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

Hello, and welcome to Bulten's Q2 2021 Presentation. My name is Ulrika Hultgren, and I'm the new Senior Vice President, Corporate Communications and Investor Relations since the beginning of June. Presenting the report are Bulten's President and CEO, Anders Nyström; and our CFO, Anna Akerblad. [Operator Instructions]. I will now hand over the word to Anders Nyström. Please go ahead, Anders.

Thank you, Ulrika, and welcome, everyone. Starting off on bit of a general note, as I believe everyone knows, the gradual recovery that's characterized the global vehicle industry since the second half of 2020. It's been somewhat interrupted during the second quarter. The lack of semiconductors has caused disruption in our customers' value chain, and almost all of Bulten's customers have halted production for a couple of weeks or more during quarter 2. On the flip side, it's important to point out that the underlying consumer demand for vehicles is high. And recovery is a matter of industry capacity more than anything else. Before we start to go through the results and numbers of quarter 2, let me briefly present Bulten to those of you who aren't familiar with the company. Going to Page 4, please. Bulten is a supplier of fasteners, primarily to the automotive industry, but 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, Jaguar, Land Rover and Volvo Cars. Our automotive customer base spans across OEMs and Tier 1s and Tier 2 suppliers. We are also expanding our business outside the automotive industry, especially in the consumer electronics sector. To be an approved supplier to these many customers is a clear strength. Customers value the way we cooperate with them and recognize us for our service. Most customers in our base have potential for further growth. On to Page 5. Our geographical footprint is another unique advantage of Bulten. None of our competitors has this geographical coverage. Bulten's value chain is balanced between in-house and outsourced production, and we can, thereby, be flexible and cost efficient. We have about 1,600 employees worldwide. We offer local production in Europe, U.S., China, Taiwan and Russia, which is unique in our competitive set. So we go to Page 7 for a market overview. Looking at the market development for our industry and the shorter perspective, the forecasting company, LMC Automotive, estimates an upturn in production of vehicles this year compared to 2020, which we all know was heavily hit by the pandemic. LMC now predicts a 13.8% higher global production volume during '21 for light vehicles. This most recent LMC prediction is, however, lowered somewhat compared to a quarter ago as a result of the semiconductor shortage. For heavy commercial vehicles, the full year prediction is 6.6% higher volumes. Translated into Bulten's automotive customer mix, this would mean approximately 13% higher volumes in '21 compared to a year ago. Looking at the global sales of cars during the first half of this year, LMC sees an increase by 28.5%, once again compared to the same period last year, which was very much affected by the pandemic. Page 8, please. In the longer term, LMC estimates a bounce-back of production of cars in the coming years with an increase of almost 14% in '21 and 10% in '22. Based on these estimates, we -- it seems likely that volumes missed last year and in the first half of this year will create a pent-up demand. The corresponding estimate for commercial vehicles is an increase of around 7% in 2021 and a slight drop in 2022. So going on to the second quarter and the major events, quarter 2, Page 10, please. As I mentioned earlier, the momentum from quarter 4 in 2020 and quarter 1 '21 was disturbed during quarter 2. The lack of semiconductors caused disruptions in the industry, for actually the entire industry. We believe this shortage might continue during the rest of '21. The lower volumes and capacity utilization resulted in lower profitability. The profitability was also negatively affected by steel prices, which is an important raw material in our production. We continue to have a strong focus on what we can actually control, and we've continued to strengthen Bulten's position and offer during the quarter. The construction of our new production unit in Poland began in May. The production is expected to start in the first half of 2023. With this plant, we get a facility with world-class surface treatment processes in terms of both efficiency, quality and durability. The facility is a vertical integration of our existing facility in Bielsko-Biala, and will further strengthen our competitiveness. Turning to Page 11. Just a deep dive a bit on the semiconductor shortage that we've spoken about. Looking at the semiconductor situation, we see on this slide that the imbalance between supply and demand has increased in the last few months. This is primarily focused -- this is primarily caused by increased demand as the pandemic have fueled the demand for consumer electronics products as society, in general, has become more connected and digitalized. Simultaneously, also the supply chain was hurt by the pandemic through shutdowns in 2020. And in the U.S., there has now been governmental initiatives to solve this situation and capacity is being put in place. However, increasing supply is not a quick fix and this shortage will hurt many industries, not only automotive in the next few quarters before supply and demand becomes balanced. On the next slide, please. Looking at steel prices, we see a similar situation with an imbalance in supply and demand. Even though steel shortages haven't caused a new production stops in quarter 2, it causes higher material costs in the industry. The imbalance is particularly notable in Europe. On this slide, you can see price development for cold-rolled coils, where prices have doubled since the end of last year. Steel is an important raw material for Bulten as well as our industry peers and customers, and prices are expected to continue to climb during the rest of '21. Bulten's framework agreement with customers contained for the most part, raw material price classes that regulate price compensation, but not to [100% ]and in all cases, with a certain time lag. On the positive side, history has shown that disturbances in the value chain such as those we see now are temporary. Moreover, and more importantly, our customers' order books look very good and the underlying demand for vehicles is healthy. In the medium to long term, this of course is more important to focus on those things for us. The pause in the sourcing activities for new vehicle programs that we saw last year is no longer there. On the contrary, vehicle development activity is at a new high, and we see numerous opportunities to win business in the short term. So with that, I leave the word to Anna to take us through the quarter 2 numbers.

Thank you, Anders. On Page 13, you can see our quarterly net sales development. And as Anders mentioned, the upturn in the second half of 2020 and Q1 2021 was disturbed in Q2 due to lack of semiconductors that caused disruptions in the production in the automotive industry. Net sales for the group in the second quarter amounted to SEK 910 million compared to SEK 441 million the same period last year, an increase of 106%. The comparable quarter last year was weak due to the effects of the pandemic compared with the first quarter of 2021, which was more representative of Bulten's ability in a normalized market, net sales decreased by 17%. We can still see a stable underlying demand, and Bulten has a good customer mix. Next slide, please. Our earnings performance was affected by the lower volumes and capacity utilization in the quarter as a result of the lack of semiconductors, but also higher steel prices. EBIT amounted to SEK 55 million in the quarter. Our EBIT margin for the second quarter amounted to 6%, an improvement compared to the weak comparable quarter last year. When adjusting the EBIT margin for currency effects, the margin is somewhat better. Next slide, please. On this page, you can see our financial summary of the second quarter. As mentioned previous, Bulten had a strong growth in the second quarter due to weak comparables. Bulten showed increased net sales with improvement on both gross profit and on EBIT level compared to same period 2020. Earnings per share is calculated to SEK 1.80. The order book increased by 132% compared to same period last year. However, last year was affected by the COVID situation. And today, we have the uncertainty regarding the shortage of semiconductors. Next slide, please. On Page 16, you can see our cash flow. And during the last year, a strong focus has been on cash management and our net working capital. The cash flow from operating activities, before changes in working capital, amounted to SEK 81 million in quarter 2. Cash flow from the change in working capital amounted to minus SEK 49 million. Increased inventory levels has led to increased working capital for the period. Cash flow from operating activities amounted to SEK 32 million. Cash flow from investing activities amounted to minus SEK 25 million in the quarter. And good news is that we have started the construction of the new facility in Poland this May. The total cash flow for the quarter amounted to SEK 10 million with a cash position of SEK 192 million at the end of the quarter. Cash flow from financing activities amounts to SEK 3 million. Our net debt, excluding lease liabilities, has reduced since the beginning of the year and amounted to SEK 94 million at the end of the quarter. Next slide, please. Our key indicators have improved in quarter 2 compared to same quarter last year and also compared to full year 2020. This is, of course, a satisfying trend, but also an effect of that 2020 was greatly affected by the COVID-19 situation. We have an adjusted return on capital employed of 14.1% excluding financial lease. Our net debt EBITDA ratio is at 0.3% at the end of the quarter. This, in combination with an equity ratio of 51.6% at the end of the quarter, shows that Bulten's financials is on a very solid level. Next slide, please. On Page 18, you can see our financial targets as well as some of the guidelines regarding relevant key figures for Bulten. On a quarterly basis, we are above our financial targets when it comes to growth, but under when it comes to profitability. This is affected by the semiconductor situation, as mentioned earlier. In the right-hand table, you can see some guidelines for some other key figures, and we are very much in line with our guidelines. The guideline for average net working capital in relation to 12-month sales is about 20% to 25% depending on the growth paced. At the end of June, we had a level of 19.4%, which is in line with our guidelines and is at the lowest level during the past years. The guideline for capital expenditures as a percentage of 12-month sales are 2% to 3% for maintenance of equipment and additional up to 2% for capacity depending on the market development. At the end of June, we are at a level of 1.8%. As mentioned before, we have halted investments during the last year, However, the construction of the new facility in Poland started in May. The guideline for depreciation as a percentage of 12-month sales is 4% to 5% considering IFRS 16. Without IFRS 16, it has been in a level of 2% to 3%. At the end of June, we are in line with our guidelines. And now back to you, Anders.

Thank you, Anna. And I'll ask you to turn to Page 20 for some words about our focus for the second half of the year. As you've seen in this presentation, the momentum we had in the second half and -- second half of 2020 and beginning of '21 was interrupted due to the semiconductor issue. The underlying demand for our customers' products and for Bulten's products is, however, healthy. Having said that, we were faced with a somewhat new set of uncertainties. Our customers' production is hampered by the shortages, and that will have an effect on our sales. Steel prices are at a record high right now and will most likely continue to rise in the second half of '21. We are, of course, closely monitoring all of these factors and maintain strict cost and cash flow control. We continue to work on margin improvements, which we've successfully done recently. There are still synergies to be realized with PSM and insourcing initiatives are being executed as we speak. We continue to ramp up our activities in technology and innovation and stay determined to remain a leader in sustainable fastening solutions, and we've taken important steps to that effect not at least through the launch of BUFOe and our collaboration with TensionCam for sensorization of threaded joints following our minority stake acquisition in 2020. Our sales force are using our track record of successful new contract launches as well as the greater customer exposure that comes from the combined customer base of Bulten and PSM to accelerate new business wins and generate additional organic growth. Turning to Page 21, and let me conclude this presentation. We're reiterating our Stronger 24 strategy. The road map for how we will go about reaching our targets presented in February last year. It's divided into 4 building blocks. And to start with, we have our strong position with the uniqueness that's taken Bulten to what it is today. Our clear ambition 3 years from now is to have further advanced our position when it comes to quality and technology leadership. The second block is growth. We now have growth momentum through the contracts that we won in the last year. Despite the past year's turbulence, we hold on to the aim for sales reaching SEK 5 billion in 2024, I think you can see that we're well in line with that. The same applies to our profitability efforts. Our margin expansion will come through realized synergy effects, improved exposure to customers in North America and China, accelerated initiatives to improve efficiencies in production and distribution and through launching new technology with a value-add for customers. We aim for an EBIT margin above 8%. We also have a strong financial position, and this is something that we really want to emphasize that you also heard Anna mentioned. To summarize, the global downturn has not eroded the validity of our strategy. Our position is strong. We stand by our targets, and we'll stay committed to all the building blocks in the strategy to get there. And that concludes the presentation, and we're ready for questions.

[Operator Instructions] Our first question comes from the line of Kenneth Toll from Carnegie.

Yes. Thank you. I'm curious to discuss steel prices and the impact on you a bit. You show the short where steel prices have increased a lot. So I would imagine that you would feel a larger pain from higher steel prices in the third quarter than in the second quarter. But on the other hand, you have also had some time to try to increase your own prices towards suppliers. So the net effect of those 2, the higher steel costs and your own price increases, taking both those into account, do you think that you will be more hit in the third quarter than you were in the second quarter?

Yes, the -- it sort of follows the same dynamic as it has in the past with prices rising and then that feeds the official indexes that's being used, and then we settled the compensation from the customers with a certain time lag and that always hurts us as prices are increasing, but it's rewarding when prices are going down. And this is the dynamic we've followed in -- for many years now. The difference right now is that the increase is steeper than we've seen in -- at an important time in the past. So that, of course, weighs quite heavily on the cost side. In terms of the sort of quantified impact, I can't give you any numbers because I will be the same as giving away confidential information, which is a product of the contracts that we have with our customers. But it is the same dynamic as before, but it's more accentuated right now with the steep development of the prices.

Yes. And you also talked about transportation costs being higher, and we hear that from many companies that there's a shortage of transportation capacity, both medium, sort of medium distances, but also very long distances and so on. But that, for steel prices, you have those clauses in your contracts. But is there any way that you can try to get compensated for higher transportation costs as well? Or is it more up to you to try to solve that?

Well, I should remember that seafreight, which is maybe the kind of transportation that's been most hit by cost increases by order of magnitude, much smaller than steel is for us. It's not it's not a big component in our cost base. But you're right, I mean, normally, that's something that every company will be responsible to handle and manage for accounts where this is maybe more important. Yes, it's a matter of negotiations. But normally, as you say, this is something that each company will handle.

Okay. And then you said also that there's a lot of product development activities going on among your customers. Does this mean also that they are discussing more FSP contracts that comes up for grabs? Or does that come later?

I won't say that there is a high activity right now relative to FSP contract as well. So quite a few ones we're chasing.

And we have 1 more question from the line of Mats Liss from Kepler Chevron.

First, I was just looking at the sales figure then this is a sequential decline, I guess, with the first quarter and the question is, do you feel that you sort of keep market shares? Or have your customer mix that's slightly maybe unfavorable given the exposure to Ford, which has been hit quite hardly by production stoppages? Could you say something about that?

Well, it's a good question, but it's 1 that's extremely difficult to answer because to try and judge market share on a quarterly basis is extremely difficult, and therefore, I don't think I have a good answer to you. It's difficult for us to judge whether we've been disproportionately hit by shortage-related customer shutdowns or not. I don't know that, to be honest.

And looking into the second half now, do you expect a similar sort of holiday shutdowns and so on among customers? Or do they try to regain some lost volumes in the second half and maybe in the third?

I'm sure every one of our customers are trying the absolute hardest to recovering lost production. And I think you can follow sort of the communication from the OEMs is clearly expressing that, but there are challenges and there will still be shortages in -- is my guess in the second half. But there's not a vehicle producer out there that won't build every single vehicle they can in order to deliver to their end consumers.

And do you sort of need to keep a higher sort of alert to supply? Or do you sort of have the normal holiday season, you're -- for the company, I guess, yourself?

Employees are going to get the summer break that they should. But you're absolutely right. We have a high preparedness and that's why we also may have seen our numbers, our inventories increased over the last quarter, and that's in order to be prepared to fulfill any customer demand in terms of volume recovery after the shutdowns that we possibly can. So we've taken that into account, and we want to make sure that we are not going to be the bottleneck for any of our customers to recover volume. So we're prepared for that.

And similar question, again, should we expect sort of maybe not this -- well the seasonal slowdown in the third quarter maybe won't be as sort of highest normal? Or could you say something about that?

I didn't quite get the question. The problem -- can you repeat that?

No. I mean the third quarter is normally sort of a holiday quarter. And should we expect maybe not be as much of a holiday quarter and be more in line with the second quarter just to get a feel for that?

Well, that's also difficult to comment because, of course, there are -- as you probably know, there are vehicle makers out there that have replanned shutdowns, and they have taken a bit more of a volume cut in the second quarter with the aim to recover that in the third, whether they'll be able to do that or not, I can't comment on. The only thing we can do is we're prepared to follow our customer demand.

Yes. Okay. And then the Polish restart on the investment there. Could you just update me on the sort of CapEx needed to finish that investment?

The whole project is, as we've announced before, about SEK 300 million. So that's the budget we have, and that's the budget we are planning to stay within.

And as there are no further questions, I'll hand it back to the speakers.

Okay. So then I thank everyone of you for listening in. Thanks for your attention. And I want to wish you all a great summer.

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