Bulten AB (publ) (BULTEN) Earnings Call Transcript & Summary

Hello, and welcome to the Bulten Q2 Report 2020. [Operator Instructions] Today, I'm pleased to present Anders Nyström and Helena Wennerström. Please begin with your meeting.

Okay. Welcome, everybody. Let me first turn you to Page #3, which contains the agenda in the presentation. The agenda for today is a brief overview of Bulten, the development in our market, the results for the second quarter and how Bulten and our industry is affected by the COVID-19 situation. And finally, some words about the focus for this year. So if you turn to Page 4. Bulten is a supplier of fasteners, primarily to the automotive industry. We don't just supply the hardware to many of our customers. We are a partner for product development, support, innovation, procurement and logistics. As you can see in this slide, Bulten has a broad customer base with light-vehicle producers as the largest customer group. Bulten's 3 largest customers are Ford, JLR and Volvo Cars. And acquiring PSM in the first quarter, we added a number of automotive customers, primarily Tier 1 suppliers, but also customers outside of the auto industry. To be an approved supplier to these many customers is a strength. Customers value the way we cooperate with them and recognize us for our service. Bulten has many customers with potential for future growth. Next slide, please, Page 5. Our geographical footprint is another uniqueness that makes us stand out. None of our competition has this coverage. We balance between in-house production and outsourced production, and we can, thereby, be flexible and cost-efficient. A major part of our production is in-house. Bulten already, today, has a lean and well-positioned operation with a global presence. Including PSM, we have about 1,685 employees. We offer local production in Europe, U.S., China, Taiwan and Russia, which is unique in our competitive set. Through the acquisition of PSM, we have an even more comprehensive geographical coverage than before. Next slide, please. In February, before the real breakout of the pandemic, we presented our revised strategy, which we call Stronger 24, and the way we will go about reaching our new targets. It's through a number of building blocks visible on this slide. To start with, we have our strong position with the uniqueness that's taken Bulten to what it is today. We have growth momentum, both organically through the contracts we're currently ramping up as well as the new contracts that we recently won and non-organically, through the acquisition of PSM, and we aim for sales reaching SEK 5 billion in 2024. Our margin expansion will come through the obvious synergies with PSM, improved exposure to customers in North America and China, also together with PSM, an accelerated effort, improved efficiencies in production and distribution and through launching new technology with a value-add for customers. And we aim for EBIT margins above 8% in 2024. We also have a strong financial position. This is something we really want to emphasize. In contrary to many other industrial companies whose balance sheets been hit hard by the corona crisis, Bulten stands strong when the market recovers. I want to underline that the global downturn has not eroded the validity of our strategy. Our position is strong. We stand by our targets, and we stand -- stay committed to all of the building blocks in the strategy to get there. So now some words about the market development. If you turn to Page 8, please. Looking at the short-term perspective, the industry forecasting company, LMC Automotive, estimates a downturn in production of vehicles this year, which is, of course, a consequence of the COVID-19 situation. LMC predicts that light -- the global light-vehicle production will decrease by approximately 20% in 2020 compared to 2019 on a full-year basis. The corresponding estimate for heavy commercial vehicles is a decrease of approximately 27%. Translated into Bulten's current automotive customer mix, this would mean a drop of approximately 21%. In the first half of 2020, Western European light-vehicle sales have dropped about 40% compared to the first half of 2019. However, in June, we saw a relative rebound, and Western European light-vehicle sales dropped about 25% versus June of 2019, which is an improvement over the prior months. Turn to Page 9. Looking in the longer perspective then. LMC Automotive estimates a bounce-back of production of cars in the years to come, with an increase of 16% in 2021, 8% in 2022. Based on these estimates, it seems like volumes missed in 2020 will create a somewhat pent-up demand. Looking at the same thing for heavy commercial vehicles. The estimate is an increase of production of around 16% in 2021 and 13% in 2022. Talking about the second quarter then. If you turn to Page 11, we'll look at the short summary of the events in this quarter. Throughout the quarter, of course, we've continued to mitigate the effects of COVID-19. The Board withdrew its proposal of dividend to shareholders, and we've implemented short-term layoffs of employees and investments have been deferred. In line with the company's sustainability strategy, Bulten's unit in Poland has signed an agreement for fossil-free electricity for their external energy supply from July 1. Moreover, Bulten has acquired a minority stake in TensionCam Systems. And after the end of quarter 2, Bulten was awarded a new FSP contract worth approximately EUR 60 million on an annual basis at full pace. It's, of course, a great achievement to receive a substantial contract like this at this difficult time. It really shows the competitiveness of our concept and offer. We've also made a few changes to group management, and we'll go into more detail on these events in the following slides, so if you turn to Page 12 then. The effects of COVID-19 have had a serious impact on the global automotive industry, as everyone knows, during the second quarter. And this applies also to Bulten. Vehicle production in Europe and the U.S. came to a virtual standstill at the beginning of the quarter, although there has been a partial recovery. And in China, volumes are now essentially back to pre-pandemic levels. Measures have been taken and operational adaptions made on each market. In purchasing and production, the company is focused on production planning and reducing lead times in the value chain. At the company's units in Europe and North America, various kinds of working hour reductions and furloughs were in place for, at the most, 1,200 employees. The combination of the mentioned value-chain actions minimized CapEx activities and withdrawn dividend has all contributed to protect cash flow. Okay. Page 13. On June 26, Bulten acquired 27% of the shares in TensionCam Systems AB for SEK 6 million. TensionCam is a Gothenburg-based company specializing in the development of sensors for clamp force monitoring in screw joints. The company, both individually and together with industrial partners and research institutes, conducts research and development in this area and already owns a number of patents. TensionCam's technology is not currently commercialized or industrialized. Bulten and TensionCam will deepen their cooperation in the development of wireless clamp force monitoring for screw joints. And the deeper cooperation aims to accelerate the completion of ready and concrete customer offers. The acquisition of the share of TensionCam is in line with Bulten's strategy of being a technology leader in fasteners and being able to offer customers a unique and sustainable functionality and to facilitate profitable growth even outside of the automotive industry. On to Page 14. As mentioned, Bulten was awarded an FSP contract for supply of fasteners to an automotive manufacturer who are also one of our existing customers. It is clear that the knowledge and experience that Bulten has built up over many years, as a global manufacturer and FSP supplier to multiple customers, was key to this award. The new contract will provide a good platform to deliver innovative and sustainable solutions for the year to come. The contract is a transfer of an ongoing FSP setup for 2 assembly plants, and the annual order value is approximately EUR 60 million on an annual basis at full pace. Deliveries are estimated to start already on the 24th of July 2020 and extend for a period of 5 years. Start-up costs are expected to be around EUR 1 million. Turn to Page 15, please. Looking at the changes we recently made to group management, I'm glad to tell you that we recruited Markus Baum as the Chief Commercial Officer, which is a newly established position, with global responsibility for marketing and sales as of November 1, 2020. Markus has experience from several senior positions at vehicle suppliers, Visteon and Benteler, and most recently comes from fastener supplier, Nedschroef, in the Netherlands, where he was Vice President, Sales & Marketing. Claes Lundqvist, who's today Vice President and Business Controller, has been appointed acting CFO until a permanent CFO has been appointed. Helena Wennerström has previously announced her resignation, and that was published in a separate press release on April 1. Furthermore, Fredrik Bäckström, formerly Senior Vice President, Production at Bulten, will take up a newly established position as Chief Operating Officer with immediate effect. And in this role, Fredrik will, in addition to his production responsibilities, also be responsible for central material planning, logistics and distribution. And with that, I hand over to Helena.

Okay. Thank you, Anders. Page 16. On this slide, you can see our financial summary of the second quarter. And that quarter was, of course, very much affected by the COVID-19 effects on our business and the industry shutdown for many weeks. The order intake and sales and profitability, however, improved gradually through the quarter as production for us and our customers started again and increased in pace. But still, sales and production continued to be at a reduced level compared to before. And the situation going forward is the same for us, as for many of our peers. We are in a situation when it's very difficult to predict the development in the coming months. But let's look at our sales and order intake. Next slide, please, Page 17. The market declines is reflected in order booking and net sales during the quarter, although the effects have been partially balanced out by the acquisition of PSM. Order bookings amounted to SEK 409 million, a decrease of 45.6% compared to the corresponding period last year. The prevailing uncertain production situation in the automotive industry is causing the development, as the next few months are still difficult to predict. Net sales for the group amounted to SEK 441 million, a decrease by 43.5% compared to the same period last year. And as you can see on the down-right graph on this slide, sales gradually improved during the quarter. Next slide, please, Page 18. Our earnings performance was, of course, affected by the low market activity in the quarter. Our EBIT margin for the second quarter amounted to minus 13.3%, severely down compared to the comparable quarter last year. And EBIT amounted to minus SEK 59 million in the quarter. Reduction of production to demand during the quarter has affected the company's earnings in the form of under-absorption of fixed costs and consequently, put pressure on margins. Currency effects of minus SEK 11 million has had a major impact on the quarter as well. And as Anders just mentioned, we have implemented actions to reduce costs, where a big portion of our employees, one way or another, has been affected by short-term layoffs. This has reduced the cost level in the quarter by SEK 28 million. Next slide, please, Page 19. In a situation like this, we are focused very much on cash management, and we are actively working with our net working capital. The lower sales volumes have had a negative impact on the profitability of the business, and cash flow from operating activities, before changes in working capital, amounted to minus SEK 9 million, clearly affected by the COVID-19 situation. But thanks to focused efforts, working capital has decreased and cash flow from the change amounted to SEK 60 million during the quarter and contributed to a positive cash flow from operating activities in total and amounted to positive SEK 51 million. Total inventories has decreased compared to last year, and especially our current receivables decreased, down SEK 181 million compared to a year ago. And our net working capital in total has increased by SEK 110 million by the end of the quarter through the acquisition of PSM. The cash flow from investing activities amounted to minus SEK 17 million, a much lower level than before as we have just, as you know, halted the operational and property investments during this uncertain time. So in total, the cash flow for the quarter was positive and amounted to SEK 6 million. And our net debt has reduced since the first quarter and amounted to SEK 634 million at the end of the quarter. Next slide, please, Page 20. Our key indicators have been heavily affected on the lower profitability level and lower capital turnover times due to the COVID-19 situation. We have a return on capital employed of 0.2% or 2.1% adjusted for allocation, restructuring and acquisition. Adjusted for lease liabilities, our net debt-to-EBITDA ratio is at 2.3% at the end of the quarter. And the equity ratio ended up in a level of 54.4% at the end of the quarter, still on a very solid level. Next slide, please, Page 21. Our financing of operations are also in a very good shape. Our main financing on May through Svenska Handelsbanken and total SEK 750 million. And during the quarter, we settled an additional financing agreement with Danske Bank with credits totaling to EUR 12 million. This financing will support our Polish operations, and final documentation will be finished in the next few weeks. Overall, all covenants linked to the financial agreements have been met so far this year. Next slide, please, Page 22. On this slide, you can see our financial targets as well as some guidelines regarding the relevant key figures for Bulten. And normally, we comment up on these key figures on the quarterly presentations. But as we have mentioned earlier in this presentation, our business is in a very special situation, making further detailed comments maybe not so relevant for this quarter since it's comparing with the rolling 12-month sales. But of course, we tried to improve the key figures as soon as we have returned to more normalized level. And I will, therefore, hand over to Anders again and what is more relevant, our focus going forward. Please, Anders.

Thank you, Helena. Then I would like to turn your attention to Page 24 in the presentation. And this slide is -- the setup of it is very familiar to those of you who follow our quarterly conferences and this shows the backlog of orders taken but not yet implemented into production. As of now, Bulten has an expected annual sales growth of just over EUR 100 million at full pace in 2022 compared to 2019. The timing of this backlog has become more uncertain due to the current situation in the industry, but it's a good buffer and a sign of strength when the industry returns to normal. We predict a stronger organic growth for Bulten versus the market. And we have a strong position, and we'll go through these times with a focus on health, cash flow, profitability and growth. And finally, Page 25, a few words about our focus for the rest of this year. It's of course absolutely core to us that we handle this situation that we're in, in a responsible way for all our stakeholders. We have implemented significant actions to mitigate current situation in the industry with rigorous cost and cash flow control. As important, we are prepared for a swift ramp-up while the signs of recovery are there. Our customers are ramping up now, but it's too early to tell when volumes will be back to normal. Moreover, we're focusing on delivering on our synergy plans with PSM, which we have done from day 1 after the transaction. We have already started to coordinate our operations in the U.S. to move to a joint greenfield building in Ohio. In uncertain times like these, opportunities of different kinds arise, and we'll be ready to evaluate and act on those as we see them. We're a product-focused business, and we'll step up our innovation activities in order to provide both functionality and sustainability. You've seen proof of that earlier, and we'll continue to take steps in that direction. And again, we stay committed to execute on our Stronger 24 strategy. This concludes the actual presentation. And I think we're ready for Q&A.

[Operator Instructions] Our first question comes from Kenneth Toll.

Yes. So a couple of questions. First, on this FSP orders that you got from an existing customer. I was under the impression that once you have such an order and you are delivering on it, it's quite a hassle for your customer to change supplier. So I thought that kind of business was very, very, call it, secure. But obviously one of your competitor lost a couple of contracts to you. So can you talk a little bit around what caused the competitor to lose the business?

Well, I'm not going to give feedback to our competition, but you're right, Kenneth. It's a high threshold to change an FSP supplier. And obviously, our customer, in this case, went through a lot of hassle, as you expressed it, to do this. And then it was a very deliberate choice they made. And I think, more than anything else, it bears witness about the -- how satisfied they've been with the services we provided to them over the years. And then what really were the downsides of the existing relationship? I don't want to comment on that.

Okay. So you don't see a risk that you lose FSP orders you have with these customers or other customers at the moment?

There's always a risk. But as you correctly expressed it, it's -- there's a lot of hassle to do it. And once you have an FSP contract for a platform or an assembly plant or whatever the contract states, then the threshold is very high. It's ours to lose, so to say. And as long as you perform correctly, and then you're competitive, chances are very, very high that you're going to keep it.

Okay. Then you talked a little bit about your customers and that the cars production is gradually improving. Can you talk a little bit about the trends you see? And also one thing that worries me a bit is that maybe a car producer had an order book when they decided to close down the production for COVID-19 reasons. And then when they started up again, they started by delivering on that order book. But what happens then? Are order books strong enough for sort of car production to keep trending higher? Or could you shed some lights on what you hear from your customers, please?

Kenneth, I think you -- there's an element of truth in what you said. They had an order book when they closed the plants for COVID reasons. And of course, they had -- they could pick that up when plants were ready to open up again. We see, however, that car registrations are coming back up again as well, and that's a good sign in Europe. The statistics' available in Europe, as you probably have seen as well. But I think the future here is so dependent on what happens with the actual COVID-19 situation. Are we going to have another round of this disease or is this going to improve from here? And it's nothing that any of us can predict. We just need to be paying attention and being flexible and adapt -- to the situation. That's all we can do. I mean, sooner or later, this market will come back. I'm absolutely sure. But if it will take 1 month, 2 months or 6 months or a year, I don't know that. And there, we're all on the same boat.

So in terms of sort of production rates compared to the normal, I believe that, in the beginning, when car plants opened up, they were running at maybe 10% to 20% capacity utilization, just to test systems and so on. So at the current rate, is that significantly higher? Is it more like 40%, 50%? Or where do you see that at the moment? I mean I'm not after exact numbers here, just a feeling.

Yes. It varies by customer very much. And you're right. When plants were opening up, they were running at around 20% of their capacity. I'd say it's a spread now. It's anywhere between that and 90% today, depending on which customer you look at. The primary concern is probably in the U.S., where they still have a shortage of parts from -- primarily from Mexico because Mexico is hard hit by the disease and many suppliers in Mexico are shut still. We're not as dependent on that, though. As you know, we're still very European-centric. And in Europe, the plant reopenings have been more successful than those in North America.

Okay. And then finally, looking at the financial situation, I tend to look at the net debt-to-EBITDA, and it reached 4x now with the poor results in Q2. Do you see that it could go even higher in coming quarters? And do you feel that it's -- that it might cause covenants to be broken in the third or fourth quarter? And a little bit, how does the bank view this and also your customers? Is it -- does everyone look at that as a temporary thing and rest assured that you are working hard with the cash flows and so on? Or can you speak a little bit around that, please?

Yes. Absolutely. And of course, as we have mentioned, we, of course, focusing on the cash flow, and that is of highly importance in this kind of situation. So we are monitoring the net working capital and the cash collection in connection with that. And that is very much in our focus. But as you also can see that we have also succeeded to actually increase our financial agreement this year -- quarter. So we have actually added on a EUR 12 million credit facility through Danske Bank to the situation due to the existing agreement with Svenska Handelsbanken. And so we are prepared. And of course, the situation with EBIT, it will follow us 12 months rolling. So that will be a part of the reporting, but we have an agreement in place for that. So we are secured in this perspective.

And you don't hear any sort of worries from your customers that, that balance sheet are too weak, but that should go for most other suppliers as well, I guess.

I would say that we still have a quite good strong financial position given the situation. And I think it's very -- it's a strength to actually be able to settle this kind of agreement in this situation. So I think that gives comfort to the customer as well. So we are ready to support the -- when the volumes is coming back.

Our next question comes from Mats Liss, Kepler Cheuvreux.

Yes. Well, only a couple of questions. First, I mean you indicated the production run rates are coming up. And I guess, could you say something about how you will use furloughs going forward? Is it a flexible situation that you could -- yes, if you could shed some light there.

Yes. The furlough schemes and the government support is -- it looks different from country-to-country. But I'd say we have a good -- very good handle on it. And in almost every country where we are, where we have an industrial presence, we -- the schemes are fairly flexible. So we have made sure that in our agreement, for instance, in Sweden, basically, you need to have a union agreement in the bottom of that whole setup. And we've made sure that we have the flexibility we need so we can call in people as we need to increase production. So I think what you're getting at is if there's going to be a situation where we have a capacity constraint, and no we're not going to have a capacity constraint because of this. So we'll use it opportunistically, for lack of a better word, to adapt to the situation.

Yes. And the third quarter, I guess, is normally a holiday quarter. Is there any sort of difference in that sense?

No. Not really. It's a holiday quarter in many countries, yes. And normally, sales and production is somewhat lower during these months. But in terms of furlough, that had -- does not have an impact.

And the customers you have, they are also sort of, well, implementing the holiday as normal as they think -- or if there's sort of a pent-up demand producing the -- of backlog that wasn't delivered previously during the year.

Well, it depends. Every plant has a different strategy, I would say, when we look at the customer base and how they're using the summer shutdowns to -- some are actually backing off on vacations, and they're actually producing more than they would in a normal quarter 3. And some are producing less. And it depends on sort of what their order book looks like. And if they want to produce at reduced pace or if they want to shut down and then produce at full pace, that's very different from plant-to-plant.

As you mentioned, you have been able to release quite a lot of working capital. And inventories also have been -- well, have come down. Is there a sort of -- well, do you need to increase production to be able to supply the current demand? Or is it still -- well, sufficient inventories and so on? I also mean the customers. Have you seen customers sort of reducing their inventories to some extent, maybe -- well, there is a -- yes, if you could say something about that.

We haven't seen customers changing their behaviors on inventories. We're delivering with the same type of notice as we always have. The only thing you can say about the customers is that, as usually -- what usually happens in these uncertain times is that their production planning and their call-off planning seems to be a bit more erratic than normal. We can see that being more stabilized now, which is a good sign, I have to say. In terms of our own inventory, yes, your observation is correct. We've reduced inventory, and it's something that we've done over the last year or a little more than a year as we're bringing efficiencies and improvements into our own processes, both our production planning processes and our lead times with the supply base, et cetera. And we're making improvements, and that comes out partly as inventory reduction, which is something we've referred to previously as well. But we do have enough inventory to react to the variations in the customer base.

Okay. And one about -- I mean you have a customer mix with both light vehicles and heavier vehicles. Is there any difference there in sort of market sentiment? Can you say something about that?

I'd say there is more difference between single customers than there is between the dynamics of those 2 markets.

Okay. And then finally, just about this FSP contract. How will you book the order in the third quarter? And also, I mean it's contract to an existing customer. And how much more sales have you been able to sort of get in this contract compared to the previous order you have there?

Not sure I understand your question. Actually the order value as such outpaces what we have published, right? And it's a substantial one. I mean this is big, even for being an FSP order. And then, of course, the market situation and the recovery rate is going to have an impact on how quickly we get up to full pace. So that's a general sort of market dynamics that comes into play.

But maybe to clarify, since the contract was announced after the Q2, after the end of June, it's not included in the order intake that we have reported.

Correct. Yes.

So during the third quarter, you will only sort of book the call-off orders that you received? You won't sort of book the EUR 60 million contract in the third quarter that that's...

Yes. And then as we report the order intake and the order book and for 100 days, it will just reflect that period then and the order that is coming in for that period being delivered. So the pace will come in for -- in during the third quarter. Yes, that is correct.

Okay. Great. And what about this sort of -- how much more have you received from this existing customer compared to the old contract you had?

But that is the FSP contract of EUR 60 million annually. But now, of course, we have a COVID-19 situation, so it's a little bit less maybe in the pace when we started up. But that is what will come in during the third quarter.

So it's sort of -- I mean it's an existing contract, but existing customer, but it's all new. This is all new, the EUR 60 million?

Yes. It's all new. Yes. It's all new. It's added on. Yes.

So you increase the delivery value on the contract value to this existing customer, yes?

Yes.

That's correct.

[Operator Instructions] Our next question comes from Kenneth Toll.

Yes. Just a follow-up on the FSP orders. You also mentioned in the presentation that there are many opportunities in strange times like these. Do you see opportunities for getting even more FSP orders? And would you be able to actually do that if there were something coming up, I mean, both from a sort of management and logistics situation, also from a financial situation?

Actually, yes, we can. And when there's turmoil in the industry, that always -- I tend to always look at that as an opportunity. And we're paying attention. And yes, we're ready as soon as we have ramped up this contract, which, as you know, is a short-term thing. And we'll be very quickly in a steady state with the new big contract just because we have to. And we're ready to take on the next if there is one.

There appears to be no other questions, so I'll hand it back to the speakers for any other remarks.

All right. I thank you all for listening and calling in. I just want, before we hang up, to draw your attention to -- this is the last quarterly call for Helena. I think you've -- for those of you who've attended these calls regularly over the years, you've -- you're familiar with her voice, and I just want to thank Helena for her distinguished and long-time service to the company. I mean that cannot be overestimated, the impact she has had on what Bulten is today. So thank you, Helena.

Thank you with that, Anders, and I wish you all best luck. I will follow you going forward as well.

I'm sure you will.

Thank you. And have a nice summer.

Yes. Have a nice summer, too.

Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect all your lines.