Earnings Call: Q3 2018

Oct 25, 2018

This is Simibas, President, Corporate Communications. Presenting will be for today are Children's President and CEO, Ms. Tali Alushund, and our Executive Vice President and CFO, Diana Ramos. After the presentation, it will be possible for you to ask questions both on the web as well as in the Taliban company. Please go ahead for me. Thank you, Kimila. So, we start here with CarSense with the new U. S. Phoenix. Screenly volatile during September into new regulations, what we call worldwide harmonized life vehicle test procedure in short WLTP. But due to ramp up and contracts managed to situation when we are still on a strong low for that. We'll continue today together holiday, which is in Breeze, market development, third quarter 2018, and our plans going forward. Then going on to Page 3, open brief, all those business concept is getting stronger every day. And during the year, we have been involved in successful launches of several new cars and model shifts with flawless execution. Investments in quality, engineering, logistics, as well as dedicated people on the key to this performance. As mentioned, it is, it takes us to resettle maintain strong growth also in a volatile market. Built in vision to support the global automotive industry with state of the art class in technology and services as well as developing the FSP concept into perfection has been the main reason for voting to be a winner in this highly competitive industry. Going on to page 4. Both them as a lean and well positioned operation and entry into the U. S. Mark the doors into new customers, but more important, strengthening the world is positioning on global platforms to customers who are already supplying. They are not seen in our industry, but also local content in Europe, USA, China, and Russia. We have today the largest, fastest, fastest operation in the industry in a low cost country, Poland, and we are planning to expand its hub. We have also a big portion of outsource production, approximately 40%, which also creates fleet flexibility. And regarding volumes built in a tool that we can adjust to volume fluctuation, both up and down. So going on to page 5. Fulton has many customers with potential for further growth and consolidation a need for strong FSP suppliers will be required to sell the cars and engines the most cost effective way. Cars remain faster than our within automotive as it is also for bolt ons, and bolt ons 3 largest customers are Ford, JLR, and mobile. Once again, raw material prices increased in Q3. However, bolton has, despite difficult raw material situation, maintained good customer relations. Raw material prices will remain on the same level as in Q3 during the fourth quarter and no further increases are announced. With the market development, I'm going on to Page 7, market shares. Pinton is growing and continue to take market shares. Total market share was 17% during 2017, and both of them is determining its position as the leading FSP supplier will give a 60% share of 2017. The growth we are turning to 2018 2019 is the largest term coming from SSP contracts. Into page 8 market developments. Core sales within EU dropped with 23% during September, and LMC. Automotive is reporting a forecast for 2018 for life shaping production in Europe of 0.6% growth. Heavy commercial vehicles forecasted to grow 1.6, which is with voltage mix of forecasted multiples of 0.7%. The LMC forecast has has been lower since the Q2 report with the insurance from WLTP and also Brexit. Still growth of car sales in our home market Europe, with sales growth of 2.5% for the 1st 9 months, 2018, according to IKEA. However, it's been a volatile market for the last few months and more about that later. Going on to page 9. Looking in a longer perspective, NMC Automotive estimated a gradual improvement of production of cars in Europe, to come with an increase of 0.7 percent in 2009. First Quarter of 2017 This is, of course, challenging for many players in the value chain. However, raw material prices will remain in the same level as in Q3 during the 4th quarter and new salary increases are now listed. Going to the 3rd quarter and to the page well, operational highlights. Everything's growing faster than the market with the continued ramp up of new contracts in the quarter. This has also affected our order intake positively, even though the order intake in the Q3 last year is a tough comparable. The profitability decreased somewhat during the quarter due to both irregular production caused by volatile market and higher prices on raw material. We have received the reward for the best annual report in Sweden in the mid cap segment and after the quarter, also won an electric vehicle drive semi technology for an FSP contract. And today, we also announced that we will relocate our production in China and more about that on the next page on page 13. As we announced today, Bolton has decided to relocate its plant in China from Dain to Tianin. The aim is to expand in the local Chinese market where volumes and growth opportunities increase considerably from previously, the very lucky low level for Bolton. The plant will be relocated Tianan in Industrial Park, which is about 50 kilometer from our existing plant in Bayying. The relocation will start in 2018 and be finalized in the end of 2019. Derication includes an investment of approximately SEK25 1,000,000, And the most, and the cost is estimated to, to amount to SEK 16,000,000 to SEK 20,000,000 distributed over the moving period and the main part in 2019. So and then I will now hand over to Elena for some financial data. Thank you, Thomas. And we go to page 14. Also shows the sales were 722,000,000 second quarter. Up 40.5% compared to comparable quarter last year, and our EBIT amount is a 38 The operating margin was slightly down lower compared to comparable quarter last year. However, we met our earnings targets on a rolling 12 month basis. And our EPS increased this quarter. No comments. Yes, ma'am. Yes. Page 15. Thanks so much, and the next steps in order intake. Since for the quarter, we're up 14 to 5%. This quarter, once again, was positively affected by currency in the top line and adjusted for that, the organic growth was at 5.8%. Here's crunching, gradually increasing volumes related to previously announced contract wins and overall good demand from our customers. And the market is a weather rather volatile and deficient customer to customer. And the contracts that they and I went in at also checked their order intake possibly. With an increase of 4.7%. The slower increase compared to the 2nd quarter is due to the market volatility and a strong order intake in third quarter 2017. Ramani ramp up of new contracts and other ships. Page 16 earnings development. I read this morning for the first quarter amounted to 5.2 percent compared to 5.5% compared with quarter last year. We were once again, negatively affected by higher raw material costs during the quarter, and the more volatile market also resulted in a more uneven production pace during the quarter. Additional to that, we also had a negative currency effect above 4,000,000. And adjusted for currency, EBIT margin was at 5.8% compared to 6.1% for UCM. And I meant, as I mentioned earlier, our EPS increased this quarter and then an EPS level, the negative impact on the EBIT level from currency effect. Sweepback positing on our financial net. Adjusted for currency, our EPS were up to 1.40 Swedish grants compared to 1.24 switched grants comparable quarter 2017. Page 17. Cash flow. And the cash flow has been affected mainly by operational result and the group. We are in place where we pay up some net working capital mainly non tourist interval, which has an impact on the cash flow. Try investment as we are in a phase preparing for books, and our investments in efficiency continues as well to become the industry's most cost effective, costly, manufacturing. Our balance sheet and financial position remained strong, and we have a net debt that I've handled the full curve 100 and 64 minutes back. Which is equal to 0.5 times EBITDA, which is H18 key indicators. You have a return on capital employed of 14%. The higher investment level have an impact as well as the modeling developments. Also, our return on equity is impacted by this and a minus 11.3%. The capital can move times slightly up compared to the full year 2017. And the equity ratio was on a level of 65.1% at the end of the quarter. Station renting. On this line, we continue to give you some short guidance regarding some key figures for those And as always, these guidelines are not because we do financial targets. The average net working capital in relation to 12 month sales amounted to 21.8 percent, which all are giving us, but it is due to increased volumes. Capital expenditures as a percentage of 12 month days we are on a level of 4.9%. And evidence of that we invest in future growth activities, and we predict that we would end up over this level in coming years but more about that in the next slide. And our depreciation was 2.8% for 12 month days. Is within our the range of our guidance as well as our average tax rate of 26.4 percent during 1 month. The tax rate will have a very fine quarter to quarter. Page 20. Investors going forward. I mean, yes, Julia, a short review of our investment strategies are coming here. Our guidance is to invest 2 to 3 percent of 12 months sales into daily business, but on top of that, to handle the growth phase. We'll be investing more than the years to come as previously announced until 2021. We will invest in new capacity. Value added production as well as a new production type of program. And as we announced earlier today, we have also defined to move our production facilities in China from between to to, with the purpose to catch growth opportunities. Hello. We'll be fine here as by the end of 2019. We've accumulated investments at 25 minutes back. And these investments will improve business production efficiency even further. And all in a way, we're committing a clear investment phase to step up Bruce in the previous department. Page 21. Financial targets. Financial fee ratios continues to be on a good overall level. Please tell me about our financial targets. We are growing more stronger than the industry in average with the backup of all its underlying days. We continue to have solid profitability within operating margin of 7% on a rolling 12 month basis. Even though raw material price and a volatile market that's made at Rainer's more challenging. Return on capital employed of 14% or 60% if you adjust for goodwill. And our ordinary dividend increased to 3.75 Swedish Crumbs, corresponding to 47% of 2017 earnings after tax. Extra time again. K. Thank you, Elena. And then we're coming to going forward, and we're gonna go on to shade 23. Winton continued to have a growth faster than the market in Q3, which confirms that you now have continual phase of growth. In major part of this growth is coming from ramp up from new contracts. On this slide, you can see a different ramp up contract and what phase of implementation they are in, respectively. Moreover, contracts signed, but not yet, enter production and support policy proceedings further in the years to come. The market also built a mix about 0.7%. To that, you have had ramp up on new contracts that have started as well as new business not yet after together totaling over 600,000,000 set earlier. Going on to page 24, Yeah. Both will continue to grow during 2018. Contracts are already signed under ramp up becoming, yes, gave us a long term and very solid organic growth potential. In the quarter, we managed to grow even though the market was more volatile, which, together with a tough comparable quarter, reflected our order intake. We have a strong financial position. And preparing for a future growth through investments and continued streamlining the common most cost effective FSP supplier in the industry. Finally, we still seek potential in taking on new business and contracts. The long term trends to 1 hybrids and electric cars works in our favor. I hope you all got a clear picture of the opportunities within Dalton, and we are now ready for Q And A. Thank you. Thank you. Ladies and gentlemen, If you have a question please hold until we have the first question. And our first question comes from the line of Matt's lease of Kepler Cheuvreux. Please go ahead. Your line is k. Please bear with me one moment. We have a technical issue. Yeah. Absolutely. K. Please go ahead, Max. Your line is now open. Thank you. Can I hear you? Yeah. Hello, Mats. I can hear you. Perfect. Good to hear you. Yeah. Thank you. Just coming back to China there, and you've mentioned the cost involved with the move. And I guess you have some some toll behind this move and how it could, it it sounds as if it's more like, improving sales. It's not, reducing your cost? Or could you say something about this? We're growing each other. So we need to, we need to, have capability to grow. We need need more space and so on. So I think it's, yeah, a step we need to be I mean, we are part of, we have, Customer. Brand new brand new plan a little bit better that way. And then I want to add something. But basically, we need we need to scale up the volume. We are we are supporting the one of the fastest growing car companies in China right now, and and need more products. Perfect. That's good. And you sort of talked about electric vehicles, just touch touch on that. This again, you you also have received the contract. I read about that. Do you still, expect the supply to be, substantially higher than, you know, electric vehicle than in, combustion engine car? Yeah. We do. I think, in this case, I mean, if you're looking to it's nothing. It it all the new contracts we are assigning right now on electric cars, there are more fasteners. And, and of course, it's also driven by there's a lot of hybrids, but, there's a lockup of, fasteners in a car, in a battery, for example. That's the, I mean, if you're taking a mobile phone, you're you're giving the the cost together, but in a, in a, in a car, it's 500 kilograms. You have to put a lot of fosteners into it, to help with the batteries and also put them in the car. So we still, of course, there will be probably rationalizations coming, but as far as agency with the getting out during the next year and the next couple of years, there will be more to us, mainly, of course, driven by hybrids. The volumes for free, pure electric cars is not that high. And that will take time to build up the battery capacity. But anyway, as I say, for a, for a battery, for a fully electric car, there is a lot of fasteners in it. Do you think, or do you aim at gaining more full service contracts compared to the what what you already have in the contract custom MD and segment, is it easier for you to, to, beverage that business in a more electrified world? I think right now, I think the whole industry is working on it works. So I mean, again, the I expect, and then more contracts to come on the electrified world, probably a little bit of a old combustion engine. It's probably a little bit put on holes, but, but they were they are working with a number of different electrical hybrid projects right now that that is in in the pipeline. Code. Then I just touched upon UK, and I guess you have a couple of large customers there. Do you have any of the jobs? Indication on how to handle that Brexit? Or Of course, of course, we have a plan, how to help if, I mean, we're coming today on the March here when then, you know, will be a Brexit. And, of course, we can do small things to make sure they can continue for a while. And then, but to be honest, I think, the whole industry is not actually to show. Nobody knows exactly what's going to happen, but there is a big car industry, and you can't yet, but that we probably get here. Some of them are protesting. Of course, we there need to be some sort of solutions for it. But, unfortunately, what we can do now is plan for more custom duty and so on that will customer procedure, so to say, and and and we are planning for it. See what we can do. But, as I say, I don't know, nobody can really tell exactly how Brexit will look. Who will it be locked in this case? We have we have no production in in the UK. Of course, that is, of course, we shall products to the customer there, but we have no production in UK, which is probably making it a little bit easier. Yeah. Then you mentioned Roma payroll prices, and I guess there are some steel parrots involved in some markets, how do you sort of are you able to pass those on as well, or is it? As I as I, you know, as I always used to do, it takes some time to pass the moment. And, after all this, so many quarters of increase, it, you're almost behind all the time. But I mean, the positive side right now to Q4 where there will be no increase on the with what we see in the market, I think there's going to be a pressure on the raw material. I mean, we haven't had number on years with increases right now in volume spent and that is probably flattening out a little bit. And So and then now I think it will, but it will take some time for us to, to, get full compensation on on the raw material and also Of course, we are out of material with many customers, as I mentioned, for you, but so many quarters in a row is quite, I've never seen it before increasing that gap, but it's to the end now. So, hopefully, we will catch up. But but just to follow-up, do you do you do you have any impact of of the tariffs or is it more like? Very, very limited. There'll be the tariffs as well. I mean, we produce the parts mostly where we in the continent where there are there are marginal effects there. There are some areas with some special material that we buy battery modeling. And finally, you mentioned the volatility in car production during the quarter, and it could well and you have been affected. Could you make some communication? How much, or is it difficult to assess that? I mean, we, of course, we have seen the effect, I mean, feeding the media and seeing what's happening in the car industry that supports quite dramatic, but then I think we have managed that pretty well with the girls we have in our pipeline and so on. So going forward, I mean, we, to say a small, the increase in the market is going down to 0.6%. But, think everybody is right now expecting me to come back when this WLTP thing is over. The market is coming back. And then I think also going to be cars with a lot of more content. So, that was by me, it has been quite turbulent in, That's mountains, I would say, especially after this WLTP introduction in Europe. By which was expected to some extent, And and it was not so extreme for both, and we we were more generally affected by it. So I think it's So do you feel the market is coming back now? I mean, the VLTP is in place and since that's I mean, our if we look into what what LMC is reporting out, the market is still continuing on a, on a reasonable level. We don't see any I mean, the LMC is not seeing any major drop. It's, just as as we can see it right now. It's a short conflict because it was very high in August. Of course, you have to follow the escrow bits. Okay. Just say you at the moment. Okay. Well, thank you very much. Okay. Thank you much. Thank you. Thank And there are no further questions on the line. So please go ahead speakers. Okay. So thank you. Listening, and thank you for the update. Thank you, and goodbye. This may conclude our call. Thank you for attending participants. You may disconnect your lines.