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

Hello, and welcome to Bulten's Q3 2021 Presentation. My name is Ulrika Hultgren, and I'm the SVP, Corporate Communications and IR. Presenting the report of Bulten is 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.

Thanks, Ulrika. Welcome, everyone. I want to start off on a general note. As I believe everyone knows, the global vehicle industry has been severely affected by the lack of semiconductors during 2021. This has caused disruption in our customers' value chains, and almost all of Bulten's consumers -- customers, sorry, have halted production during quarter 3. On the flip side, it's important to point out that the underlying consumer demand for cars is high, and recovery is a matter of industry capacity. As I think you will see in this presentation, we're building a stronger Bulten for the longer term. We have a good position to leverage a market recovery. Before we start to go through the results and numbers for quarter 3, let me briefly present Bulten to those of you who are not as familiar with the company. So we turn to Page 4. Bulten is a supplier of fasteners, primarily to the automotive industry. We don't just supply the hardware, but 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 both OEMs and Tier 1 and 2 suppliers. We're 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. Bulten has many customers with future potential for growth. So we go to the next slide, please, 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 1,700 employees worldwide. We offer local production in Europe, U.S., China, Taiwan and Russia, which is unique in our competitive set. Right now, we're increasing our capacity through a new plant in Radziechowy-Wieprz in Poland, adding state-of-the-art surface treatment processes. So let's look at the market development, and we turn to Page 7. Looking at the market development for our industry in a shorter perspective, the forecasting company, LMC Automotive, estimates a slight upturn in production of vehicles this year compared to last year, which we all know was heavily hit by the pandemic. LMC now predicts a 2.8% higher global production volume during '21 for light vehicles. This most recent LMC prediction is, however, lowered quite a lot compared to a quarter ago as a result of the semiconductor shortage. For heavy commercial vehicles, the full year prediction is 1.3% higher volumes. Translated into Bulten's automotive customer mix, this would mean approximately 2.7% higher volumes in '21 full year. Looking at the global sales throughput of cars during the first 9 months of '21, LMC sees an increase of 12%, once again a lowered estimate compared to a quarter ago. And in September, isolated months, global sales of cars was down about 20%. With the growth for Bulten year-to-date of 31%, you can see that we have well fulfilled our target to outgrow the market. Next slide, please. Looking in the longer perspective, LMC estimated a bounce back of production of cars in the years to come, with an increase of about 10% in '22 and '23. Based on these estimates, it seems like volumes missed in '20 and '21 will create a pent-up demand. Looking at the same thing for heavy commercial vehicles, they estimate an increase of production of about 8% for '22 and more or less flat in '23. And then we look at the third quarter and go to Page 10. As I mentioned earlier, the good momentum for Q4 -- from Q4 in '20 and Q1 in '21 was interrupted during Q2 and Q3. The lack of semiconductors caused disruptions in the production in the entire industry. The lower volumes and capacity utilization resulted in lower profitability. The profitability was also negatively affected by prices on steel, which is the dominating raw material in our production. We have a very good flow, however, on new contracts from existing as well as new customers, and we've announced a few of those during the quarter. Worth noting is that a good portion of these new contracts are from customers outside of the auto industry. In addition to the larger contracts we have announced, we also received many smaller contracts that confirm our strength in a very competitive environment. Turn to Page 11. I'd like to highlight 3 of those contracts that I mentioned that were won during the quarter. Firstly, we extended an existing FSP contract to a value of approximately SEK 68 million additionally per year. Deliveries are estimated to start now in quarter 4 and will reach full pace in 2022. The contract will run for 3 years. The second one was a new FSP contract from a European automaker, which is also a new customer for Bulten. The contract relates to supplier fasteners for an electrical vehicle program that's under development. The contract value is approximately SEK 220 million a year at full production. Deliveries are estimated to start in the third quarter of 2022, reaching full pace by 2025. The third one is the smallest of the 3, but still very important. It's a contract made in China for supply of fasteners to a leading provider of consumer electronics. That contract has an estimated annual volume of approximately SEK 50 million. Deliveries began in August of this year and has reached full pace already. Growing with new customers in new sectors are 2 priorities we have in our strategy, and it's very satisfying to see that we score on both of those in this quarter. Next slide, please. Just a few words about the semiconductor shortage if you happen to be unfamiliar with it. The semiconductor situation is caused by the imbalance between supply and demand that's increased quite a lot in the last few months, starting in January of this year. This is, first and foremost, due to an increased demand as the pandemic has fueled demand for technology products as society in general has become even more connected and digitalized. Simultaneously also on the supply side were hurt by the pandemic-related closedowns earlier this year. So there's definitely an imbalance between supply and demand, and we believe that, that shortage will continue throughout 2021. Next page, Page 13, just again the steel price situation. We see a very similar situation there with an imbalance in supply and demand. Even though the increase in steel prices haven't caused any production stops in Q3, it brings higher material costs to the industry in general. On this slide, you can see the price development for coking coal, iron ore and scrap. Prices have doubled since the beginning of the year. And lately, some metal prices seem to have peaked, but that remains to be seen. It's no doubt that metal prices are now on historical high levels. Steel is the dominating raw material for Bulten. Our framework agreement with customers contain, for the most part, raw material price clauses that regulate price compensation but not to 100%, and in all cases with a certain time lag. So now we'll leave the word to Anna for the quarterly numbers.

Thank you, Anders. On Page 14, 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 and Q3 due to lack of semiconductors that caused disruptions in the production in the automotive industry. Net sales for the group in the third quarter amounted to SEK 764 million compared to SEK 853 million the same period last year, which is down 10%. The comparable quarter last year was a quarter in which volumes returned after the pandemic outbreak. We can still see a stable underlying demand for cars, as Anders mentioned, and Bulten has a good customer mix. Next slide, please. On Page 15, you can see that our earnings performance was affected by lower volumes and capacity utilization in the quarter as a result of the lack of semiconductors and also higher steel prices. We implemented decelerating measures during the quarter, which had a short-term negative effect on earnings. EBIT amounted to SEK 31 million in the quarter. Our EBIT margin for the third quarter amounted to 4.1%, slightly down from the comparable quarter last year. However, this quarter, we'll get some help from currency effects. Next slide, please. On this page, you can see our financial summary of the third quarter. As mentioned previously, Bulten showed a drop in many key figures in the third quarter due to external factors affecting the whole industry. However, looking at the year-to-date figures, we show an increased net sales of 31% and substantial improvement in earnings key figures compared to same period 2020. Earnings per share year-to-date amounted to SEK 5.69 compared to SEK 2.66 for the full year 2020. Next slide, please. On Page 17, you can see that the cash flow from operating activities before changes in working capital amounted to SEK 64 million in Q3. Cash flow from change in working capital amounted to minus SEK 122 million. Increased inventory levels has led to increased working capital for the period, now which is why we have taken measures to reduce the inventory. Cash flow from investing activities amounted to SEK 55 million in the quarter, a key figure affected by the start of the construction of the new facility in Poland in May. Cash flow from financing activities amounted to SEK 171 million. Total cash flow for the quarter amounted to minus SEK 6 million, with a cash position of SEK 191 million at the end of the quarter. Our net debt, excluding lease liabilities amounts to minus SEK 285 million at the end of the quarter. Next slide, please. Our rolling 12 months key indicators have improved in Q3 compared to last year and also compared to full year 2020. We have now a return on capital employed of 11.7%. Our net debt-to-EBITDA ratio is at minus 1.4% at the end of the quarter. This, in combination with an equity ratio of 50.9% at the end of the quarter, shows that Bulten financials is on a solid level. Next slide, please. On Page 19, 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 below our financial targets, but on a rolling 12-month basis, we're well ahead. In the right-hand table, you can see some guidelines for some other key figures. We are very much in line with our guidelines. Our guidelines for average net working capital in relation to 12-month sales is about 20% to 25%, depending on the growth pace. At the end of September, we had a level of 21%, which is in line with our guidelines. 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 September, we are at the level of 3.1%. As mentioned before, we started the construction of the new facility in Poland 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%. And at the end of September, we are in line with our guidance. And now back to you, Anders.

Thank you, Anna. Now we turn to Page 21 to look at some of the priorities in 2021 for the rest of the year. The underlying demand for our customers' products and Bulten's products is healthy, as we've said. But having said that, we're faced with a new set of uncertainties. Our customers' production is hampered by restrictions in the value chains, and that will have effect on our sales. Metal prices, as we also mentioned, are at a historical high right now. We are, of course, closely monitoring all of these factors and maintain strict cost and cash flow control. We've taken necessary steps to reduce production in order to protect net working capital, and we will continue to adapt our production to the situation. We will, of course, be prepared for a recovery in customer production, which will come when the imbalances have been sorted out. We will continue to work on margin improvements, which we've successfully done this year. We continue to ramp up our activities in technology and innovation and stay determined to remain a leader in sustainable fastening solutions. We've taken important steps to this effect, and the recent new contract wins are very much enabled by our progress in these areas. 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. Turn to Page 22. Let me continue the presentation with reiterating our Stronger 24 strategy, the road map for how we will go about reaching our targets presented in February of last year. It's divided into 4 building blocks. To start with, we have our strong position with the uniqueness that's made Bulten 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 have market share momentum through the contracts that we won in the last year and in this quarter. Despite the past year's turbulence, we hold on to the aim for sales reaching SEK 5 billion in 2024. The same applies to our profitability improvements. 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, which is something that we really want to emphasize. To summarize, the global downturn has not eroded the validity of our strategy. While our position is strong, we stand by our targets, and we stay committed to all the building blocks of the strategy to get there. And this concludes the presentation, and we're ready for questions.

Our first question comes from the line of Kenneth Toll at Carnegie.

First, on the inventory situation and your need -- you talked a bit about that you want to protect cash flow and so on. But do you see a need to dramatically cut your inventory levels in the fourth quarter? Or will it not be a more cut than in the third quarter, so to say?

Yes. Kenneth, we continuously do that because we think that the inventory levels are too high as they are, and we're taking measures to adapt the inventory to the sort of the markers that we've set ourselves, so yes.

Okay. Yes. So a further reduction but maybe not accelerating cuts in Q4 versus Q3.

We have a pretty good pace as we have now. So we'll continue down that glide path.

Okay. Great. Then on the steel price side, you wrote in the report also that you've been managed to increase some steel prices to mitigate -- sorry, you had been able to increase your prices a bit in order to compensate for higher steel prices. So I would guess that the net effect from higher steel costs and your own prices, were they a little bit better than in Q2? And what do you see for Q4? Would they be even a little bit better again?

Yes. Yes. As we've said before, we do have a time lag of adapting customer prices. It's somewhere between 3 months and 6 months, depending on what contract it is and to a varying degree as well in terms of what percentage of the fluctuation that we adjust for. And that has a natural lag. I think we also talked before about us using indexes that are actually updated after the fact. So that has a lead time itself as well. So if we would say, are we done adjusting prices? No we're not, so in answer to your question.

So if steel prices remain where they are right now, you will have -- the more to unpause, the more you will have had catched up, so to say, as we go forward.

Yes, that's true.

Great. Then also you mentioned in the new contracts you have that your product offering is a very strong argument for you to win those orders. Is it -- could you elaborate a bit on that? And also, have you sold any of those new BUFOe products that you talked about at the Capital Markets Day last year?

It's a good question. The product range that we have now is clearly an advantage for us when we approach customers. So we have a wider product range now than we had before the acquisition of PSM. And we've also developed a BUFOe product family, absolutely right. And also, on a general note, from a sustainability standpoint, we are in a good position. And we also have quite ambitious plans for additionally improved sustainability, which we also discuss with our customers. And being pretty transparent about that has helped us a lot. And I'd say that we have definitely won business in this last quarter based on that and based on our credibility and our performance in sustainability area. On the BUFOe, we're working with a number of customers now to implement BUFOe. It is an engineering process that requires validation in the specific applications that are going into. And I would say it's in the works, and it's not necessarily no specific contracts for BUFOe. It's a joint effort with the customers to actually replace traditional heat-treated bolts with BUFOe, which they very much are -- they're very motivated to do so because they're chasing CO2 like everybody else.

So do you think that this BUFOe product -- could it be also sort of a door opener so that you have something new, very interesting to talk about? And if they are interested in that one, could you also then try to sneak in an FSP contract to be able to deliver even a broader product range on the back of the BUFOe products? Is that the way it will go for?

Yes, to a high degree.

Our next question comes from the line of Matt Liss at Kepler Cheuvreux.

A couple of questions. First, I look at the order intake there and the new contracts you have received, the FSP contracts, are those included to a full extent in the order figure for the quarter?

Sorry, I didn't get your question. Can you repeat that?

Yes. I mean the order figure for the quarter, does that include full service contract that you announced during the quarter such as the September 1 that were 200-plus something?

You mean the order intake number?

Yes, the order intake. Yes.

No, no. Because the order intake, the way we define that is 100 days out, and the contracts that we won, especially the big one over SEK 200 million, that starts in 2022 and naturally, that won't be visible in the order intake.

Okay. Great. Then -- well, Kenneth, well, talked -- asked about the inventories and how you -- well, try to reduce them. But should we expect the production to be about current levels? Or will you reduce it further during the quarter?

Well, the only thing I can tell you is we'll adapt it to a very volatile situation, the only thing I can say.

Yes. And well, finally, there on the raw material clauses you have in the contracts, will they be more supportive in the fourth quarter than in the third? I mean, is that how it works?

Well, we're applying the contracts we have and as I said, we -- there is a time lag. And that means that if prices remain stable over time, price compensation will ultimately catch up with the material price. So that's the way it works.

[Operator Instructions] There seems to be no further questions from the phone line, so I'll hand back to our speakers for the closing comments.

Thanks, all, for listening in, and thank you for your interest in Bulten. And we'll speak to you all back in about 3 months from now.