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

Good morning, and good afternoon, everyone, and a warm welcome to this presentation of Bufab Q1 report. My name is Erik Lunden, President and CEO of Bufab Group. And together with me here, I have Par Ihrskog, my CFO. This presentation will be recorded, and by attending to the meeting, you agree to the recording. I will start this presentation to go through the first quarter highlights, and then I will leave the word over to Par Ihrskog for some financial highlights. After that, I will take you through the different regions' performance in the quarter. And at the end, we will have a slide about the situation in U.S. and tariffs before we ramp up and sum up the quarter and outlook. So let's start with the first quarter highlights. I think it was a good start of the year. If we start with the top line and sales growth, we had a sales growth of 1.6% in the quarter after several quarters of negative growth. Our organic growth was minus 0.1%, and this is an improvement versus Q4 when we have minus 1.5%. Region Asia Pacific showed strong organic growth of 17.2%, led by China. If you look at the market demand, we see continued cautious market out there. It's still a large variation across industries. We continue to see very strong development in energy, defense, and also in medical, while agriculture, automotive, and furniture had a weaker demand. General industry, construction, mobile home, and our trailer segment in U.S. then were stable. If we continue down and look at the gross margin, we had a strong gross margin in the quarter, reaching 30.3% compared to 29.1% last year's Q1, and this is driven mainly by our trading business. We have now, for the last seven quarters, have gradually strengthened our gross margin compared to comparative quarters. And this is something I'm very pleased to see. For us, the gross margin is a driving factor reaching our profitability target next year. and also a clear signal that we are continuing creating value for our customers. If you look at the cost base, our underlying cost base in the quarter was lower than last year if we adjust for one-offs, restructuring costs, and currency effect in the quarter. And then if you look at our operating margin also improved, ending up at 12.7% versus 12.1% last year, also a step in the right direction to reach our profitability target. I will then leave the word over to Par for some financial highlights. Please, Par.

Good morning, and good afternoon. Par Ihrskog here. I will take you through the financial highlights then, starting with sales. Our net sales is up by 1.6%, amounting to SEK 2.184 billion in quarter 1, which is a trend break after several quarters of negative growth. The 1.6% is built up of a negative organic growth of 0.1%. We had a positive currency effect of 0.6%. And then we had the effect of both VITAL, the acquired company we acquired in Q4 last year, but also that we sold Bufab Lann and Hallborn last year. So the net effect is positive 1.1%. Our gross profit ended up at 30.3%, which is an improvement of 1.2 points versus Q1 last year, but also an improvement of 0.6% versus Q4, our last quarter -- last quarter in 2024. The improvement is mainly driven by our traditional trading business. And then moving to EBIT adjusted on the right side, we see also an improvement there ending up at 12.7%, a clear improvement from quarter 4 last year, but also 0.6% improvement versus Q1 2024. Then coming to our operational expenses. We have an improvement on the underlying cost level compared to last year when we adjust for one-offs and restructuring costs, and currency effect. We continue to place a strong focus on cost control across the organization, and several measures have been implemented to reduce our cost base. And we will have additional minor restructuring costs during the upcoming quarters. Our cost level ended up at 17.2% in quarter 1 compared to 17.0%. The underlying cost level after adjusting for these one-offs ended up at 16.7%. Then moving over to the cash flow. Our cash flow ended up at SEK 164 million in quarter 1. The main reason for the lower cash flow versus Q1 last year is less reduction in inventories. Last year in Q1, we had a quite big reduction in our inventory that contributed to very strong cash flow. We don't see -- as previously communicated, we don't see the same level of reduction in inventories going forward. We have had an overstock for the last two years, and we have gradually reduced that, and now we are coming to a more normal situation. Yes. And then moving on to our debt. Our net debt has been reduced to the leverage to 2.5. And the reason for that is reduction in our loans, partly coming from real reduction in loans, but also from a positive currency effect on our foreign loans.

Thanks a lot, Par. I will then continue and take you through the regional highlights, and I will start with the biggest region, and that is Europe, North and East. Total growth in the region was minus 11%, and the organic growth was positive 0.8%, the difference then between the total growth and organic growth is the divestment of Bufab Lann and Hallborn that took place in Q3 last year. The market situation remains uncertain in the region, and there's also a big variation between countries and different customer segments. We could see that Finland also continued weak development, while Bufab Poland saw improvement in their demand in the quarter. Gross margin ended up very strong in the quarter, up by 3.6 points. And this strength in gross margin in the region is due to improved customer and product mix as well as consolidation of purchasing volumes, which generate savings, and this is part of our updated strategy as well regarding to our sourcing. If we look at the OpEx, it lowered in the quarter, mainly due to revaluation of additional purchase considerations that is the divestment of Bufab Lann and Hallborn, and also effect. We end up a very strong operating margin in the region of 14.2% versus 10.6% last year. If we now continue with Europe West, total growth amounted to 22.7%, and organic growth was minus 2.3%. Here, the difference between the total growth and organic growth is the acquisition of VITAL. The lower organic growth is due to lower activity levels in the automotive and construction industries in the West. Stable gross margin, up by 0.2 points, and OpEx was in line with last year. The adjusted operating margin improved in the region, ending up at 13.4%. And also maybe worth to mention that the integration of VITAL goes according to plan in the region, and VITAL has contributed positively to the margin improvement for West in the quarter. We then continue with the region Americas. The total growth in the region amounts to minus 1.5%, and the organic growth was minus 4.2%. Demand was stable for our important RV and trailer market in the U.S., which is big then for ABS. We saw lower demand in the automotive industry that is impacting the CSG operation in the U.S. Automotive manufacturers are trying to navigate U.S. tariffs, which is causing some factories slowing down the production that's impacting CSG in a negative way. Our gross margin decreased by 1 point, driven by the automotive industry and also the general uncertainty in the market. The gross margin for ABS, though, have strengthened during the quarter as expected. Lower share of OpEx in the region due to good cost control, and the adjusted operating margin ended up on 12.5%. And I will later give some more insights about the U.S. and the impact of the U.S. tariffs. If we then continue with the region U.K. and Ireland, total growth amounted to 0.4%, and organic growth was minus 1.7%. The decline in the region was attributed to lower market prices for APEX in stainless and also to a certain extent, lower demand in the manufacturing industries that are impacting Bufab U.K. and Bufab Ireland. We saw a decrease also in the gross margin, 0.5 percentage points, mainly driven by price pressure then within Stainless that's impacting APEX. We had a higher OpEx versus last year, SEK 11 million, but this was impacted by a bad debt expense of SEK 6 million and also some restructuring costs that we have taken in the region. Adjusted for this, operating expenses increased by SEK 4 million. And all in all, we end up then on an operating margin of 9.5%. If we then exclude the bad debt, our adjusted operating margin ended up at 11% for U.K. and Ireland in the quarter. And then finally, we go through the region of Asia Pacific that performed very well in the quarter. The total growth amounted to 19%, and organic growth was 17.2%. We saw strong organic growth in all companies, but mainly driven by China, Bufab Shanghai business. We also had a good development on the gross margin side, up 0.6 points. This is driven by purchasing savings and also active work with value-based pricing in the region. We had some higher share of OpEx compared to last year, mainly driven by investments in sales force, but also some negative currency effects for the region. And if you look at the adjusted operating margin end up at 16.1%, a small improvement versus Q1 last year. I will then take you through a little bit about the situation in U.S. and the impact from the U.S. tariffs as well. So first of all, I would like to start talking a little bit about our U.S. business to give you some context. In U.S., as of today, we have 2 niche companies, and that is ABS and CSG Group. ABS, as you know, are very strong in the mobile home and trailer market, and CSG are heavy within automotive, EV vehicles and SUVs, and trucks. If you look at the total sales in the Bufab Group, 12% is coming from our U.S. operation as of 2024. If we then look at the impact from the tariffs that have been taking in place in the last couple of weeks and start with how we're sourcing in U.S. as of today. ABS sourced 38% and CSG 8% from China. And for us, we don't expect any impact or negative impact on Bufab's margin now due to the tariffs. But of course, with those high tariffs on China goods, it could lower the demand in the U.S., especially for CSG. But we also see some positive things about the tariffs. We expect that the buyers' market will continue from China, so that we will continue to have low prices from China to the rest of the world. And if we look at the overall risk with the tariffs, we see that on the global economy that if this continues that, that could impact the global economy. But we are not that worried in the long run for Bufab. We see ourselves and we are also within our niche industries, a large and stable player in the U.S. market, and we are often better at handling those type of disruptions better than competition that of our small local players. Of course, we take actions to handle the situation in the best possible way. First of all, we put price increases passed on to the customers in line with the tariffs. That's the reason why we don't see any margin decline in our U.S. operation. We do our best to prepare ourselves for different tariff scenarios in the coming weeks. And also, what we do is that we're looking at alternative sources when needed. U.S. sourcing is generally not an option. It's not developed in U.S. So they are dependent on sourcing from Asia. But of course, in some small cases, we do find alternative sources. And also what we do and we've done that also in the last couple of years is to building up other alternative sources outside China and Asia as well, like India and Turkey. And also what we do is, of course, working closely with different stakeholders, such as suppliers, customers, and border control to ensure that everyone knows what's going on and understand how we are best mitigating negative impact of the situation in U.S. and tariffs. But to sum up, all in all, I'm not that concerned about this. We focus on things we can control. And so far, I think we have done a good job. And we are, of course, monitoring the situation and development very closely also going forward. If we then sum up the quarter, and also say a few words about the outlook and our priorities. Once again, I would like to emphasize that I'm pleased with the start of the year. I'm very happy to see that we have continued to improve our gross margin and also delivering a stable operating margin in the quarter, and also that the organic growth is continuing in the right way, and we're getting very close now to show positive organic growth. We continue to take actions when it comes to our cost base. That helped us now in Q1, and we will continue to take actions also in the coming quarters that will give positive effect on our cost level of the year, but also in 2026. There are still a lot of uncertainty in the market, that's for sure, but we are optimistic about the future. As I said many times, tough times is also market share times for a player like Bufab. So we do our best to ensure that we take market share, continue to invest in sales where it makes sense, and of course, focus on things that we have within our control, how we work with the offering, and our cost base, and taking market share. I'm pleased that we have during 2024 and also in Q1 have executed on our strategy, and that work will continue during rest of 2025. As I mentioned, continue to secure new business and taking market share that will help us to grow later on when the market bounce back, continue to work on our margin improvement, focus on strength and gross margin that should continue to improve in the coming quarters, but also, of course, ensure that we have our cost base under control and continue to work on our net working capital, mainly then focus on our inventory levels and also secure solid and strong cash flow in the coming quarters. That was my final slide for today. I will now leave the floor open for Q&A. So please.

[Operator Instructions] We start with the first question from Henrik.

This is Henrik from ABG. So starting off with your comment that the general market has shown some signs of stabilization, but still remains cautious, taking this in combination with that the organic growth trend has been positive for the past few quarters. Is it fair to say that you think this will continue based on that?

Yes. We expect this trend to continue. We do not expect any major differences versus the last couple of quarters, but more or less the same trend is what we can see right now.

Yes. All right. And one question on the tariffs as well. Growth in the Americas segment was still negative, but quite a bit better. Do you see any -- than the previous quarter? Do you see any like pre-buying effect in Q1? And how did this shift in April, if you can give any comment on that?

Yes, it's a good question, but difficult to answer how much impact we saw in the numbers. We think there could be some positive impact on the sales numbers in the end of the quarter linked to the U.S. tariffs. But it's difficult to tell, obviously, but most likely, it is partly helping situation. Having said that, we have seen that the underlying trend and looking at forecast and others also was going in the right direction for the RV industry. So it's also something that we saw before this thing started with the tariffs. But most likely, yes, some impact. And when it comes to the beginning of the quarter, I don't have any comments there to share about the start of the Q2. But what I said is that we have at least don't expect in the short term any big impact. That's what I can say.

And then, finally, from me, the gross margin continued to improve year-on-year. How happy are you with the development so far? And how much do you think remains to be done here on the gross margin?

I am pleased with the development. I've said that many times before. I think that what I want to happen is that we're gradually improving and working on our offering and the value that we give our customers. And if we do that in the right way, our gross margin should gradually continue to improve every quarter. And I don't see an end to this after this quarter. I think we still have a lot of work to do here and a lot of potential but we are very strong in our offering and how we serve our customers. So gradual improvement, I expect also in the coming quarters.

Karl Norén.

Question from my side here as well. I was just wondering a bit, you mentioned the bad debt expense here in the quarter. Just wondering, did you adjust for that in the adjusted EBITDA? Or is that that's not adjusted for, right?

No, that's not part of adjusted EBITDA. That's what we call one-off, but it's not part of adjustments.

Okay. Yes, that's clear.

We specified the adjustments or the adjusted EBITDA.

Yes, I saw it. I just wondered if it was included or not, but that's a good clarification then. Good. And then now with the stronger Swedish krona here, I'm just wondering how long will it take before we see it in your numbers in terms of lower purchasing prices? And how are you positioned to strengthen the gross margin out of that? Or will you need to lower prices? Or how do you see it on that?

Yes. On the currency rates, we saw a big strengthening of the SEK in March. But in January, February, we had a weaker SEK. So it's going both directions, and it's hard to tell what will happen. But of course, with the weaker if that stays, it has an impact on us, of course. But it's hard to tell. We don't know where it will go.

On the weaker USD, I guess, should be quite positive for the purchasing prices, especially from China, I guess.

Yes. Correct. If it stays, yes.

Yes, if it STAYS. Yes, let's see. And just on the U.S. business as well, I mean, have you already raised prices in ABS and CSG? And when you say no impact on margins, do you mean that already in Q2, you should have compensated for that? Or how should we see it?

Yes, we didn't do any adjustments in the Q1, but starting in Q2, we have done adjustments to ensure that we don't get any negative impact on the margin side.

And on the U.S. again, I mean, I guess you're making quite large price increases given that the tariffs are quite high for Chinese goods. But I was wondering, do you think that will lead to better organic growth in the U.S.? Or do you think that demand will shrink quite a lot as well? I was curious to understand like the net-net effect there.

Yes. And I think that's a very good question that's very difficult to answer. So I think it depends a lot of how the development will be in the coming weeks that is outside our control. So I don't want to guess here what will happen. But what I can say is that there's not much alternatives outside Asian sourcing for customers. So they are dependent on Asian sourcing for most of the items. And that will not change in the quarter or the coming quarters.

I can add to that answer, Karl. Our organic growth definition is not the volume definition, it's including price as well, actually. We don't separately report price changes. So of course, if we increase prices related to tariffs, it will be shown in the organic growth as well.

Yes. Yes, of course. And then just one final one on Region West, where you now have included VITAL in the numbers here. I mean, can you say anything about how much of the margin improvement that comes from VITAL because I think that has quite a high margin compared to the overall segment?

We don't disclose separate companies, but we can say that it has a higher margin than average. So it has a positive impact.

So Marcus Develius, welcome to ask a question.

I'm going to stick to the theme and talk about the U.S. business, specifically the sourcing. 12% of the group sales in the U.S. Sourcing is much lower, and you mentioned it briefly there. But could you please give some more color here on why sourcing is generally not an option in the U.S.? Do you have a strategy to increase it slightly? What are you doing here?

The main reason is because the major product doesn't have any production in the U.S. That is the reason why it's not an option. There is production for, for example, certain items for CSG in the automotive, we already do sourcing in the U.S. and have a good network. So that's the simple answer. What we can see is that we have moved some sourcing from China to Taiwan to mitigate the impact due to tariffs, as it is lower tariffs on Taiwan than on China, for example. So those kinds of alternative sources we have been doing now in the last couple of weeks, and that we will continue doing when needed to mitigate the impact for us and for our customers.

And then a quick follow-up on the lower demand in automotive and the CSG operations. Did you see this accelerate by the end of the quarter due to the tariff situation? Was it stable throughout the quarter? Can you say something there?

Yes. What we can say about the automotive industry is that it has actually been a disappointment after the election. There were a lot of people who estimated that the automotive industry in the U.S. should bounce back after the election, but that didn't happen. And so not at the end of Q4 and not in Q1 either. And of course, the situation with the tariff didn't help either. But what I can say is that it's been quite a general low level in the Q1. So not been any major impact in the last couple of weeks or so. It was quite a similar level, actually, throughout the quarter.

Zino Engdalen, welcome to ask your questions.

If we jump over to another region, Asia Pacific showed strong organic growth. And you mentioned that all companies performed well there. Can you describe a bit more about the underlying drivers that sets this region apart from the others?

Yes. I think, as I mentioned also the main driver behind the strong development in the region is China. And here, the team has done a good job and grabbing market share, and that is now paying off in the numbers. So that's the main driver. On top of that, I think the region had quite a tough 2024. And now we see improvement happening also in the rest of the region, for example, India, and for Kian Soon in the Singapore region and Southeast Asia. So they are also bouncing back from a little bit lower demand. India, positively impacted by the election that took place last year, and some stronger demand after that. And in Kian Soon in Singapore, we also see a small but gradual improvement also in demand. But the main driver for the good numbers is Bufab Shanghai in China.

And regarding the cost initiatives, you mentioned that they will have some effect in '25, '26, which are not visible yet. Is it possible to quantify or get some insight into the effect of those?

We will not quantify them, but what we can say is that they are minor. There will not be a material effect on the result.

And also a question on your view on acquisitions. Of course, you relatively recently closed VITAL. Does this increased market turbulence make you relatively more cautious about acquisitions in the near term? Or do you see this as an opportunity?

No, our strategy remains firm. So we are after buying good companies that suit Bufab well, and that is #1 priority. So we still are looking for acquisitions and have discussions ongoing, and that will not change. For us, it's most important to find the right company. That is the key thing for us.

And just lastly, on the bad debt costs in the U.K., is there any reason to expect more of these kinds of costs in the upcoming quarter?

No, we don't expect any other bad debts in that region or any other region.

So, Marcus, did you have a follow-up question?

Yes. Just a follow-up on China here. You spoke about Americas, the pull-forward effect. How much of the strong performance in China would you say? Or do you estimate there's a pull-forward effect from the tariffs? And do you expect this strong performance to continue in the sequential quarters?

No, there's no link between the tariffs and the good performance that we have in China. So there's no link at all. We are having good development in China due to taking market share, and that has been taking place for several quarters, and that's paying off. So it has nothing to do with the tariffs. And then, sorry, what was your second question there?

Just if you expected this to continue, but I think you answered it.

So, Karl, did you have a follow-up question?

Yes, just in Europe, North and East, I mean, it was a very strong quarter here by all metrics. I mean, is it something specific here that happened or in the quarter, would you say? Or can you say anything because I think the gross margin was like record levels and also EBITDA margin of 14% was quite decent to the list.

No. I think it's just the payoff of hard work within different areas that helped the region deliver a solid quarter. So, nothing specific has happened in the quarter. Maybe that's the right word. And hopefully, we continue in that direction.

Gustav Berneblad, did you have a question?

Yes. Sorry, just to build on that question from Karl on North and East because you mentioned it's supported by customer mix effect. I was just wondering if it sounds like it's more structural than just temporary or is that correct?

Yes. So it's nothing temporary happening. It's just as I said, they have done a good job in several areas, then working in such a way to improve the gross margin is a key focus area for all companies, and also, of course, working with the cost base. As we have pointed out, we do that in all regions. We have plans for each region and for each company, how to address the cost base, and they are doing that. So all in all, ending up in a solid quarter.

Okay. That was the last question for today. So thanks, everyone, for joining, and have a good day. Bye-bye.