Earnings Call: Q2 2021

Jul 13, 2021

Hello, and welcome to Voltan's Q2 2021 Presentation. My name is Ulrike Olkern, and I'm the new Senior Vice President, Corporate Communications and Investor Relations since the beginning of June. Presenting the report are Oelkhoorn's President and CEO, Anders Nystrom and our CFO, Anna Wachkeblad. As usual, you will be able to ask questions after the presentation, both on the web as well as in the telephone conference. President. I will now hand over the word to Anders Nystrom. Please go ahead, Anders. Thank you, Ulrikun, and welcome, everyone. Starting off on a bit of a general note, as I believe everyone knows the gradual recovery that's vice president of the global vehicle industry since the second half of twenty twenty. It's been somewhat interrupted during the Q2. Vice president of the company. The lack of semiconductors has caused disruption in our customers' value chains, and almost all of Boltons customers have halted production vice president for a couple of weeks or more during quarter 2. On the flip side, it's important to point out that the Underlying consumer demand for vehicles is high, and recovery is a matter of industry capacity more than anything else. Before we start to go through the results and numbers of quarter 2, let me briefly present Wirtgen to those of you who aren't familiar with the company. Going to Page 4, please. Wilkun is a supplier of fasteners, primarily to the automotive industry. But we don't just supply the hardware to many of our customers. We are a partner for product development support, Innovation for Turin and Logistics. As you can see in this slide, Wilkern has a broad customer base with likely co producers as the largest customer group. Wilkun's 3 largest customers are Ford, Jaguar, Land Rover and Volvo Cars. Our automotive customer base stands across OEMs and Tier 1s and Tier 2 suppliers. Chief. We're also expanding our business outside the automotive industry, especially in the consumer electronics sector. To be an approved supplier to this many customers is a clear strength. Customers value the way we cooperate with them and recognize us for our service. Most customers in our base have potential for further growth. On to Page 5. Our geographical footprint is another unique advantage of Welten. None of our competitors has this geographical coverage. Wilkun's value chain is balanced between in house and outsourced production, and we can thereby be flexible and cost efficient. We have about 1600 employees worldwide. We offer local production in Europe, U. S, China, Taiwan and Russia, which is unique in our competitive set. So we go to Page 7 for the market overview. Looking at the market development for our industry in the shorter perspective, the forecasting company, LMC Automotive, estimates an upturn in production of vehicles this year compared to 2020, Which we all know was heavily hit by the pandemic. LMC now predicts a 13.8% higher global production volume during '21 for light vehicles. This most recent LMC prediction is, however, lowered somewhat compared to a quarter ago as a result of the semiconductor shortage. For heavy commercial vehicles, the full year prediction is 6.6% higher volumes. Translated into bolt ons automotive customer mix, this would mean approximately 13% higher volumes in 2021 compared to a year ago. Looking at the global sales of cars during the first half of this year, LMCC sees an increase by 28.5%, Once again compared to the same period last year, which was very much affected by the pandemic. So Page 8, please. In the longer term, LMC estimates a vice president of the production of cars in the coming years with an increase of almost 14% in 2021 10% in 2022. Based on these estimates, we it seems likely that volumes missed last year and in the first half of this year will create pent up demand. The corresponding estimate for commercial vehicles is an increase of around 7% in 2021 and a slight drop President in 2022. So going into the Q2 and the major events of Quarter 2, Page 10, please. As I mentioned earlier, the momentum from quarter 4 2020 in quarter 1, 2021 was disturbed during quarter 2. Lack of semiconductors caused disruptions in the industry for actually the entire industry. We believe this shortage might continue during the rest of 2021. Lower volumes and capacity utilization resulted in lower profitability. The profitability was also negatively affected by steel prices, which is an important raw material in our production. We continue to have a strong focus on what we can actually control, and we've continued to strengthen Wilton's position president of the company. The construction of our new production unit in Poland began in May. The production is expected to start in the first half of twenty twenty three. With this plant, we get facility with world class surface treatment processes in terms of both efficiency, quality and durability. The facility is a vertical integration of our existing facility in Bioskobjar and will further strengthen our competitiveness. Turn to Page 11. Just a deep dive a bit on the semiconductor shortage that we've spoken about. Looking at the semiconductor situation. We see on this slide that the imbalance between supply and demand has increased in the last few months. This is primarily focused this is primarily caused by increased demand as the pandemic has fueled the demand for consumer electronics products as society in general has become more connected and digitalized. Simultaneously, also the supply chain was hurt by the pandemic through shutdowns in 2020. And in the U. S, there has now been governmental initiatives to solve this situation, and capacity is being put in place. However, increasing supply is not a quick fix and this shortage will hurt many industries, not only automotive in the next few quarters before Supply and demand becomes balanced. Next slide, please. Looking at steel prices, we see a similar situation with an imbalance in supply and demand. Even though steel shortages haven't caused any production stops in quarter 2, it causes higher material costs in the industry. The imbalance is particularly notable in Europe. On this slide, you can see price development for cold rolled coils, where prices have doubled since the end of last year. Steel is an important frontier for Bilton as well as our industry peers and customers, and prices are expected to continue to climb during the rest of 2021. Vice. Floten's framework agreement with customers contain, for the most part, raw material price clauses that regulate price compensation, Not 200% and in all cases with a certain time lag. On the positive side, History has shown that disturbances in the value chain such as those we see now are temporary. Moreover and more importantly, our customers' order books look very good and the underlying demand for vehicles is healthy. In the medium to long term, of course, it's more important to focus on those things for us. The pause in the sourcing activities for new vehicle programs that we saw last year is no longer there. On the contrary, vehicle development activity is at a new high and we see numerous opportunities to win business in the short term. President. So with that, I leave the word to Anna to take us through the quarter two numbers. Thank you, Anders. On Page 13, you can see our quarterly net sales development. And as Anders mentioned, the turn in the second half of twenty twenty and Q1 twenty twenty one was disturbed in Q2 due to lack of semiconductors that caused disruptions in the production in the automotive industry. Net sales for the group in the 2nd quarter amounted to SEK910,000,000 compared to SEK 441,000,000 the same period last year, an increase of 106%. The comparable quarter last year was weak due to the effects of the pandemic compared with the Q1 of 2021, which was more representative of bolt on stability in a normalized market, net sales decreased by 17%. We can still see a stable underlying demand, and bolt on has a good customer mix. Next slide, please. Our earnings performance was affected by the lower volumes and capacity utilization in the quarter as a result of the lack of semiconductors but also higher steel Vice President. EBIT amounted to SEK 55,000,000 in the quarter. Our EBIT margin for the 2nd quarter amounted to 6%, an improvement compared to the weak comparable quarter last year. When adjusting the EBIT margin for currency effects, the margin is somewhat better. Next slide, please. On this page, you can see our financial summary of the Q2. President. As mentioned previous, Olfsen had a strong growth in the Q2 due to weak comparables. Olfsen showed increased net sales with improvement on both gross Office and on EBIT level compared to same period 2020. Earnings per share is calculated to SEK1.86. And today we have the uncertainty regarding the shortage of semiconductors. Next slide please. On Page 16. You can see our cash flow. And during the last year, a strong focus has been on cash management and our net working capital. Director. The cash flow from operating activities before changes in working capital amounted to SEK 81,000,000 in 42. Cash flow from the change in working capital amounted to minus SEK 49,000,000. Increased inventory levels has led to increased working capital for the period. Cash flow from operating activities amounted to SEK 32,000,000. Cash flow from investing activities amounted to minus SEK 25,000,000 in the quarter. The good news guest that we have started the construction of the new facility in Poland this May. The total cash flow for the quarter amounted to SEK 10,000,000 with a cash position of SEK 192,000,000 at the end of the quarter. Cash flow from financing activities amounts to SEK3 1,000,000. President. Our net debt, excluding lease liabilities, has reduced since the beginning of the year and amounted to SEK94,000,000 at the end of the quarter. President. Next slide, please. Our key indicators have improved in quarter 2 compared to same quarter last year and also compared to full year 2020. This is, of course, a satisfying trend, but also an effect of that 2020 was greatly affected by the COVID-nineteen situation. We have an adjusted return on capital employed of 14.1%, excluding financial lease. Our net debt vice president of the company. The EBITDA ratio is at 0.3 at the end of the quarter. This, in combination with an equity ratio of 51.6% at at the end of the quarter shows that bolt on financials is on a very solid level. Next slide, please. On Page 18, you can see our financial targets as well as some of the guidelines regarding relevant key figures for Wurtele. On a quarterly basis, we are above our financial targets when it comes to growth, but under when it comes to profitability. Director of the semiconductor situation as mentioned earlier. In the right hand table, you can see some guidelines for some other key figures, President and CEO of the Board of Directors. The guidelines for average net working capital in relation to 12 months sales It's about 20% to 25% depending on the growth pace. At the end of June, we had a level of 19.4%, director, which is in line with our guidelines and is at the lowest level during the past years. The guideline for capital expenditures as percentage of 12 month sales are 2% to 3% for maintenance of equipment and additional up to 2% for capacity depending on the market development. At the end of June, we are at a level of 1.8%. As mentioned before, we have halted investments during the last year. However, the construction of the new facility in Poland started in May. The Degalielain for depreciation as percentage of 12 month sales is 4% to 5% considering IFRS 16. Director. Without IFRS 16, it has been in a level of 2% to 3%. At the end of June, we are in line with our guidelines. President. And now back to you Anders. Thank you, Anna. And I'll ask you to turn to Page 20 for Some words about our focus for the second half of the year. As you've seen in this presentation, the momentum we had in the second half of twenty twenty and beginning of 'twenty one was interrupted due to the semiconductor issue. The underlying demand for our customers' products and for bolt ons products is, however, healthy. Having said that, we are faced with a somewhat new set of uncertainties. Our customers' production is hampered by the shortages, And that will have an effect on our sales. Steel prices are at a record high right now and will most likely continue to rise in the second half of 'twenty one. We are, of course, closely monitoring all of these factors and maintain strict cost and cash flow control. We continue to work on margin improvements, which we've successfully done recently. There are still synergies to be realized with PSM, President and in sourcing initiatives are being executed as we speak. We continue to ramp up our activities in technology and innovation and stay determined to remain a leader in sustainable fashemic solutions. We've taken important steps to that effect, not police through the launch of Rufo E and our collaboration with TensionChem for sensorization of threaded joints following our minority stake acquisition in 2020. Our sales force are using our track record of successful new contract launches As well as the greater customer exposure that comes from the combined customer base of bolt on and PSM to accelerate new business wins and generate additional organic growth. Turning to Page 21. President. And let me conclude this presentation with reiterating our stronger 2024 strategy. The road maps for how we will go about reaching our targets vice president in February last year. It's divided into 4 building blocks. And to start with, we have our strong position With the uniqueness that's taken WILTEN to what it is today, our clear ambition 3 years from now is to have further advanced opposition when it comes quality and technology leadership. The second block is growth. We now have growth momentum through the contracts that we won President. In the last year, despite the past year's turbulence, we hold on to the aim for sales reaching SEK5 1,000,000,000 in 2024. And I think you can see that we're well in line with that. The same applies to our profitability efforts. Our margin expansion will come through realized synergy effects, improved exposure to customers in North America and China, accelerated initiatives to improve efficiencies in production and distribution and through launching new technology with a value add for customers. We aim for an EBIT margin above 8%. We also have a strong financial position. This is something that we really want to emphasize that you also heard Anna mention. To summarize, the global downturn has not eroded the validity of our strategy. Our position is strong. We stand by our targets, and we stay committed to all the building blocks and the strategy to get there. And that concludes the presentation, and we're ready for questions. Thank senior vice president. Our first question comes from the line of Kenneth Tow from Carnegie. Please go ahead. Yes. Thank you. I'm curious to discuss steel prices and the impact on you a bit. You showed a short where steel prices have increased a lot. So I would imagine that you would feel a larger pain from higher steel prices in the Q3 than in the Q2. But on the other hand, you have also had some time to try to increase your own prices towards suppliers. So the net effect of those 2, the higher steel cost and your own price increases, Taking both those into account, do you think that you will be more hit in the 3rd quarter than you were in the 2nd quarter? Yes. Hi, Kenneth. The it sort of follows the same dynamic as it has In the past with prices rising and then that feeds the official indexes that's being used. And then we settled the compensation from the customers vice With a certain kind of lag and that always hurts us as prices are increasing, But it's rewarding when prices are going down. And this isn't the dynamic we've followed in for many years now. The difference right now is that the increase is steeper than we've seen in at any point in time in the past. So That, of course, weighs quite heavily on the bus side. In terms of the Sort of quantify the impact. I can't give you any numbers because that will be the same as giving away confidential information, Which is a product of the contracts that we have with our customers. But it's it is the same dynamic as before, but it's More accentuated right now with the steep development of the prices. Yes. Vice president. And you also talked about transportation costs being higher. And we hear that from many companies that there's a shortage of transportation facility, both medium sort of medium distances, but also very long distances and so on. Vice president. But for steel prices, you have those clauses in your contract. Is there any way that you can try to get compensated for Higher transportation cost as well or is it more up to you to try to solve that? Well, I should remember that sea freight, which is maybe kind of transportation that's been most hit by cost increases is by order of magnitude much smaller Danfel Steel here for us. No, it's not a big component in our cost base. But You're right. I mean, normally, that's something that every company will be responsible to handle and manage. For accounts where this is maybe more important, yes, it's a matter of negotiations. But Normally, as you say, this is something that each company will handle. Okay. And then you said also that there's a lot of product development activities going on among your customers. Does this mean also that They are discussing more FSP contracts that comes up for grabs or does that come later? I would say that there is a high activity right now relative to FSP contracts as well. So, I find a few interesting ones we're chasing. Okay. Great. That's all of my questions. Thank you. And we have one more question from the line of Matt Sluis from Kepler Cheuvreux. Please go ahead. Yes. Hi. Thank you. Couple of questions. First, I was just looking at the sales figure there and there's a Sequential decline, I guess, with the Q1. And what the question is, do you feel that you sort of vice Keep market shares or have your customer mix that slightly maybe unfavorable given the very exposure to Ford, vice president. Could you say something about that? Vice It's a good question, but it's one that's extremely difficult to answer because to try and judge Market share on a quarterly basis is extremely difficult. And Therefore, I don't think I have a good answer to you. It's difficult for us to judge whether we've been disproportionately hit by Shortage related customer shutdowns or not. I don't know that, to be honest. Consultant. And looking into the second half now, do you expect similar sort of holiday shutdowns and so on among customers? Or Do we try to regain some lost volumes in the second half and maybe in the third? I'm sure every one of our customers are trying their absolute hardest to recover any lost production. And I think you can follow So the communication from the OEMs was clearly expressing that there are challenges and There will still be shortages in it is my guess in the second half. Chief. But there's not a vehicle producer out there that won't build every single vehicle they can in order To deliver to their end consumers. And do you sort of vice Need to keep a higher sort of level to supply or do you sort of have the normal holiday season For the company, I guess, yourself. Our employees are going to get the December break that they should. But you're absolutely right. We have a high preparedness and that's why you also May see in our numbers that our inventories increased over the last quarter and that's in order to be prepared to fulfill any customer demands in terms of volume recovery after the shutdowns that we possibly can. So vice. We've taken that into account and we want to make sure that we are not going to be the bottleneck for any of our customers to recover volume. So we're prepared for that. And Similar question. Again, should we expect sort of maybe not this, but the seasonal slowdown in the 3rd quarter, Maybe it won't be as sort of highest normal or could you say something about that? Vice I didn't quite get the question. I probably hearing you. Can you repeat that? No. I mean, the 3rd quarter is normally Should we expect maybe not be as much of a holiday quarter and then vice president. Be more in line with the Q2 or just to get a theme of that. Well, that's also difficult to comment because, of course, there are as you probably know, there are vehicle makers out there that replanned shutdowns and they have taken a bit more of a volume cut in the 2nd quarter with the aim to recover that in the 3rd. But whether they'll be able to do that or not, I can't comment on. President. The only thing we can do is we're prepared to follow our customer demands. President. Okay. And then the Polish restart of the investment there. Could you just update me on the sort of CapEx needed to finish that investment. The whole project is, as we've announced before, about SEK 300,000,000. So that's the budget we have, and that's Thank you. That's all I needed. Thank you very much. Okay. Thank you. And as there are no further questions, I'll hand it back to the speakers. President. Okay. So then I thank everyone of you for listening in. Thanks for your attention. And This concludes our conference call. Thank you all for attending. You may now disconnect your lines.