Earnings Call: Q4 2018

Feb 7, 2019

Good evening. Hello, and welcome to Burston's 2018 Q presentation. My name is Camita Wilson, Senior Vice President, Corporate Communications. Presenting the report today are Bertens, President and CEO, Tom Anderson, and our Executive Vice President and CFO, Heliana Vanstrom. After the presentation, it will be possible for you to ask questions, both on the web as well as in the telephone conference. So first, with us today is Anders Nystrom, who would pick up the position as Bolton's new President and CEO as of tomorrow, under Can you please say a few words about yourself before we start the Q4 presentation? Yes, absolutely. Thank you for coming on. Tomorrow is my first day as the president and CEO of Hilton. Tommy has served the company for almost 2 decades and I have a lot of respect for what he and his team has done, especially in the last 5 years. As some of you know, I've most of my career on the OEM side of the business. I'm a mechanical engineer by training and started in quality and mobile cars. Moved on to product development and then to purchasing. I stayed with Babakars for 27 years, which 6 were in different purchasing management roles for Ford Motor Company, both in, North American and Europe. While the former cars was, part of the Ford family. When I left former cars, I was responsible for our materials and components purchasing and that was back in 2011 and then joined Huntsbury Automotive where I have the opportunity to run a global business unit with customers and manufacturing facilities around the globe. I did have a short stint with the IAC group, as well before being asked a question whether I would be interested in leading this prime company, which, Bolton is. And I've been looking forward to get to work ever since the day in June when I signed the contract. And the last few weeks months, I've had a chance to shadow Tommy and start to understand the business and the organization. And I have to say that we, we have good people. We have good technology, wealth of knowledge in the company and a global presence to capitalize on. So, my observation so far is that We have a very solid foundation to continue to build the company from. And, I'll now hand over to Tommy and Helena for the Q4. Okay. Thank you, Anders. And I'm convinced that you will do a great job. Session there. And now going to the 4th quarter and full year outcome. Car sales within EU has been extremely volatile during Q4 due to new regulations, what we call worldwide harmonized light vehicle test procedure in short WLTP. Bolton has due to ramp up on new contracts, managing situation well and are still on a growth pace. Coming to, again, the first day, Bolton in brief, Mark development fourth quarter 2018 and our plans going forward. Going on to page 4, building in brief, Both business concept is getting stronger every day. And during the year, we have been involved in successful launches of several new cars and modern shifts with flawless execution. Investments in quality, engineering, logistics, as well as dedicated people are the key to this performance as mentioned, this is the reason for maintaining growth also in Israel as a market. Volton's vision to support the global automotive industry with state of the art fastener technology and services, as well as developing the FSP concept into perfection has been the main reason for both to be a winner in this highly competitive industry. Going on to Page 5. Bolton has a lean and well positioned operation and entry into the U. S. Market with open doors into new customers but more important, the strengthens Bolton's position on global platforms to customers we are already supplying. There are not so many in our industry that can offer local content in Europe, USA, China and Russia. We have today the largest Faucin operation the industry in the low cost country, Poland, and we are planning to expand it further. We have also a big portion of outsourced production approximately 40%, which also creates flexibility. Regarding volume, both and has proven that we can adjust the volume fluctuations both up and down. Moving on to page 6. Fulton has many customers with potential for further growth. When consolidation and strong FSP supplier will be required to sell the cars and engines the most cost effective way. Cars are the main fastener market within automotive as it is also for built in. And both the Stray Largest customers of Forge, JLR and Bongbong. Coming to market development, page 8, market volatility. As we commented in our report today, the industry has been quite volatile the last few months. In Europe, car sales have decreased each month since September. And in December, in car sales were down 8% according to AKA. This is due to several factors. The new global test procedure from new Chorus Call WLTP is more strict in terms of CO2 emission. This has rated distortion in many EU countries. This has created the demand for cars produced prior to the new test procedure was introduced And the trend towards more CO2 friendly cars, hybrids and electric vehicles is in a long term perspective, however, positive for both them. Also concerns about Brexit has had an impact, especially in the UK. We can see a drop in car sales in Europe of 7% to 8% during fourth quarter, while Bolton managed to remain almost unchanged due to new business. And as you can see in the graph, car sales in many key markets were down in December. Raw material prices will remain in the same level as in Q4, during the first quarter 2019, no further increases are announced. Going on to Page 9, market development for production. If you then look at the production of cars in Europe during Q4, the most relevant statistics for built in, LMC reports are a clear drop This is, of course, a result of lower sales, but also a result of lower exports, of course, to other continents like China. The market that has, as mentioned, also weakened Ned in Q4. According to LMC, especially Germany and UK production went down in Q4, in an overall market perspective, it's obvious that built in value to keep production volumes at a good level during the quarter. LMC Automotive has reported an estimated 2018 for light vehicle production in Europe of 0.2% growth and heavy commercial makers to grow 0.7%, which is with both mix an estimated market growth of 0.3%. The LMC estimates has been lowered since the Q3 report with the influence from WLTP and Brexit. Page 10. Looking in the longer perspective, I would say, Automotive estimated bumpy production of cars in Europe for years to come with a decrease of 0.5% in 2019, and an increase of 3.5% in 2020. And looking at the same thing for heavy commercial vehicles, this estimate, an increase of production around 2.1% for 2019 and 4.1% for 2020. For bolton's mix the minus 0.1% for 2019 3.6% for 2020. Page 11 market shares and what's about our market and positions. Both is growing and continue to take market shares. Those market share was 18% during 2018, both of them is defending its position as the leading FSP supplier well, We increased our market shares from 60% to 65% in 2018, mainly due to a new major FSP contract. The growth we are planning for 2019 is to a large extent coming from FSP contracts. Going on to the 4th quarter and operational highlights page 30, opening is growing even though the market was down in the quarter, an effect of our continued ramp up on new contracts in the quarter. The order intake decreased due to weak market as well as a tough comparable last year. Profitability decreased somewhat during the quarter due to irregular production caused by volatile market, high level of prices on raw material and negative currency effects. We continue to take new contracts within the quarter as well as after the quarter, 2 new FSP contracts for drivetrain to electric vehicles 7,000,000 and 1 new FSP contract of SEK 30,000,000 after the quarter. And the board is proposing a dividend of SEK 4 2018 increased from 3 0.75 percent, 2017. And I will now hand over to Iliana for some financial Thank you, Duane. This issue is a sales of SEK 747,000,000 in the quarter, up 1% compared comparable quarter last year. Our EBIT amounted to 48 Milliseconds and operating margins lower compared to the comparable quarter last year. An effect of irregular production due to market volatility, higher raw material prices and currency effects. Looking to our EPS, it decreases with 34% during the quarter. This drop mainly relates to our financial net, which were SEK 10,000,000 lower than Q4 previous year, which basically the most of it relates to currency effects. More comments about earning in the estimates. Page 15. Some comments on the next day is an order intake. Since for the quarter, we're up 1%. However, adjusted currency, the organic growth was down 3.3%. In an overall market perspective, our performance comes from increasing volumes related to previous announced contract wins, and overall good demand from our customers. However, the market has been volatile, especially in December. But the situation differs from customers. Looking at our order intake, it was down 11.7% This also, of course, is a result of market volatility, but as importantly, the top comparable quarter of 2017. That was posted by ramp up of contracts. The speed of ramp up of countries in Q4 2018 has been somewhat affected by the market situation. Page 16. Our rabies margin for the 4th quarter amounted to 6.4%. Compared to 7.5% comparable quarter last year. And looking at the underlying profitability, excluding currency, the difference is much lower. With a margin of 6.8% in the quarter 2018 compared to 7.1% the previous year. In addition, we also need to take into account the higher level of raw material prices compared to a year ago. And during the quarter, we also started to see some costs for a start with relocation of production in Shanghai. And as a result of volatile market, we have just started adjustment to our production levels with some lead time. And as mentioned previously, and as you can see on the right chart, our earnings on EPS level was down in the quarter, but much less if we disregard the currency effects. Page 17, the cash flow from operating activities was mainly affected by the operation result. And our token cash flow is, of course, also impacted by the high investment level as we are in a phase preparing for growth and increasing our capacity. And our investment in efficiency continues, as we aim to become the industry's most cost effective business manufacturer. Our balance sheet and financial position remains strong, and we have a net debt by the end of the quarter of 100 and 81000000 achieved from 2.6 times EBITDA. Page 18. Our return on capital employed has decreased down to 12.8%, mainly due to the margin development but also our return on liquidating antibodies and amounts to 9.9%. Capital turnover times whatsoever at the same level compared to the full year 2017. The equity ratio was on a level 64.8% at the end of the quarter. H 19. On this slide, we continue to give you some short guidance regarding some key figures for bolt on, and as always, these guidance are not to be considered as financial targets. Average net working capital in relation to 29 sales amounted 23%. Working capital has been driven by Positive redevelopments for 1st quarter was also impacted by region volume development in the latter part of the quarter. Capital expenditures as presented at 1 month sales, the earning level of 5.3%. An evidence of that we invest in future growth activities. And we predict that we will end up over this level in coming years more about this on the next slide. Depreciation of 2.9% of 12 month sales is within the ratio of our deadline. And our average tax rate was 29 percent during 12 months, which is above our guidance. And during this year, we can see an effect of revelation of deferred taxes due to coming new tax rate in Sweden. But also other changes in the federal regulations, mainly in Poland, which also affects the risk tax rate. However, the test rate will vary from quarter to quarter going forward. Page 26. Let's ensure a preview of our investment structure in the coming years. Our guidance is to reinvest 2 to 3 percent of funding sales in today's business. On top of that, to handle the group pace, we will invest more in the years to come, as previously announced. We will invest in new capacity, value added production, as well as a new production plan to pull down. This investment has, however, been delayed due to negotiations regarding land development and the building and will and pay some additional investment compared to earlier estimates, but it is still under negotiations. You also see some delays in finalizing oral cancer of a treatment line in Poland due to the the reason that I just mentioned. In connection with the release of our Q3 report, we announced the relocation of our production facility in China from Beijing to a T And D with purpose to catch growth opportunities. The modes have started and we will be finalized with by the end of 2019. With associated investments of 25,000,000 acres. At all in all, these investments will improve business production efficiency even further. Thank you, Tiffany. Financial targets. We are really most owners on the industry average, 6.9.7 percent for the full year 2018 versus a 4 question, market growth of 0.3%. We continue to have a good profitability with an operating margin of 6.7 percent on a rolling 4 months basis, even platform appear to be prices and volatile market has made the environment more challenging. Return on capital employed of 12.8%. Or 40.6% if you had also got reduced mainly due to the modern development. EPS developed negatively mainly due to the financial net translation effects but also due to higher average tax rate as mentioned earlier. And our board will propose to the AUM an ordinary dividend of 4 Swedish pounds per share, an increase compared to 3.75 Now, thank you Toni again. Okay. So with that going forward, I'm going to page 23. Building continued to perform better than the market in Q4. The major part of this growth is coming from ramp up for new contracts. On this slide, you can see the updated different ramp up contracts and what phases of implementation there are in, respectively. Moreover, we're contract signed, but not yet entered production with the support Fulton growth even further in the years to come. The market situation, of course, will have an impact on bolt on and for bolt ons mix to market according to LMC is estimated to be flat. During 2019. To that, you have to add ramp up of new contracts that have started as well as new business not yet started. Again, the total thing over 65,000,000 yearly. And going on to page 24, going forward there. The European car market dropped from 7% to 8% during Q4 compared to previous years. But both to remain on the same level as Q4 2017 due to ramp up on new contracts. Strong financial position and an increased dividend is proposed. Preparing for future growth through investments and continued streamlining to become the most cost effective FSP supplier in the industry. Finally, we are also in a good position to win new contracts when the industry is changing for more environmental friendly ride trains. The long term trend towards hybrids and elliptic cars works in our favor. And I hope you all got a clear picture of the opportunities within Bolton and you are now ready for Q that. And if you wish to withdraw your question, you may do start by pressing 0 2 to cancel. Our first question comes from the line of Kenneth Toll from TD. Please go ahead. Thank you. Yes. First, you commented a bit, yes, Alo. So you commented a bit on the Polish share project that there are some delays there. But the project for capacity increases in Halfta Hambar and the move in China, or are those moving according to plan? Yes, they are moving on according to plan, setting it up now in Alstohammal and machines are there and that they are following the plan. It's just a negotiation regarding planned buildings in Poland that takes some time. So they are on plan. Okay, great. And then I was curious on the new contracts and the ramping up you are doing, how How is that working operationally? Is it smooth or do they incur extra costs and so on? I think you have seen over the years that we are really skilled to implement new contracts. We don't secure a lot of extra cost. We are doing it with quite a good execution I don't expect it to be anything special there. It's a ramp up period, of course, in some cases, and a little bit of maybe under observation with machinery, but we are quite good on ramping up new contracts. Okay. And then finally, the raw material prices have gone up during 2018 and now seem to stabilize. And over the long term, you are usually good in adjusting your own prices. But this year, you have been or last year 2018, you were hurt a bit from higher raw material prices. Do you think that you can still increase some prices from the level you had in Q4 in order to mitigate for some of the increases last year or? I think we're always working with our customer to get compensation the material. And as I mentioned before, a lot of our customers, I want to call out the material. It just takes some time before it's getting in there. The problem we have had is so many quarters in a row with increases, but I would also expect now when the market is slowing down a little bit that we will have some more leverage on the raw material suppliers. Yes. So if the current raw material prices stay flat for the remainder of 2019, then the difference between your pricing and the raw material pricing would be more favorable in 2019 than what it was in 2018? It should be. Yes. It's quite natural. I mean, when the market is up at a high demand, the raw material prices increase in the it's going down. And and, of course, we we we always lose a little bit when it when it's going up. And as long as you, we'll not have first increases, it will not be the delay effect. No, no. Yeah. And then one thing, you are selling quite a lot of products in the UK. And there might be a Brexit coming. How are you preparing for deliveries in the UK, in the case of a hard Brexit? First of all, we have no production in UK. So that will help us. It's basically logistics. And of course, we are looking over the situation to build up inventory in case there is a stop force. So we are not the show stopper or what will happen. And that's basically what we can do right now. Of course, we have, we have a look at overall, our flows, what we can do, if there's something we can move that going to UK that we don't need to send her and things like that, but that's basically it. We just make sure that we we can maintain the production. And of course, if it's something that's getting really bad, which I don't think it will, but that's, then then of course, the car company will. There were probably other things that stopped the car. We are prepared, right? We are not going to, of course, it might hurt us. It's, for sure, it could hurt us if the production stops Hopefully, that will not happen. And the next question comes from the line of Matt Slice from Kepler Cheuvreux. Please go ahead. Hello, Matt. Thank you. I didn't. Hello, Mads. Hello. If you now, you can hear me. I was slow on the mute. But, you're talking about the slowdown there in late in the quarter and I expect the same situation have continued during the beginning of the year. Is that so? I think it's quite a mix. Of course, it continue on a slower pace, but I mean, is WLCI made a lot of people buying cars before and then they just mean, if you take Sweden, for example, it dropped 34% in December, but it's back on. I only dropped 10% in January. So there quite a change in the market, right? But of course, you're right. It will, as I mentioned on the LMC report, it's almost it's about 0.5%, 0.3% with our mix. So of course, it is a weaker market than we are used to with the growth market growth But the well, the best guidance is, of course, the order intake you had in the 4th quarter to be delivered during the first quarter. Yes. On the other hand, as we also said, the order intake was some are affected by a very high order intake the quarter the year before. So was maybe indicating a little bit more. I don't know if you want to add anything here. You're talking about the absolute but I think we as of course, it is, let's say, 7%, 8% down. And, you probably can expect things like that to continue. Yeah. Okay. And then the delays there in Poland, do that affect your ability to ramp up the new FSC contract? Do you have No. We are still managing that. I I as it is right now, I mean, with the volume still going down, are still managing that. And we expect it to be not negotiated in time, so we're not working there. I think that contract is is just starting to ramp. So I was starting to going by the end of the year. So I think we have time to to ramp it up. I don't think it will affect that. And then, about the FST contract, you're gradually ramping up now. I mean, expecting unchanged car production in 2019, how much would would you outgrow the underlying market down? Given the contract you have of of our ramping up? I mean, we we are not giving forecast in that way. You could see that we, of course, outgrown the market. The market was down 8 to 8% in the fourth quarter and then we were almost flat and the only thing we have is 1,000,000 that will be in ramp up and things like that. And exactly to say how and when they will go in this is a little bit difficult to say. Okay. But, so I'm not going to give it's too uncertain now to give a number. And of course, we don't keep forecast. We just referenced to the LMC report. Yeah. Do you know Danielle and I, you have anything else? And since the well, just, briefly on the tax rate, it was a bit high in the quarter, and you you write something out of the pool Polis, Yes, changes in what is the deductible and different kind of changes that affects now when we are into the new regulation. So we can see in effect here. So but that's a temporary impact. So in 2019, you will have a sort of within the indication that 2040, 20 We will adapt to the new regulation. Absolutely. K. Thank you. There'll be a brief pause while any other questions As there are no further questions, I'll hand back to the speakers. Yeah. So this was my last for Bolton, and I want to thank you all for listening in. And, I wish you all the best for the future. And thank you.