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

Once again, a warm welcome everyone to Bufab's Q4 and year-end report. My name is Erik Lunden, President and CEO of Bufab Group; and together with me here I have Par Ihrskog, our CFO. I will start to go through our Q4 results and highlights and then also our full year performance, and then I will leave over to Par for some financial details. So let's start to sum up the quarter. I think we made a strong performance in a challenging market throughout Q4. And we start with the top line, our net sales amounted to minus 6%, and our organic growth was minus 9%, driven by lower demand in some industry segments that have favorable development throughout pandemic, and also partly due to customers de-stocking at year-end. We have also some industries that have favorable development like energy, automotive, and defense, but they were not compensating enough for industries that had a lower demand in the quarter. Our order intake was slightly lower year-on-year, but still on a high level. If you look at our margin, it was a strong margin in the quarter, we will continue to improve our gross margins that end up on 29.3% versus 28.1% last year due to good work with our product- and customer mix. And also if you look at our adjusted operating margin improved in the quarter, ending up at 11.8% versus 11.5%. We saw a strong EBITA contribution from Segment North, however, some negative impact from Segment East. And what we saw also in the quarter was a quite big impact due to good performance of our TIMCO acquisition last year. So remeasurement for additional purchase consideration was SEK 48 million, impacting our operating expenses for the quarter. If then look at our cash flow, it continues to be strong and up on SEK 359 million for the quarter, corresponding to a cash conversion of 188%, which I'm very pleased with, and we put ourselves in a strong financial position to do more acquisitions going forward. If we then sum up full year 2023, it was, all-in-all, a record year for Bufab. If you look at the top line, we had a strong top line in the -- during the year despite weaker underlying demand. And net sales increased by 3%. Organic growth was down 6% and order intake increased by 2% and was in line with net sales. We are pleased to see that our journey with improving our operating margin continues. And I think we demonstrated our resilience throughout 2023, to performing a strong operating margin despite a more challenging market. Our EBITA increased by 5%, over SEK 1 billion for the first time in the group's history and operating margin of 12%, reaching our target -- financial target for the year. Adjusted operating margin of 12.9% for the full year. As I mentioned before, we have a strong cash flow throughout the year amounted to a total of SEK 1.6 billion, corresponding to a cash conversion ratio of 146% in the year. And the Board proposes a raised dividend of SEK 5 per share for 2023. If you look at some highlights throughout the year, we've been working throughout the year to put our new strategy in place. And I think we start off with a strong execution of the new strategy. We launched a new strategy to the market at our Capital Markets Day in December, and we call the new strategy as Discovering the Next Solution, which focused on continuing creating even more value to our current and new customers. And we saw good execution during 2023 so far with improved margin and also a strong cash flow. And as I see it, I think Bufab is a much more robust company today than it was 1 year back. And our offering that we have to our customers is becoming more and more relevant. So I look forward to continue this journey during 2024. I will now leave over the word to Par for some financial highlights. Please, Par.

Okay. Some more details on the financials. As mentioned, order intake was slightly higher than net sales in the quarter, amounting to SEK 2.036 billion, but was 3% lower than last year. Our quarter 4 net sales amounted to SEK 1.943 billion, which was a decline by 6%, 9% coming from negative organic growth, 3% from positive currency effect, and no effect from acquired companies in this quarter. For the full year, we increased by 3%. And there, we had minus 6% organic growth, plus 5% currency effect, and 4% from acquisition. Our gross margin was 29.3% compared to 28.1% quarter 4 last year. The high gross margin was mainly due to the more favorable customer and business mix, but also partly due to that we start to see lower purchasing prices. For the full year, the gross margin was slightly higher than in the previous year and amounted to 28.7% versus 28.3%. And then our operating expenses, they increased to SEK 388 million versus SEK 341 million quarter 4 last year. The increase was due to the remeasured additional purchase consideration, which amounted to SEK 48 million. Adjusted for this revaluation, we end up at SEK 340 million operating expense, which is in line with last year. But in percent of net sales, we ended up at 17.5% versus 16.6%. The higher share is a pain with a decline in sales in Q4 versus last year. And then we move on to the adjusted EBITA. It decreased by 4% to SEK 229 million versus SEK 239 million, corresponding to an operating margin of 11.8% versus 11.5%. And for the full year, we had an increase in operating profit -- adjusted operating profit reaching SEK 1.121 billion, an operating margin of 12.9%, which is the same level as last year. And then if we move to our profit after tax in the quarter, it was decreased to SEK 71 million versus SEK 135 million. And the difference here is mainly coming from the revaluation of the additional purchase consideration. If we adjust for that, the reduction in profit after tax is minus 10%. And that 10% is explained by the lower sales in the quarter. For the full year, profit after tax, it was reduced by 6%, reaching SEK 574 million. And the main reason for the difference compared to last year is the higher interest rate we are facing during the year compared to last year. Our earnings per share in the quarter ended up at SEK 1.87 per share versus SEK 3.58 last year. And for the full year, it was SEK 15.17 per share versus SEK 16.23. Next slide. So let's look at this graph to the left. It's net sales growth per quarter. The line, the yellow line explains the total growth and the bars, the orange bars explain the currency effect and the blue bar, the organic growth and the gray bar, the acquired growth. And as we can see that we have no acquired growth, the last couple of quarters, the 3 last quarters. And the currency effect is also having lower impact, it's gradually being reduced, but still positive. All-in-all, this is ending up at a negative growth of 6% in the quarter. And then if you look at the graph to the right, this shows the 12 months rolling net sales and 12 months rolling EBITA. With the lower demand and no recent additional acquired growth, we see a flattening in our 12 months rolling net sales as well as our EBITA earnings. So next slide, please. Let's look at the cash flow to the left. Our cash flow continues to be very strong. We have shown record levels of operating cash flow, the last 4 quarters, coming from strong profits and high focus on net working capital reduction, mainly in our inventories throughout the year. And to the right, the net debt/EBITDA or the leverage KPI, it continues to improve, now reaching 2.6x versus 3.2x last year, quarter 4; and 2.7x last quarter.

Thanks, Par. I will then go through some highlights from the different segments, and I would like to start with Segment North. Segmental North had a total a negative growth of 6% with organic negative 8% in the quarter. The negative growth was due to market downturn in Finland and also some specific sectors that had challenges in the quarter, example, kitchen and bathroom sector. We'd saw also strong demand in defense industry throughout the quarter. Strong development in gross margin compared to last year, mainly due to a favorable product and customer mix, some purchasing savings and also that we have been working on renegotiations on old contracts that gradually improve our margin for the segment. So all-in-all, a strong operating -- adjusted operating profit and operating margin to 13.1% versus 11.9% last year. Then we continue with the Segment West, that's had a strong development throughout the year. But in Q4, there was 0 growth and minus 5% organic. What we see is a mixed bag in the quarter for the segment, still favorable development within energy, automotive, and defense, but this growth was offset by a general slowdown in other industries. Looking from a counterpoint view, a strong development in France, the Czech Republic, and Germany, while we struggled a little bit with the growth in Austria and the Netherlands due to weaker market. Good to see gross -- sorry, gross margin was lower than last year due to product customer mix driven by Netherlands and operating margin decreased slightly to 10.3% versus 10.5% last year. If you look at Segment East, big decline, minus 9% and minus 12% organic in the quarter. And this is due to a weaker trend in, mainly in Asia, particularly in biomedicine sector. They had a very strong development throughout the pandemic and a strong quarter Q4 2023. Eastern Europe maintained its growth by capturing market share, mainly in Hungary and Turkey, and order intake for the segment was slightly lower than net sales. The gross margin in the quarter was slightly higher compared to last year, due to improved customer and product mix and some price adjustments that we have made in the quarter. And looking at the margin then, there was a decrease to 11.7% versus 13.4% in last year Q4. Looking at Segment U.K. and North America, also declined minus 8% organic, down minus 10%. And this is mainly driven by stainless steel in U.K., but also our RV industry in U.S. that had a very strong development throughout the pandemic, but also full year 2023 and also a little bit longer production breaks in different customers throughout the Christmas and holiday season. Good gross margin due to favorable customer and product mix, but also some price adjustments in the quarter. And as Par pointed out before, we had share operating expenses increased due to those remeasured additional purchase considerations. TIMCO that we acquired last year had a very strong development throughout the year and therefore, we have to do those remeasurement on our purchase considerations for the segment. And if you look at the adjusted operating margin for the segment, we were up and ended up on 11.5% versus 10.5% last year. And then look at our M&A that I would say is a natural part of our DNA. We want to continue to be a consolidating a very fragmented market. As I mentioned initially, we have throughout 2023, done a good job with our cash flow and lower our inventory throughout the group and now put us ourselves in a position where we have a lower leverage, and we are ready to do acquisitions. And I can say that activity in the market is increasing now. I think buyers and sellers start to find a common ground. So we expect that there will be some acquisitions made in the industry throughout the year, and we're also looking actively now to find some good acquisitions to make throughout 2024. If then take a sum up then, the quarter and also look ahead. And -- But before we do that, just a few words about our Capital Markets Day that we had in December last year. At the event, we had a pleasure to talk about our new strategy that we call Discovering the Next Solution. And what we are trying to do is to build on our success in Bufab and ensure that things are doing well. We continue doing and, of course, addressing areas that we can do better. As we see it, we have a very strong position in the market and offering that gets more and more relevant every day. But also if you look at the different companies in Bufab, we have different companies with different potential. And what we have said going forward is that our trading business and niche companies, we see as core going forward. And the Board have decided that our manufacturing business should be evaluated for different strategic alternatives as it's not seen as core anymore in Bufab. We also decided throughout 2023 that we will raise our bar when it comes to profitability to reach at least 14% on EBITA margin by 2026. In that journey, I think we started already last year, and we have gradually shown that we are resilient in more challenging market that we have in our control to gradually improve our margin with good customer and product offering development to reach our EBITA margin of at least 14% by 2026. Another part of our new strategy is also that we have a new regional structure, that will be Europe North & East, Europe West, U.K. & Northern Ireland, Americas and Asia-Pacific, that will be ported effectively from quarter 1, 2024. So if then sum up the quarter and look ahead and start with the summary then. We've shown in the quarter improved margin, strong cash flow in a weaker market. Our sales were down 6%, organic 9%, driven by sectors that had a very favorable tailwind during the pandemic. Pleased to see that we continue doing a good step in the right direction when it comes to our growth and adjusted EBITA margin, ending up 11.8% for the quarter. And also that we managed to continue having a strong momentum when it comes to our operating cash flow ended up on SEK 359 million. Looking ahead, there are a lot of uncertainty in the market. Geopolitical uncertainty but also unrest in Middle East that impacting the supply chain and somewhat longer shipping times, but we have a strong position in the market. And hiccups and supply chain constraints is after actually something that can help a big player like Bufab. We have a broad supplier base, alternative transport routes for our customers. And so far, we have seen limited impact for our customers. And we aim to take this opportunity to show the strong position that we have and to continue to try to grab market share also in 2024. On top of that, we have a large and well-diversified customer article portfolio that we're continuing to strengthen all the time and also what we aim to do organically, but also through acquisition, ensure that we have a good diversification of risk in various industries and markets also going forward. If we look at what we aim to do now going forward, that is continue to execute our new strategy, focus on profitable growth by creating even more value for our current and new customers, obviously. The short-term priorities that we set at the end of Q3 2022, we stand firm and we'll continue doing also the coming quarters, ensure now that we take the opportunity in a more challenging market with a lot of cost pressure from our customers to actually secure new business and taking market share. Turbulent times in the seaport industries is actually something positive. Then often, our customers do a consolidation of the number of seaport suppliers and open up for market share opportunities. So that is a full focus for us also in the coming quarter. As we already said, we see opportunity to gradually improve our margin. That is what we aim to do, continue to working on the product and customer mix and gradually also improve our offering to our customers also going forward and showing that it gradually improved operating margin. And then, of course, continued focus on net working capital reduction to ensure also that we can have strong cash flow also going forward. That was our presentation for today. We will now leave the room open for Q&A. So please.

We start with the first question from Johan Skoglund at DNB. Please ask your questions.

Johan from DNB here. So a few questions for me. The first one being, if you could comment on the pacing of organic growth through the quarter. I mean, was there a difference between the beginning and end of the quarter? And could you perhaps comment on how Q1 has started?

Yes, we saw the stronger start of the quarter versus the end of the quarter, and that is quite typical for us and our industry, I would say. And you can also see that in the number that we had a little bit bigger gap between order intake and net sales in the quarter and a little bit -- the trend is often that in December, you see a little bit bigger gap between order intake and net sales. So that's what we see. And often, there's some destocking taking place in the end of the year. We don't guide anything on the beginning of the year. But what we can say is that we believe that the trend that we have seen will continue, that we will have a challenging market. We're up against strong comparable numbers. And that the industries that had a favorable development, after the pandemic, more or less, we continue to having lower demand now also in the beginning of 2024, but be offset by other industries are doing well. So there are uncertainty out in the market. And what we do is to -- we try to impact where we can impact, so to say. And we try to grab market share, and of course, put ourselves from a cost point of view in a good position to managing a little bit weaker demand. So we think that this uncertainty and will continue also in the beginning of 2024.

Okay. Understood. And although order intake, it is down year-over-year, but it is stronger quarter-over-quarter and book-to-bill is above 1. I mean, could you help us a bit here? Are you seeing any changes in customer order behavior, seasonal effects in play? You mentioned an impact from the Red Sea situation, placing orders up front with longer lead times, et cetera?

Yes. What we see is that also as I mentioned before, that there were some destocking taking place in Q4, that was clear, that is impacting. When it comes to the situation in the Red Sea and those things, the only impact we see is a little bit longer lead times. And -- but not really impacting our customers, really more than these longer lead times. And of course, the freight prices will get impacted. So here, of course, we are monitoring this closely and sure that we can continue supporting our customers in the best possible way. That is what we have seen so far. Other than that, there is same pattern as we've seen now for a few quarters with a very mixed bag in the behavior in different industries and also more linked to segments than geographical areas actually. So -- as you see in the numbers, we have a weaker demand in U.S., for example, that is linked to the RV industry. We have weaker demand in U.K. to some extent that is stainless, and then the same thing when it comes to Asia and in the East, that has also had a very strong development in end of last year. So we have -- we are up against strong comparative numbers in a few companies now, and we don't offset that completely with a strong demand in other industries, like energy, defense and automotive and so on.

Okay. And a question on margins, where gross margins are strong. You mentioned better customer product mix, some price adjustments. Would you be able to split out the price and volume components and the organic growth figure?

Yes, the price effect getting less and less. So it's not much in the quarter at all. And Johan, as you pointed out, we are working, I think, throughout 2023 to improve our gross margin, yes, across Bufab Group. And I think that we are a good pattern here. We're taking the right actions and good to see the development continue also in Q4. But we aim to continue working on this also throughout 2024.

Okay. And then last question for me is on cash flow and inventory release. So could we expect that the main share of the post-pandemic inventory reduction to be done now? And is that the shift turns toward long-term working capital efficiencies? Or do you still have some overstock to work down, if you know what I mean?

Yes, I understand what you mean. Yes, I think that the majority of the stocking that we -- the extra stock, to say, to managing a turbulent time, is more or less gone now. Of course, there are some areas of things still it could be done, but we're getting closer now to more working on improving our way of working with our inventory and net working capital across the group. So gradually that is disappearing and now it's more up to us to ensure that we get more efficient and managing our inventory in a better way. So that is clearly what is happening.

Okay. Those were all my questions. So good luck with the Q1 and have a good rest of the day.

So, Karl Norén from SEB. Welcome to ask your question.

A couple of questions here. So if we start with the gross margin. You mentioned here that you are seeing some lower purchasing prices from your suppliers. Is that anything that you would say have impacted the gross margin positively already in Q4? Or is that, that's more to come, so to say?

Yes. It is impacting a little bit in Q4, but hopefully, more to come. It's something that we see as opportunity to 2024 to take advantage of the situation with lower pricings mainly from Asia and offset, of course, the price pressure that we will face from some customers throughout the year. So we've seen maybe some in the Q4 as we write in the report, but hopefully more to come.

Okay. And you're saying also on price pressure from your customers, are you -- how do you view that? I mean, previously, you said that you try very -- work very hard to keep up prices, but do you think it's reasonable to assume that you need to lower prices on average in 2024 versus 2023? Or how should we think about that?

No, I think that we are in a very strong position to handle that across. I mean, our value to our customers getting more and more relevant every day. And I think the offering that we have are very strong and our positions are very strong. So yes, of course, in specific cases, we need to lower some prices, but then we should be able to offset that by other efficiency like lower purchasing and so on. So all in all, I think we should be able to keep up the price levels at a good level and gradually, as I mentioned, improve our margins. So yes, I'm positive.

Yes, sounds good. And then just a question on the Segment in U.K. and North America, which saw very strong gross margins despite quite negative sales. Is that driven by the mix with more sales coming from TIMCO, which I think has a better gross margin, is there anything else you would like to highlight there? Or is that final, do you think?

No. But, as I also mentioned before, linked to the remeasurement SEK 48 million in TIMCO are a good development throughout 2023, are a strong contributor. And then also we have other companies in the segment that also do a good job with their product and customer mix. But TIMCO is a main contributor to the performance.

Okay. Is it possible to give any more color on how TIMCO performed in 2023 in terms of growth and margins?

No, not really.

Okay. But then they see growth year-over-year or...

We have a strong -- I think, we're pleased with TIMCO's performance and they are facing a tougher market in 2023, but I think they've been working well with the product develop, then offering, and also working well with the gross margin. So we're pleased with the performance, but we don't guide more details specifically if it is about TIMCO.

Okay. Understood. And then just one question on the segments you mentioned, which had a strong development during the pandemic and has been weak for quite some time now. Are you seeing any signs of this turning around or seeing improvements in the segment? Or is it still at very low levels? Because I guess it was around 1 year ago where we saw like the large drop in these segments. And now we've been through that. So it's in the comparable figures. Are you seeing any signs of improvements in these segments like kitchen, for example, or RVs?

Yes. We -- there is a mixed bag. In some, we don't see any major change, and more or less that we maybe reached the bottom and others, we start to see some light in the tunnel. So it's a mixed bag. But in some cases, yes, we see some improvements. But also if you look at our comparable numbers, Q4 was a strong, Q1 2023 was also a strong quarter. So we still have a quite good -- we had a very good development in many different industries. So we are up against strong comparative numbers. We need to have that in mind when we look at Q4 or for Q1.

Sure. That's all for me.

Okay. That was all questions. So thanks a lot for joining and wish you all a nice day ahead. Thank you.