customers. Yes. So, yeah, there's a big chance. Okay. And are those then existing customers that want to move more to SSD 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 group stays. Okay. Okay. I'll I'll settle with that. Thank you. Our next question is from Please go ahead. Your line is open. Just coming back to the FSP contract, there, demands on the delay in the Polish capacity build there. And do you have any, or do you need that, plan to be finished before or you take on more contracts or do you have sort of available capacity to ramp up the contracts you have on them? The answer is actually no. We can contain that within the capacity that we have. Since you're you don't need Poland, too. Well, Poland, and it's in its first step is primarily in efficiency, with moving operations in house that are currently outsourced. So from a capacity standpoint, we, we don't have the immediate need for, for the Turkish transfer. And maybe you could update me on the why is there the I project is delayed, the what it's Yes, that's basically we're engaged in negotiations with local authorities and even national authorities in Poland. And, as we kind of appreciate, it's it's somewhat difficult to control a process where you're negotiating with authorities And it has taken longer than previously estimated, but we are working hard on getting the final analysis quickly as possible. And well, the problem is you need approval to continue with us. You need persons I mean You mean? No, it's not about permits. It's about purchase of of of the land. Yeah. Okay. Is it a pricing issue or something like that, or is it more like I really in the interest of preserving that, that negotiation And and then to preserving our interest in that, I, I won't comment on the, on the reasons as you can probably understand. Yes, okay. Then you mentioned that the FSP contract will be ramped up during the 2nd half? And should we expect the second quarter to be, of the same level I guess, it indicates the state level with the order intake. It's just something to come in with your 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 on the basically what we have done since the market slowdown is that we have normalized utilization of production capacity, going away from from over time and basically overutilization of our assets. So, yes, the answer is yes. Okay. Good. Yeah. It's you well, you mentioned that raw material prices have stabilized and you haven't seen any change since last autumn. Have you been able to sort of increase prices as you wish, or are they still, I mean, for potential there to improve, going forward. We do that in line with the contracts that we have. And I think, it has been explained previously that there is a time lag in in pricing and, and, we have done that to for the most part with our customers that's been settled. And, as you're saying, we don't see any, any warnings on the horizon when it comes to additional raw material price increases, it's fairly stable right now. Okay. Great. And our next question is from Kenneth Tull from Carnegie. Please go ahead. Your line is open. Yes, thank you. Just a question on the balance sheet. Now with these 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 can are able to continue buying back shares going forward? Absolutely. And we're still asking for that, in the, again, today. So, so that is in our plans. To have that opportunity. And there seems to be no further questions at this time. So I will hand the word back to the speakers for any final comments. So I would just like to say thank you to everyone for spending time with us. This afternoon. This concludes our conference call. Thank you all for attending.