Earnings Call: Q3 2020

Oct 22, 2020

Everyone. The agenda for today will be a brief overview of Bilton, the market development, the result for the Q3 and finally some words about our focus for the rest of this year and going forward. So next slide, please. Milton is, as most of you know, a supplier of fasteners, primarily to the automotive industry. We don't just supply the hardware to many of our customers. We are a partner for product development support, innovation, procurement and logistics. As you can see in this slide, Wirtgen has a broad customer base with light vehicle producers as the largest customer group. Woten's 3 largest customers are Ford, Jaguar Land Rover and Volvo Cars. When acquiring PSM during the Q1, we added a number of automotive customers, primarily Tier 1 suppliers, but also customers outside of the auto industry. 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 of the customers in built in space have potential for further growth. Next slide, please. Page 5. Our geographical footprint is another unique advantage of bolt on. None of our competition has this geographical coverage. Bolten's value chain is balanced between in house and outsourced production, and we can thereby be flexible and cost efficient. Including PSM, we have about 1700 employees. We offer local production in Europe, U. S, China, Taiwan and Russia, which is unique in our competitive set. Through the acquisition of PSM, we have an even more comprehensive geographical coverage than we had before. So Page 6, please. In February, before the real outbreak of the pandemic, we presented our revised strategy, which we have named Stronger24 and the way we will go about reaching our new targets. It's through a number of building blocks visible on this slide. So to start with, we have a strong position with the uniqueness that's taken Wootton to what it is today. We have growth momentum, both organically through the contracts that we're currently ramping up as well as the new contracts we recently won and non organically through the acquisition of PSM. We aim for sales reaching SEK 5,000,000,000 in 2024. Our margin expansion will come through the obvious synergies with PSM, improved exposure to customers in North America and China, an accelerated effort to improve efficiencies in both production and distribution and through launching new technology with a value add for customers. We aim for an EBIT margin above 8% in 2024. We also had a strong financial position, which is something that we really want to emphasize. 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 of the strategy to get there. We've used the last two quarters to come out even stronger now when the demand has returned. So few words about the market development. And I ask you to turn to Page 8. Looking at a shorter perspective, the industry forecasting company, LMC Automotive, estimates a downturn in production of vehicles this year, a consequence of the COVID-nineteen situation. LMC now predicts a 17% lower global production volume during 2020 for light vehicles. This is a somewhat more bright forecast compared to last quarter when LMC estimated a deeper downturn. For heavy commercial vehicles, the full year prediction is 21% lower volumes. Also that somewhat more positive outlook compared to last quarter forecast. Translated into bolt ons automotive customer mix, this would mean about 17% lower market production volumes in 2020 compared to 2019. Looking into LMC Automotive sales estimates for light vehicles globally for the 1st 9 months of 2020, we look at a decrease of approximately 19% compared to 2019. Next slide, please. A longer perspective then. LMC estimates a bounce back on production of cars in the years to come, now with an increase of 14% in 2021 and 7% in 2022. Looking at the same thing for heavy commercial vehicles, LMC estimates an increase of production of around 11% in 2021 9% in 2022. Turning to Page 11 for some highlights during quarter 3. Throughout the quarter, we've been we've continued to mitigate the effects, of course, of COVID-nineteen. However, gradually from August, we've seen increased sales and a stronger order intake. This indicates a vehicle market in recovery, but more importantly, that Bilton continues to gain market share as a result of new contracts, but also favorable development of PSM acquired earlier this year. The significant FSP contract we won in July has an annual value of approximately €60,000,000 at full base and more about that in the coming slide. During the quarter, Bilton and PSM's respective operations in the U. S. Began moving into a shared greenfield site in Streetsboro, Ohio. The transfer will be finalized shortly. We've also signed a lease agreement for a new production facility in Taipei, Taiwan. The new facility enables more efficient and sustainable operation and forms a basis for future expansion. The current operations in PSN, Taiwan will be moved to the new facility during the autumn. Our focus on technology and innovation has further intensified, and I'm very pleased to welcome Emmy Partlovich to a newly formed position as Senior Vice President, Technology and Innovation. During the quarter, the President of PSM, Marco Susuppi, has chosen to leave his position. And I have taken up the role as acting President of PSM until new management structure is in place. Turning to Page 12. As announced on July 2, we've signed an FSP contract for supplier fasteners to European automotive manufacturer at an annual value of approximately €60,000,000 at full pace. The contract runs over 5 years. The date of the delivery start was July 24. The contract is a takeover of an existing FSP from a competitor for 2 assembly plants, which means that delivery started immediately at the point in time pace. The contract will improve the utilization of a number of manufacturing facilities for both and its supply base and has not required any major investments. The start up costs are estimated to approximately €1,000,000 of which 300,000 have been spent in the 3rd quarter. Margin improvements are expected when value chain optimizations have been carried out. And with that, I will leave the word to our acting CFO, Claus Lundqvist. Thank you, Anders. Page 13. On this slide, you can see our financial summary of the Q3. The quarter was, of course, affected by the COVID-nineteen effects on our business and the industry, especially in July. Then gradually, in August, volumes started to come back. The order intake, sales and profitability have gradually improved throughout the quarter as production for us and our customers have started again and increased in pace. Looking at our 12 months net sales. We are not far behind our full year 2019 figure despite our 40% drop in the 2nd quarter. Even though September was good, the situation going forward is same for us, like for many of our peers. It is very difficult to predict the development in the coming months. Let's look at our sales and order intake. Next slide, please. In the right graph on this page, you can see our quarterly sales development this year and monthly this quarter. As I referred to on the previous slide, the gradual upturn of volumes are very visible. Order bookings amounted to SEK1.322 billion, an increase of 70% compared to the corresponding period last year. This is partially explained by the acquisition of PSM, but also probably a pent up demand from the spring when many of our customers' production plants closed down. The new FSP contract is, of course, another addition to the order intake as well as other new contracts ramping up. Net sales for the group amounted to SEK 853 1,000,000 and increased by 19% compared to the same period last year. Our earning performance was affected by the improved sorry, next page, please. Our earnings performance was affected by the improved volumes in the quarter. EBIT amounted to SEK 40,000,000 in the quarter. Our EBIT margin for the 3rd quarter amounted to 4.7%, an improvement compared to the comparable quarter last year of minus 1%. Adjusted EBIT margin for the quarter amounted to 5.2% compared to last year's quarter with an adjusted EBIT of 2.6 for restructuring costs in Germany and relocation costs in China. We have, during the quarter, also received government support of approximately SEK 8,000,000. And as of 1st October, all bolt in employees are back from short term layoffs. The ramp up cost for the new FSP contract affect us negatively by about SEK 3,000,000 and is part of the previously communicated SEK 10,000,000. The rest of the expected cost will be allocated in the next 2 coming quarters. Moreover, adoption of production to demand during the quarter has affected the company's earnings negatively in the form of under absorption and consequently put pressure on margins, especially in July and part of August. The last next page, please. The last two quarters were naturally focused on cash management and our net working capital. The cash flow from operating activities before changes in working capital amounted to SEK75 1,000,000, clearly an improvement compared to Q2. Q2. Thanks to focused cash management efforts and a good development of customer receivable payments, working capital has decreased in the quarter. Cash flow from the change amounted to SEK 82,000,000 and contributed to a positive cash flow for operating activities in total, which amounted to SEK157 1,000,000. Cash flow from investing activities amounted to minus SEK12 1,000,000, a much lower level than before as we have, as you know, halted operational and property investments during this uncertain time. In total, the cash flow for the quarter was positive and amounted to SEK 1,000,000 with a cash position of SEK 147 1,000,000 at the end of the quarter. Our net debt, excluding lease liabilities, has reduced since the beginning of the year and amounted to SEK 238,000,000 at the end of the quarter. Next page, please. Page 17, key indicators. Our key indicators have improved since Q2, but are on last 12 month basis still affected by the lower profitability level and lower capital turnover times due to the COVID-nineteen situation. We have a return on capital employed of 2.5 percent or adjusted for relocation, restructuring and acquisition, 3.1%. Our net debt to EBITDA ratio, the asset for lease liabilities, is at 1.1 at the end of the quarter. This, in combination with an equity ratio of 56% at the end of the quarter, shows that bolt in financials is on a very solid level. Next slide, please. Financial targets and guidelines. On this slide, you can see our financial targets as well as some of the guidelines regarding relevant key figures for bolt on. In terms of reaching our financial targets, we are now moving in the right direction. We normally comment on the guidelines for some other key figures. But as mentioned earlier in this presentation, our business has been in a very special situation. Since our key figures is calculated on a rolling 12 month basis, further detailed comments may not be so relevant for this quarter. We will, of course, strive to improve the key figures graphically. And I will now hand over to Anders again and what is more relevant, our focus going forward. Thank you, Klas. And I'll ask you to flip to Page 20. And this slide is for those of you who normally tune into our quarterly reports. You become familiar with this. And it shows our backlog of orders taken but not yet implemented into production. As of now, Wilton has an expected annual sales growth of just over €100,000,000 at full pace in 2022 compared to 2019. I do want to draw your attention to the fact that due to COVID-nineteen, 2 of our electric vehicle customers have decided to postpone industrialization of new products, which is why you see that the start date of the top two contracts in red have moved 1 year. So that's the explanation for that for those of you who noticed. Even though there is still uncertainty in our industry due to COVID-nineteen and other macroeconomic factors, This is a very good buffer and a sign of strength for us going forward. We predict a stronger organic growth for bolt on versus the market as already shown in Q3, and we have a strong position. Next slide, please. So the focus for 2020 and the rest of the year. So far, we've done everything to handle the COVID downturn and do that in a responsible way for our stakeholders. We've implemented significant actions to mitigate the situation in the industry with rigorous cost and cash flow control. We will, of course, continue to do so. And despite the strong September, there are still uncertainties about the short term development. During the downturn, we stayed prepared for a swift ramp up. That's an important factor why we were able to deliver flawlessly on the higher demand in September. Moreover, we continue to focus on delivering on our synergy plans with PSM, which we've done from day 1 after the transaction. We have coordinated our operations in the U. S. And are pursuing numerous other opportunities, especially in sales and purchasing. We're in a product focused business and will step up our innovation activities in order to provide both functionality and sustainability to our customers. One example of this is our continuing collaboration with TensionChem for sensorization of threaded joints after a minority stake acquisition in TensionChem in June of this year. Finally, we deliver on our new Stronger24 strategy and continue to build an even stronger bulletin. And that concludes our presentation. And I think we're ready for Q and A. And Our first question comes from Max Frieden from Danske Bank. Please go ahead with your question. Perfect. Thank you and good afternoon. Just a question on the sales development. Can you share if all of that outperformance versus the weighted light vehicle production is related to the recent FSP contract ramp up? You mean if all of the outperformance of the market is related Yes. You versus the market, yes. Okay. We actually, we don't break down the organic growth. What we can tell you is that our organic growth is definitely outperforming the market. And then if you add PSM on top of that, which is our unorganic growth, that makes up the sales development. So that's the EMR breakdown I'm prepared to give you. All right. I guess, as it comes down to the bottom end, it doesn't really matter how you get there. But if you leave it at that and then just to the EBIT margin development. On the order wins and ramp up of contracts, you mentioned that you will source less of your components as you ramp up, and that should be beneficial to margins. Can you say how large part is sourced today on these contracts? And at full production, what is the target of in house versus outsourced production? I think we previously said we manufacture about 60% of our total sales and the rest is traded or outsourced. And that relation varies a bit over time as the product mix changes. But it is in that neighborhood still. All right. And then just trying to if I look at the seasonal pattern for the EBIT margins And over the years, you seem to always or almost always report better margins in Q4 versus Q3. I'm just wondering if there's anything that we should be aware of as we try to put in our estimates for the next quarter due to different seasonality in PSM and then further under absorption as you ramp up these contracts. And then it's a little bit of a different world this year compared to historically. Correct. You're right. In your observation, yes. Q4 is normally a bit better for us than Q3. Naturally, since a large portion of bolt on is European centric and July August are normally low production months for Europe. I don't think that it will follow a different you can expect the same type of relation for Q4 this year. In terms of impact of PSM, if anything, I mean, they are more Asian focused than the rest of the group. And December is not a big shutdown month in Asia. That's right, the February. So of course, that will a certain impact. But I think the overall patent will stay pretty much the same. Yes. Okay. And just finally, the COO of PSM leading, can you share any more details on that? Was it a mutual agreement or initiated from your side? Kind of things that would help. Well, he chose to leave and his reasons for doing so, I'm not going to elaborate on. But when you go through acquisitions and integration, those things happen. And can you just conclude that we parted ways and we're going to handle it? Yes. And just remind us, where is the head office for PSM? Just to bear in mind the new recruiter, the new CEO. The holding company for PSM is based in the UK. Okay. And recruitment as CEO could be based in UK? Could be. But since it's a global company, we're not that geographically dependent. Okay. Thank you so much. Thank you. Our next question comes from Matt Spies from Kepler Cheuvreux. Please go ahead with your question. Yeah. Hi. Thank you. Well, congrats on a good set of numbers. I just wondered about FSP contract at €60,000,000 Is it included fully in the order figure? It depends on what you mean. I mean, the production rate right now, the cost No, I mean the full service contract you received in July, that's included in the some SEK 300,000,000? Yes. That's correct. Yes. Yes. Of course. I mean a portion of the add to the order intake is generated by that contract, yes. Yes. And well, talking about PSM a bit more then, I mean, you have talking about the synergies there. Could you be somewhat more specific there? What kind of amounts we could expect going forward or the deal in ramp up trade flow? Yes. I mean, we will harvest synergy effects for I mean, we've done so this year and will be even more so next year and in the coming years. I mean, since we're aiming for both cost synergies and revenue synergies, the revenue synergies normally take a little bit more time to come into fruition. I'm not going to give you any amounts, but it is the obvious areas that we're targeting like increasing our exposure to the combined customer base, giving basically the sales force, the access to the total product portfolio of the group. That's on the revenue side, on the cost side. And we mentioned one example in the report, and that's the combination of the activities in the U. S. Moving in one roof and saving lots of overhead. So and we'll see more of that going forward where we get a better utilization of our combined manufacturing sites as well as in sourcing of components that are historically and classically traded and outsourced by bolt. And for the FSP contracts, those are typical products that the PSM manufacture. And we are in sourcing some of those as we speak. So there's a number of areas that we're targeting and that will gradually come into fruition over the both this year and the next couple of years, I would say. Yes. Then, but just trying to get a feel about the Q4, Aaron. You have sort of indicated that you have sort of gradually ramped up production during the Q3. And even the current production level, how much more could we expect in the Q4, keeping in mind? I mean, we are approaching the holiday season and you never know how December will be. But if we look at the current level and sort of make a quick calculation there about a stepwise change in the Q4 compared to the 3rd? Well, I think our customers have basically ramped up the production now. It looks pretty stable going forward. We don't see further increases. But the uncertainty here, of course, is around the infection rates in various countries. Whether there will be a hard Brexit that will definitely have an effect on both consumer confidence and other things. So I mean, there's tons of uncertainty out there, as we all know. In terms of production rates, I'm expecting the customers to continue unless anything disruption happens that they would continue at the pace of right now. Okay. And finally, just about I saw the tax rate was a bit on the high side. Maybe you had mentioned that in the report, but could you give some comment about that as well? So the high tax rate is very much coming from our internal situation with subsidiaries and their performance. And we are not taking in deferred tax into our balance sheet. So that's sort of the short explanation. Okay. And in the 4th quarter, will it sort of, well, level out on the That will balance out when it comes. Yes. So when we come into end of the year, that will give a more balanced view. Okay. Okay. Thanks a lot. Thank you very much. Thank you, Rich. Thank you. Just as a final reminder, if you do wish to ask an audio question, Okay. There appears to be no further questions. So I will hand back to the speakers for any other remarks. Okay. So we have one additional question by mail from Klausner Lande Buffander, who wants to know what's our definition of order intake. Okay. So the way we are calculating our order intake, I think this has been mentioned before, but we are calculating on our order stock on a 100 day basis. So given the incoming order stock and outgoing together with the actual sales for the period, we'll give you the orders received. We're talking about working days, 100 working days. Yes, 100 working days. Okay. So I guess there are no more questions. Yes. In that case, thank you for tuning in and listening. Thanks for your interest and the year. Thank you. Bye bye. Bye.