Bufab AB (publ) (BUFAB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 earnings call. [Operator Instructions] I also must advise you that this conference is being recorded today. And I would now like to hand the conference over to your first speaker today, Jörgen Rosengren. Thank you. Please go ahead, sir.

Thank you, operator, and good morning, everybody. My name is Jörgen Rosengren. I'm the President and CEO of Bufab, and I'm joined in this conference call by Marcus Soderberg, our CFO. We will be referring throughout this call to our presentation, which is available on www.bufab.com/ir, Investor Relations and to the page number in it. And we'll start on Page 2. We start there because we have the pleasure to report a very strong result in the fourth quarter of 2020 last year and also, in fact, the full year results that's quite attractive also. 2020, obviously, was a challenging year. It was a challenging year for most people in the world and for most companies and also for Bufab. But we can say though that our position strengthened during the year, as evidenced by the results figures and also by other things. The last quarter was a strong one. Some headline numbers are that the sales were up 10% and all of that increase was organic. There was a negative currency effect, which was offset by a positive acquisition effect. And the 10% is a very strong recovery compared to earlier in the year and very certainly, a strong recovery compared to the situation we had during the spring when the pandemic affected our sales quite severely. It was nice to see that demand was spread evenly across all segments and across many, many subsidiaries and customers. The strongest improvement in the 2 segments, UK/North America and in segment West. And it's so also that the underlying demand in all segments actually is higher -- clearly higher than last year and also that we are taking market share pretty much across the board, which feels good. This strong growth development also translated into a strong improvement of our operating profit, which was up by [ 66% ] as well as on net profit, which was nearly twice what it was 1 year ago. And here also, many of our subsidiaries contributed, not exactly each one but most of them. But if we have to pick out a few that contributed most strongly, it was, in fact, the 2 most recent acquisitions that we made during 2019, 1 in Denmark and 1 in the U.S., and they both contributed in a very good way to these results. We announced, in the middle of 2019, a cost savings program, which we then expanded in the spring of 2020 in the face of the pandemic. The target for this cost saving program was SEK 100 million, measured as the run rate relative to the middle of 2019. And this program has developed well and it reached its targets in hitting the SEK 100 million by the end of 2020. So it is now completed and fully contributing to our results improvements. Now looking then at the full year results, it also was strong like I said. It's, in fact, all-time high sales and all-time high operating profit for -- again, for sixth time running. And the main reason for that are that we were able to quickly meet the actions -- with the actions needed to combat the effects of the pandemic early in the year, that we have been able to capitalize on our earlier investments in productivity and in digitalization and that we've been able to maintain and even strengthen our customer relations and our supplier relations. And that is entirely, in fact, due to our very strong team in Bufab, which is also dedicated and quite successful in managing these things. Looking ahead at the balance sheet, we had a very good cash flow in the quarter and also for the full year. It's, in fact, our best cash flow ever and it is quite gratifying since we -- that cash flow helps us then strengthen the balance sheet in a way that makes it possible for us to continue our investment strategy and our leadership strategy and also makes it possible for us to continue to make acquisitions. And finally, it's worthwhile mentioning that the Board of Directors met yesterday and is now proposing a dividend increase to SEK 2.75 a share, which is an increase then over the last dividend paid, was paid in 2019 because 2020, we did not pay a dividend. So that concludes, I guess, the headline statements about last quarter or last year. And I will now turn the word over to Marcus Soderberg, our CFO, who will take you through some more details in the numbers starting on Page 3 of the presentation.

Thank you very much, Jörgen. As said, please turn to Page #3 and you will see the financial highlights for the group. As you can see for the quarter, the order intake was quite strong, up about 13% compared to previous year. Also, net sales came in strong and increased with about 10%. And the strong growth was actually mainly attributable to a robust performance in segment UK/North America together with segment West. All of those 10% in growth was actually organic growth. We saw clearly higher underlying demand, and we saw market share that we consider to be high compared to the correspondent -- the comparable quarter. The reduced gross margin, which was down just slightly, was mainly offset by a significantly lower proportion of operating expenses on the other hand, which declined to 16.3% compared to 20% previous -- the comparable quarter. And the reason for lower operating expenses is mainly due to good operational leverage from the higher volumes we saw in the quarter and due to the effective cost control achieved throughout, more or less, all of the subsidiaries of Bufab. The cost savings program that Jörgen just talked about developed in accordance with plan during the quarter. And just as Jörgen said, we are now running at full speed from January 1, 2021. All in all, the operating profit increased sharply about 66% to SEK 121 million, corresponding to an operating margin of 9.8%. The good development went all the way down to profit after tax, increased by 96%, which also means that earnings per share had a really good development with an increase of about 97% to SEK 2.03 per share. If you look at the low left corner, you can see the EBITA bridge. And you can see that currencies in the quarter had a negative impact of about SEK 7 million. The strong increase in volumes had a positive increase of about SEK 41 million. Cost reductions, together with price/mix/other added about SEK 1 million in total, and acquisitions contributed with about SEK 13 million. If you turn to Page #4, you have 2 graphs, one of them showing the development of the growth quarterly the last couple of years. And as you can see, we are now back at solid and very healthy for organic growth levels in the last quarter. If you look at the right graph, you can see the running 12 months, the development of the net sales and EBITA. And as you can see, we have seen growth once again the last 2 quarters. When it comes to the EBITA development, you can see it's a big leap upwards the last couple of quarters, of course, achieved by good cost controls, incremental cost savings programs and volumes going up again, so to say. So a nice -- a really nice development when it comes to the EBITA line, the gray dotted line. If we turn to Page #5, we start by going through segment North, and I will just go through the segment figures quite quickly. As you can see in segment North, we had quite healthy demand in the quarter. The demand came mainly from the Swedish and Danish companies, so organic growth of about 6%. We actually saw really good and strong performance from our rather new company in the group, HT BENDIX. We saw high demand mainly from customers in the kitchen and furniture industries. As you can see, the gross margin was slightly lower and the [ loan ] was more -- was mainly attributable to the segment's manufacturing companies. On the other hand, the lower gross profit percentage was more than fully offset by a lower level of operating expenses, leading to an increased EBITA of about SEK 10 million or 26% and the corresponding operating margin went up to 9.2%. If you turn to Page #6, we see the figures for segment West. And in segment West, you can also see that we had a good development, net sales-wise. All of the segment's companies actually noted quite a strong recovery, but of course, from rather low levels. The organic growth was strong, 10%, and mainly attributable from higher volumes across more or less, all markets and for most industries. The gross profit was slightly increased mainly due to the high volumes noted, but also due to good work when it comes to purchase savings or realizing purchase savings throughout the quarter. This, together with reduced operating expenses, had a rather dramatic impact, positive impact on operating profit. In the quarter, we increased 77% to SEK 23 million, corresponding to an operating margin of about 8.4%. Segment East, you can see segment East actually had a really good development when it comes to net sales as well, unfortunately, negatively impacted by currency effects, but anyway, the organic growth was above 16%, the healthy demand mainly recorded in China, Southeast Asia and Poland. Gross profit, slightly down mainly due to higher price pressures from certain customers. The share of operating expenses increased due to -- mainly due to adjusted reserves in the quarter. Expenses for the full year was significantly lower from -- compared to 2019, it should be mentioned. All in all, operating profit decreased by plus SEK 4 million or 20%, corresponding to an operating profit of about 9%. If we turn to Page #8, we can have a look at the segment figures for UK/North America. And as you can see, of course, this segment had a really good development as well. Order intake, plus 36%; net sales plus 35%. We saw really strong recovery in the demand in the quarter, especially in the North American market. The organic growth came in at strong 16%. High gross margin mainly due to a strong contribution for the newly acquired company, American Bolt & Screw, and on top of that, realized purchase savings in the quarter. All in all, together with the good cost control, we saw a really strong EBITA improvement due to acquisition and significantly lower operating expenses, as said. By that, I leave the word over to you, Jörgen, again, to talk a bit about our efficiency improvements.

Yes. And then we'll be turning to Page 9. We've worked quite a bit during the year, obviously, on improving our efficiency, our productivity in Bufab Group. And there are 3 aspects to that. One is, of course, our cost savings program, which as we have already mentioned a number of times now, was completed in the last quarter of 2020. In the actual quarter 4, there were -- in our bridges that we will present in a moment, we have a low savings from the cost -- low cost savings. But that is due to the high volumes in the quarter and to restructuring costs. We are, however, convinced that the -- quite content that the program has generated run rate savings of SEK 100 million starting now then. But we have also, on the other hand, worked on efficiency, meaning the productivity of our actual workforce within this envelope. And that builds heavily on the digitization of our internal processes but also on the organization, which we changed about a year ago or so into 10 business units. These business teams were able then to organize their work a little bit more independently and to also create efficiency between the subsidiaries within each business unit using a concept of the [ cost ] center of Excellence. And there are some especially hard-hit subsidiaries that have been hard hit by the pandemic, where we are also implementing restructuring moves. And all of this is a bit of a proof of the strength of the trading business model, where we have low fixed assets, low structural costs and are able, therefore, to be fast and flexible when meeting a challenge such as the pandemic. We've made quite significant staff reductions. We reduced staff by a little bit more than 170 people or well above 10% relative to the middle of 2019. But the vast majority of those staff reductions are voluntary, and that means that we've had also quite limited restructuring costs associated with the cost savings program. It does take in some time, of course, until those measures take full effect. But this last year, we were able to focus that by reducing our discretionary spend and also by very short-term work measures so like many other companies also. So in summary, the organizational model is the key to this success. And on the right-hand side here you can see that we have reduced the number of full-time equivalents, that we have increased the gross margin generated by each full-time equivalent and that we have decreased the cost as a percentage -- the OpEx as a percent of -- the percentage of the [ sales ] to a level where it has never been in a long time and maybe never before of just above 15%. Turning to Page 10. You can see how the savings that we created in last year protected the margin. So there was a slowdown, obviously, in the first and second quarter of last year, which really was an acceleration of the [ slowdown we saw right ] in 2019. That was fortunate for us because we had already put cost savings program in place, which we were then able to quickly expand to the new level needed. And therefore, we also generated quite large savings in the second and third quarter of last year in total of about SEK 100 million. And here, you can all see that in the last quarter, there were not large cost improvements, but like I said before, it depends on the increased variable cost and on the onetime effects of the cost savings program itself, results all of which is that we were able to keep a stable operating margin. And in fact, top 10%, which we have not been about for quite some time, and that's quite good, of course. Finally on Page 11, as mentioned, the cash flow, our main focus in this level, first focus is always organic growth. But this is the strength of our business model, that it does not require a lot of CapEx. And that means that especially in a year of low growth, we were able to generate good cash flow and good cash conversion. And that has also been the case in 2019 and was very much the case in 2020. On the left-hand side of Page 11, you can then now see how the cash conversion, in fact, topped 100%. Last year, we made over SEK 0.5 billion of operating cash flow, the result of which is that our leverage or net debt as a multiple of EBITDA was reduced every quarter last year and ended up below 2.2, I think, or...

2.3.

2.3, I'm sorry. And we're well below 2.5, and at the lowest level, it's been for many years despite the 2 very large acquisitions we made at the tail end of 2019. The acquisitions we have made are mentioned on Page 12, with the list there of mainly quite successful, impactful acquisitions, and we intend, of course, to add to that over time. And finally, turning to Page 13. To wrap up the year 2020, we can look briefly at the EBITA bridge. And there you can see the effects, both on the quarter and on the full year of currencies or volume of cost reduction and price/mix/other and finally, of acquisitions, bridging the quarter to the -- bridging the period here to this last year's quarter. On Page 14, we show that early in 2020, we set 3 priorities for the year: first, to protect our health -- the health of our employees; protect our customers from the effects of the pandemic; and to protect Bufab results-wise, also from the effects of the epidemic. That program was put in place in the beginning of the year. And during the second half of the year, we ran another program, which we called Restart, the focus of which was to restart, in fact, profitable growth. And we believe that the fourth quarter was a good proof of how that program has succeeded. The success of the first 2 steps in this picture makes it possible to go on to the third step which is to invest. And what we're intending to invest in is leadership because we have a strategy to be a leading company in the industry, and now we have good terms for the next couple of years to execute on that promise. So in summary and then turning to Page 15, the fourth quarter was a strong one. It showed a recovery of demand. It showed improved margin, a strong profit and a very good cash flow increase and also strengthened balance sheet. The outlook is uncertain because there is, as many of you are probably aware, a very severe strain on the global supply chain systems in the world, both logistics but also raw materials. And that may cause pressure on operations, and certainly on our operations, it may cause pressure on our margins during 2021, on the one hand. On the other, we saw very favorable growth, as we've now seen at the end of 2020, and it has continued at least until the beginning of this first quarter of the year. So those 2 effects are -- go in different directions. But I think it's fair to say that the uncertainty is very large, and we certainly do not know what will happen with the development of the pandemic. That being said, though we feel we're in a strong position to be able to take -- to both meet any challenges that we may be facing but also take advantages of -- take advantage of the opportunities that will, no doubt, also present themselves in this new phase. Our priorities for the year 2021 is to manage our customer relations well during these very tough operating conditions, and that is always supported at this -- one of our strategy is customer-first. The second part is to make sure that we continue to keep our team motivated and that we develop it throughout the year. And finally, we are, of course supporting -- prioritizing our margin, especially our gross margin and the productivity necessary to keep also a good operating margin development in these tough conditions. And with that, I would like to close. But just before I close, remind you that you are invited to our Capital Markets Day, which will be, of course, in a digital format and take place on the 18th of March. It's in about a month's time. And you're all cordially invited to participate in that event, where we'll be able to talk about our strategies and plans for the next couple of years in more detail. But with that, I conclude my comments and also our joint comments on the fourth quarter of 2020 and on the full year 2020. And operator, if there are questions from the audience, now is a good time to ask them. So I'm turning the word over to you, operator.