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

Good morning and good afternoon, everyone, and a warm welcome to Bufab's Q2 report. My name is Erik Lunden, President and CEO of Bufab Group. And together with me here today 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 today's presentation to go through the highlights of Q2, and then, I will leave the word over to Par for some financial highlights before I go through the performance in each region, and then at the end, I'll sum up the quarter, and then, we'll have time for Q&A. If we then start to look at the highlights in the quarter, I must say that I'm overall pleased with our performance considering the geopolitical situation. Our efforts in the quarter to continue strengthening our gross margin, while gradually reducing our cost base, have been paying off and leading to an all-time high gross margin and also a strong operating margin in the quarter. The revenue was down by 4.8%, largely driven by currency effects. Our organic growth remained slightly negative in the quarter at minus 0.3%. Region Asia Pacific showed the strongest growth in the quarter, while U.K., Ireland the weakest. The demand varies still across companies and segments with the defense sector and agriculture showing the strongest growth. The gross margin, as I mentioned, strengthened during the quarter amounted to 31.1% compared to 29.8% Q2 last year. The increase is a result of our effort to continue to create more customer value creation and also due to lower purchasing prices during the quarter. Our adjusted operating margin was strong, ended up at 13.1% compared to 12.2% last year. And also, I would say a step in right direction to reaching our profitability target of 14% EBITDA by 2026. I'm also pleased to see that we continue to be very active in the market. And we could see in the quarter that we've been able to secure several major customer projects in key segments, like defense, agriculture and also general industry. One example is Kverneland in Norway, an international company using agriculture machinery, where we'll be appointed as new C-Parts supplier. And what I highlighted by choosing Bufab was we could offer the broad solutions with the logistics, sustainability and also our global presence. I'll also briefly like to mention what we communicated last week, and that is the divestment of a small manufacturing unit within CSG Group in U.S. The divestment is a result of the view that we presented in December 2023 at Capital Markets Day. We will be going forward aiming to focus on our trading and complementary niche businesses as our core. We would aim to gradually improve our profitability. The transferred business generates net sales of approximately SEK 35 million, and the divestment expected to have a positive impact on profitability in the region Americas going forward. I will then leave the word over to Par for some financial highlights. Please, Par.

Thank you, Erik, and good morning, good afternoon. Some more details on the financials then, starting with the sales. Our revenue was down by 4.8% in the quarter, ending up at SEK 2.039 billion. The 4.8% can be explained by a negative organic growth of 0.3%, a currency effect of minus 4.9% and then a positive effect from -- this is a net effect of acquisition of VITAL and also the divestment of Hallborn and Lann last year. So the positive effect from VITAL is 5.4% and the negative from the divestment is 5%. So net ends up at plus 0.4%. And then if we move to the next slide, our gross margin strengthened in the month, ending up at 31.1%, and the combination with also good cost control resulted in an improved EBITDA margin in the quarter, ending up at 13.1% compared to 12.2% last -- Q2 last year. The -- if we move to the next slide, on the cost control side, our operating expenses was reduced compared to Q2 last year by SEK 8 million. And it's a combination of our cost reduction initiatives that we've been running now for a while. We reduced FTE and reduced traveling and other costs that we have reduced, but also we have a positive currency effect helping out. The cost control is compensating the inflation that we are still facing. And despite inflation, we can then reduce the operating expenses by SEK 8 million. The initiative on the cost reduction, we will continue to see some results for the remainder of the year coming from that. I would also like to mention related to the manufacturing unit in U.S. that Erik mentioned that we will see some minor and not material restructuring cost during the upcoming quarters from that activities. So going over to the cash flow. We had a cash flow from operating activities of SEK 245 million in the quarter. That is representing a cash conversion of 89%. And cash flow is lower than Q2 last year, and that's mainly coming from high inventory reduction last year that now we have come to a normalization of our inventory. We still had a positive effect from the inventory reduction this quarter, but much smaller than last year. Next slide, please. And on the net debt related to EBITDA, we ended up on a net debt of SEK 3.199 billion and leverage of 2.5x, that should be compared to 2.8x last year. In the quarter, we also had a dividend of SEK 199 million. That also had an impact on the leverage. Thank you.

Thanks, Par. I will then continue to take us through the performance in each of the regions, and I would like to start with the region Europe North and East. The total growth in the region was minus 14.9%, and organic growth was almost flat. The difference between the sales growth and organic growth is mainly explained by the divestment of Bufab Lann and Hallborn that took place last year. HT BENDIX in Denmark noted continued weak development while Bufab Poland and EU East saw improvement in their demand. The gross margin in the region improved to 2.8 percentage points and reaching a high level of 31.2%. The strength in gross margin was a consequence of improved customer product mix and also good work with purchasing savings in the quarter. Also, the operating expenses decreased by SEK 18 million, mainly due to the divestment of Bufab Lann and Hallborn, but also due to cost savings initiatives and efficiency. All in all, the region end up on a solid operating margin that improved to 14% compared to 11.7% Q2 last year. If they continue with the region Europe West, the total growth in the region amounted to 18.5% and organic growth was minus 0.4%. Of the change in sales, 24.7% was attributed to acquisition of VITAL. Organic sales decline was attributable to lower activity levels in the automotive and construction industries, and the gross margin for the region was in line with last year. Operating expenses increased by SEK 15 million year-on-year, mainly related to the acquisition of VITAL. If they look at the adjusted operating margin, ended up at 11.8% compared to 12.4%. The region had some negative impact in the quarter. We have moved our operations in France. And, therefore, SEK 2 million in sales was put forward from June to July. And also that we have extra cost -- moving costs of SEK 2 million, one-off cost for the same move. We also had some impact negatively due to investments with a new customer at Bufab Flos in Netherlands in the quarter. And finally, VITAL contributed positively to the operating profit for the region in Q2. If we then continue to Americas, the total growth amounted to minus 8.2% in the region, and organic growth was plus 1.7%. The demand was stable for the mobile home and trailer market, but still low demand in automotive industry for CSG. The gross margin was strong for Americas, increased by 4.7 percentage points, driven by general price increases and adjustments, mainly for ABS and also effects of the tariffs that have taken place in the quarter. Operating expenses declined by SEK 30 million year-on-year due to good cost control and efficiency gains in Americas. And adjusted operating margin reached a high level of 19.3% compared to 11.6% last year. And I will later on come back with more details about Americas linked to the tariffs. If we continue then with the region U.K. and Ireland, the total growth amounted to minus 8.5%, and organic growth was minus 4.1%. The decline for the region was mainly driven by lower market prices, which impacted Apex, but also lower demand in the manufacturing industry impacting Bufab U.K. and Bufab Ireland that are both trading business in the region. The gross margin declined by 0.7 percentage points, mainly driven by price pressure in the construction industry for TIMCO. Operating expenses increased by SEK 1 million year-on-year, mainly due to one-time cost related to the consolidation of warehouses that we do for Apex. This consolidation of warehouses will give a positive effect this year with full effect in 2026. And to sum up then the adjusted operating margin for the region ended up at 10.8% compared to 12.7% in Q2 last year. Then, finally, we have the region Asia Pacific. The total growth amounted to minus 2.1%, but organic growth was 6.8%. So the positive trend continued for Asia Pacific. Organic growth was mainly driven by good development for Bufab Shanghai, but also improvement for Bufab India. The gross margin in the region improved by 3.1 percentage points, include purchasing savings and active work with value-based pricing in the region. Our operating expenses increased by SEK 2 million year-over-year, primarily driven by negative currency effects. And all in all, we ended up on adjusted operating margin that improved to 13.7% compared to 12.6% in 2025 -- 2024, sorry. [Audio Gap] about our business in U.S. looks like, and then, I'll go through our mitigating actions and then also the impact we have seen so far due to the tariffs. If we start with our U.S. business then, we have 2 niche companies in U.S. That is American Bolt & Screw that are big in trailer and mobile homes industry. And then we have CSG in automotive. Our total sales, 12% is in U.S. And if you look from a sourcing point of view, ABS sourced 38% from China and CSG 8% from China. What we have done since the beginning, when the tariffs was implemented, we've been working on passing on the price increases to our customers. We, of course, also prepared ourselves for different types of scenarios and helping our customers in the best possible way by finding alternative sources when needed. U.S. sourcing is generally not an option in our industry. So what we've done is to reallocate sourcing from mainly China to other countries to mitigate impact due to tariffs for our customers. And what we do also, of course, is continue working closely with different stakeholders to optimize the flow and also minimize the cost for our customers, but also, of course, working with officials when it comes to customs and border control. When it comes to the impact so far for us, as we could see in our numbers for Americas, we had a positive development on our gross margin. That was linked to good work with pricing, but also linked to short-term effects on our margins in the U.S. due to tariffs. As we have the stock levels, that is not tariffs prices on, and we have implemented our tariffs right away. As we implemented, we have a positive effect. They have a small impact on our margin in the U.S. But it's also, of course, negative side of this. We see a lower demand as manufacturers are trying to navigate the U.S. tariffs, which are causing some customer plants to slow down their production and also then their demand on C-Parts. Other aspects that's impacting us is that the buyer market situation in China continues. We see low prices coming to Europe that's helping us on -- from a pricing point of view. And we expect that to continue as situation seems to continue with tariffs also in the coming weeks. The main risk as we see is actually impact on the global economy. As a company, we feel very confident with our position. We have good control in what we can impact, and we do our best for our customers, and also, of course, for Bufab to manage disruptions in a best possible way. And as we are a big player compared to majority of our competitors, we have a positive scene on the future here and that we will also be able to handle those U.S. tariffs and uncertainty in a good way also going forward. Then I will take us through a quick summary, talk a bit about outlook and our priorities going forward. If we then sum up the quarter, as I mentioned, I'm overall pleased with our performance in a quite challenging market. We continue to strengthen our gross margin, and we also delivered a strong operating margin despite lower demand in the market. We have in the -- during the year, had several measures to reduce our cost base, and that has given effect, and more to come. We expect continued positive development on our cost base due in 2025, but also in 2026. If you look at the future, despite the uncertainty in the market, we are optimistic. We focus on things we can control, and that is, of course, continuing to take market shares. A lot of opportunities raises in the market where our customers do the best to lower the cost base. And, of course, consolidation of C-Parts is one way to go. So we do our utmost to continue taking market shares and be active in the market. We will also continue to improve our margin, of course, focus on strengthening our gross margin. But also then, as I mentioned, continuing working on cost efficiency and cost savings. And then finally, continuing to improve our net working capital and also continually secure a strong cash flow. That was the final slide for today. I will then leave the floor open for questions, please.

[Operator Instructions] So we start with the first question from Henric Hintze.

This is Henric at ABG. So after 4 quarters of sequential improvement in the organic growth rate, we saw some stagnation here in Q2 around 0%. While yesterday, Fastenal reported quite strong Q2 growth in its Fasteners segment. Now I know they operate largely in a different geography and that your Americas businesses differ in customer exposure. But given that they stated that their Q2 growth was driven not by market improvements, but by new customer signings, I kind of wanted to ask whether you see sort of a point in the near term where you think you will similarly get an above-market level contribution to organic growth from new customer signings, which you have been talking about over the past year?

Yes, Henric. Thanks for the question. Yes, as you mentioned here, we don't really compare the Fastenal numbers in U.S. with Bufab as our exposure in U.S. are very different than Fastenal. They have a broad exposure in the U.S. in trading, while we have 2 niche companies that are strong in RV trailer and then automotive. So it is as comparing apple to pear. So we don't draw that many conclusions out of Fastenal's report. Having said that, as I mentioned also in the call here, we have a very good feeling when it comes to how we are addressing the market and how we also get new customers coming in. We have in the quarter, and throughout 2025, signed good contracts in industries and with customers that we want to be in the future, where we see sustainable and profitable growth that we are convinced will help us going forward. So from that point of view, I'm satisfied with the work we have done. And then gradually, I think that will be shown off in the numbers, but that's more linked to our work and what we have done to continue with our work on showing our value to our customers and not that much related to what's going on in U.S., more or less our performance, so to say, globally. So I'm pleased with the performance when it comes to the market and the opportunities that we see out there.

Yes. And can you give any indication of when we should expect this to start coming through on the organic growth level with the customer signings or such because I guess these contracts take some time to ramp up, and you've talked about that previously. So how should we think about the timing there?

Yes, it's a difficult question to answer because in many of the contracts is, of course, linked to the overall market situation and also when they decide to go in with new models and so on and how the macro situation is developing as well. Because even if we get new customers coming in, adding more volumes, there are others that are holding back in some segments. So it's very much a mixed bag there. What we have said before and still saying is that we are -- we have an optimistic view on the future and that the trend will continue in the right direction from a growth point of view. But, of course, there are a lot of uncertainties out there. So it's very difficult to predict when and how we will see the market coming back as we hope it will do. So uncertainty with the tariffs and the global economy is not helping for many sectors right now.

Okay. Very good. I'll take 1 more question, and then, I'll pass it on. So your gross margin improved again here in Q2, and based on your commentary, it seems to me that you think this trend will continue. You mentioned a strong cost focus, which will gradually yield results through '25 and '26. So firstly here, I was just wondering if you think this will mainly come in the form of gross margin improvements or if you see similar or smaller opportunities on the OpEx level as well? And secondly, I was wondering to what extent you think your 2026 EBITDA margin target of 14% is dependent if at all on a return to organic growth here in the coming quarters.

Yes. As I mentioned in the call, I mean, we will continue working on cost efficiency. And we have already taken measures actually starting over last year. That's now showing -- paying off, and that will continue. We're not talking about huge impact, but a gradual improvement in terms of our cost base. That's what we're aiming for. Of course, at the same time, as we're taking measures on decreasing our cost base for several companies, we're doing the opposite and investing at the same time, where we see strong potential for good growth. But all in all, we expect the cost base to gradually go down. And, of course, on the gross margin side, we have delivered, I think, good now in Q1 and Q2, but I expect that trend to continue. We still see potential to further capture the gap that we actually have today in the real value that we provide to our customers and actually show off in the gross margin and combined, of course, with the buyer market that we have in -- especially from Asia. So I expect also the trend to be able to continue. So yes, did you have one more question there? Or was that it?

Yes. And on the EBITDA margin target, to what extent do you think that is dependent on organic growth?

No. I mean, I think it's possible to reach that level without a strong market out there, but, of course, it will help. What we do in Bufab is that we focus completely on what we can control, and that is taking market share, improve our gross margin, keeping cost under control. And then I think we will put us in a very good position for 2026. And then how much tailwind we will get from the market or not, time will tell. But, of course, we will hope to get some support, but full focus we can control and feel confident that we are in a good position to deliver on our targets. So the trend is good as I see it.

Gustav Berneblad, welcome to ask your question.

Now just thinking maybe to build on sort of your comments on the buyers' market here in China. Can you just expand a little bit about the situation and how you view it? And also for sort of prices, I guess, to normalize, do we need a normalization in the market? Or do we actually need a very strong market, so to say, if you understand my question?

No, I don't understand your second question. Can you please repeat?

I guess it's related to overcapacities, right? So -- or correct me if I'm wrong. But do we need just a normalization in the market? Or do we actually need sort of a very strong cyclical recovery in order for prices to normalize, I guess?

Okay. Yes, I will take your first part of the question. And yes, we have seen the buyer's market in China for quite some time. So the price level has been good from China and actually from Asia. And that trend seems to continue. And I think what happened now in U.S. and with the tariffs and the whole situation in those discussions and the high levels of tariffs that we have seen between China and U.S. is actually making this to continue. So from one part of our business that, of course, positive. But then also, as you also mentioned in your second part there, we have a negative effect for some sister companies in the Bufab Group due to the same consequence to say due to high volumes, especially on the, for example, stainless side that is pushing us for Apex, for example. So there are good and bad, but all in all I would say that the buyer's market situation is positive from Bufab point of view. And how quick this will change? That's a million-dollar question to answer. I don't have the answer to that. That, I think, is how the macro development and political game will continue, and that will define when and how this will change in the coming quarters and years. So very difficult to tell, and I will not guess on that one.

That's fair. And then just on the Americas, should we expect the margins there to normalize in Q3 already? Or would you expect there to be some sort of support also in Q3?

Yes. That's also a good question, but a difficult one to answer. As the tariffs are changing, more or less, at least the discussion around how they will change is coming up new news every day more or less. So it's very difficult to predict how actually Q3 and Q4 will look like. I mean, one guess is that some -- sooner or later, we will see some negative impact if we have a more stabilized situation, but it's hard to tell if that will come in Q3 or later on. So difficult to say. So we are following the situation closely, of course, and try to mitigate the impact for our customers and to Bufab investment...

Okay. Perfect. And then just the last one here. I mean, you commented a lot on the cost situation. What are sort of the key items or low-hanging fruits you see here in the coming years to mitigate or sort of lower the cost base?

I don't see any low-hanging fruits. I think this is working with efficiency in the best possible way across the group. And then, of course, also that each of the sister companies that have very solid plans in place on what they need to improve that execute well on those plans. So they differ quite a lot. And companies that are going through a more tougher time, maybe with lower demand and don't see a quick recovery, they have more work to do on the cost side. Others that are facing a good market and a strong situation, then we'll let invest to put Bufab in a good situation in the longer perspective. So not one answer is more to each of the sister companies, clear plans on how they will drive efficiency and cost reduction where it makes sense, so to say, rather than one-size-fits-all. Okay. That was all questions today. Thanks, everyone, for joining and wish also a nice day and a nice summer ahead. Thank you.