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

Hello, and welcome to the presentation of Bulten's Q2 results. [Operator Instructions] Today, I'm pleased to present CEO, Anders Nystrom; and CFO, Anna Akerblad. Speakers, please begin.

Okay. Thank you, and welcome, everyone. Let's turn to Page 3 in the presentation where you can see the agenda. It will be an overview of Bulten, the market development, second quarter and what's in focus for the rest of the year. When we presented our quarter 1, I said in the introduction that we're facing both old and new challenges ahead. In quarter 2, all of those challenges have been very real, but also they have been dealt with. I will describe those in a bit more detail further on in the presentation. So next slide, please, Page 4. As you know, Bulten is a supplier of fasteners. Our primary customer group is light vehicle OEMs, but customers categorized as automotive suppliers and customers outside the automotive industry are continuing to grow in share of our business. But we don't just supply the hardware. To many of our customers, we're a partner for product development, support, innovation, procurement and logistics. Bulten's 3 largest customers are still Ford, JLR and Volvo Cars. To be an approved supplier to these many customers is a strength and clearly facilitates further growth. Next slide, please. Look at market development, and you can turn to Slide 6. In the month of April, semiconductor shortages were again a major issue across most of our customer range. For that reason, many customers basically took a 2-week extended Easter break, making April more of a half month than a full month. As you all know, China went into extensive lockdowns due to the new wave of COVID outbreaks, which caused much of the Chinese industry to come to a halt for weeks at a time. We managed to keep our own facilities operational for most of this period, thanks to our very loyal workers who volunteer to set up camp in the plants and live there during the lockdowns since if they left, they wouldn't be able to come back to work. However, customer demand was severely hampered also during this period. Inflationary cost increases also, and it continues to be an issue during quarter 2. We have been able to adjust pricing but not only for raw materials but also for freight, energy, et cetera, but only for part of it. And since costs are continuing to rise, this is an uphill battle until the situation gets more stable. Turn to Page 7. For automotive volume statistics and outlook, Bulten looks to the independent forecast maker, LMC. In quarter 2, according to LMC, light vehicle sales fell 0.8% compared to quarter 2 in 2021. So to look at the future, say we turn to Page 8 where you can see the graphics of that, LMC's global vehicle production outlook for the full year is somewhat mixed. Light vehicle production volumes are forecasted to increase 5.7%, and this is somewhat lower than what was predicted a quarter ago. Heavy commercial vehicle production is predicted to drop 11%, which is down from minus 5% in the last quarter's outlook. For Bulten's automotive customer mix, this means an increase of 3.7%, but it's important to remember that the LMC global outlook is weighted across regions and OEMs and that Bulten's customer mix may perform differently. Right now, we see a much more favorable prediction from our customer base, which is also reflected in the order intake, which is up 36% versus quarter 2 of '21. To summarize the outlook, we're very positive about the second half of the year. So turn to Page 9. As said before, we're getting compensated in sales prices to customers through the raw material clauses we have in our contracts. But there is always a time lag, which means that we get a negative impact on our margins as long as prices are on the rise. Steel wire oil prices were again at record high levels in quarter 2. Indications point towards a trend shift. And if we turn to Slide 10, here, we can see that cold-rolled flat steel prices have plunged in Europe, which is normally an indication of what will happen next for the wire rod material. So next page, please. As is already well known, energy and labor costs are also sharply on the rise. Customer price adjustments are subject to negotiations, but always involve an after-the-fact data analysis, thus, the same sort of lag in price adjustments and as we face on the raw material side. Next page, please. We'll look at the second quarter and we can turn to Page 13. The structural challenge we faced going into quarter 2 was the execution of the decision to withdraw from the Russian market and to divest of all the assets connected to Russia. During the quarter, we did what we said we would do, and I'm very pleased that we have now derisked Bulten's business in that we very rapidly and still in an orderly manner divested our interest in Russia. The year-to-date business wins are also very encouraging and the highest number we've had in the first half year ever. I'm glad to say that it's also quality wins, good programs with good customers. And now over to Anna for the financial side of the quarter. Please go ahead, Anna.

Thank you, Anders. On Page 14, you can see an overview of our quarterly sales the last 2 years, including 12 months' rolling sales. We had continued strong sales in our second quarter, and we saw slightly higher sales to automotive suppliers and continued sales growth in other industries outside the automotive sector. Next slide, please. On Page 15, that is fine to say that our effort to grow in industries outside automotive and with automotive suppliers have given results in increased sales. Other industries outside automotive is now contributing with approximately 10% of total sales compared to approximately 9% at year-end. Automotive suppliers are contributing with 15%, which is in line with year-end. Our main customer group is still OEM light vehicles with almost 65% of net sales. Next slide, please. Our earnings performance for the second quarter was affected by exchange rate effects related to finalizing the divestment of our Russian business with approximately minus SEK 10 million. This has no cash effect. Adjusted EBIT amounted to SEK 51 million in the quarter. And customer price adjustments are starting to have effect, but there is still some delay in timing. There's also continued increased costs in energy and transport, which is only partly compensated for. Our adjusted EBIT margin for the second quarter amounted to 5%, which is down from the comparable quarter last year. Taking into consideration the currency effects, the adjusted EBIT margin amounts to 4.8%. Next slide, please. On Page 17, you can see our financial summary of the second quarter. As mentioned previously, Bulten delivered strong sales for the second quarter with an adjusted EBIT of SEK 51 million and an EBIT margin of 5%. Adjusted earnings per share amounted to SEK 1.32 in the quarter and SEK 5.22 for rolling 12 months. Next slide, please. The cash flow from operating activities, including change in working capital, amounted to minus SEK 19 million in quarter 2. Dividend was paid in the quarter with an amount of SEK 47 million. Cash flow from investing activities amounted to minus SEK 50 million in the quarter, a key figure affected by the start of the construction of the new facility in Poland in May last year. Cash flow from financing activities amounts to SEK 131 million. The total cash flow for the quarter amounted to SEK 62 million with a cash position of SEK 233 million at the end of the quarter. Our net debt, excluding lease liabilities, amounted to minus SEK 446 million at the end of the quarter. Next slide, please. Our adjusted rolling 12-month key indicators are affected by cost increases in raw material, energy and transport. Last year's rolling 12 months included the 2 best quarters ever, which were Q4 in 2020 and Q1 in 2021. Our adjusted net debt and adjusted EBITDA ratio is at minus 1.4% at the end of the quarter and our equity ratio at 47.3%. Next slide, please. On Page 20, you can see our financial targets as well as some of the guidelines regarding relevant key figures for Bulten. Comparing with last year, the growth in sales is above 10%, and adjusted margin for the quarter is in a 5% level. 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 pace. At the end of the quarter, we had a level of 23%, 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% from capacity depending on market development. At the end of the quarter, we are at a level of 6.8%. As mentioned before, we started the construction of the new facility in Poland in May last year. And postponed capital expenditure due to the pandemic has also an impact on this figure when starting up again. 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 quarter 2, we are in line with our guidelines. And now back to you, Anders.

Thank you, Anna, and we'll turn to Page 22 or some words about the focus for the rest of the year. The underlying demand for vehicles is still very strong. Our customers' order books are very healthy. And for them, it's all about being able to produce. The order intake shows that we have to be prepared for a rapid increase in sales on a number of customer accounts, but also maintain flexibility if new restrictions should occur. Pricing adjustments has been a big topic for us since the beginning of the year, and we're stepping up these efforts now. Our M&A strategy for North America still stands. Bulten is not and won't be a serial acquirer, but we do need to add to our capabilities in North America, and we continue to work to make that come true. As pointed out earlier, we are at a record new business win rates. Both our global reach and our sustainability offer continue to be instrumental for us to win with both new and existing customers. We turn to Page 23 finally, just to remind every one of our strategy and our financial targets, which we stand by. To be a SEK 5 billion company delivering 8% unit EBIT and 15% ROCE in 2024 remain the targets. We are on track to deliver on these targets, and we have the building blocks in place to do so. And this concludes the presentation, and we're ready for questions.

[Operator Instructions] The first question comes from Mats Liss at Kepler Cheuvreux.

A couple of questions. First, looking at the order intake, it's quite impressive. And I just, well, wondering there if you can give some flavor regarding the mix, I mean, price volume and maybe in which segments you are growing the most.

Mats, as you know, over time, the non-auto segment is the one that's actually growing the fastest. But right now, looking into the second half of '22, it's really the passenger car OEMs that are recovering from the component shortages and basically building back the backlog that they have accumulated over time.

Okay. Great. Could you say something about price/mix there? I mean price/volume, is there anything you can comment on?

Well, not exactly sure what you mean with the mix price volume, but do you mean historically? Or do you mean future?

I guess the order figure as such. Well, volume contributed 10% or whatever and price still in balance, so if you could say something.

No, that will require a longer analysis if we would then sort of break it down into pricing, currency effect, volume, et cetera. But there is no doubt if you look at the volume predictions that LMC has for the third quarter, I think they were up 23% in volume globally. And I think we actually do have a little bit more aggressive mix. So there's a pressure of volume in there. But then there's, of course, pricing effects as well if you compare to the same quarter last year, no doubt. But if you want a number, sort of a neutral volume growth number quarter 3 to quarter 3, LMC gives you 23%.

Yes, yes. Great. And then, I mean, you mentioned the second half will be clearly much stronger. And is there any difference there in the seasonal impact? I guess the third quarter is normally a holiday quarter. Do you expect to, well, have to work harder this year? Or is it more sort of a very strong fourth quarter we should expect? Or could you say something about that?

I think generally, the second half would be positive in terms of volumes. It's always more challenging if you have a sharp increase in sales right after the vacation period. And you're right, normally, quarter 3 is a bit clogged by various summer vacation shutdowns. But -- and the comparison quarter is, of course, impacted by that as well. But I don't know how to illustrate that more clearly to you, but it's for being in quarter 3, it's very high.

Yes. You also mentioned that steel prices have sort of peaked, maybe has come down quite a bit in some areas. And well, it will be -- it seems that you -- well, could it affect your ability to pass on price increases? Well, that's already there or is it sort of contract-based situation and maybe it's a normal way. I mean you probably have some positive impact [indiscernible] and then it's sort of when the new contracts kick in, you get the new steel price level again. Yes, maybe...

Yes, we're normally on quarterly contracts on steel, and we normally adjust either quarterly or biannually with our customers and then that we talked about before. And you're right, if there is a leveling out of the steel pricing, our customer price adjustments will catch up with that and improve our situation. And I did mention in the report that we see a softening of -- or at least sort of a leveling of the steel prices and maybe even a decline. Whether that's going to last into quarter 4 or not, we don't know because, as everybody knows, energy is a big factor and steel pricing as well and energy is going up. So it's extremely difficult to predict what will happen in -- throughout the second half of the year. Right now, it seems like it's taking a bit of a pause when it comes to the increases, but we haven't seen all of it yet.

Okay. Great. And finally, just about the tax line there, you have quite high tax charges in the second quarter. And still, you indicated that it will sort of temporary to some extent, at least that was my integration. And should we expect you to be more in line with the guide than already next year? Or is it sort of things that are moving parts that it's difficult to comment on.

Yes, we're expecting that it will go down next year in line with the guidance.

The next question comes from Kenneth Toll at Carnegie.

Yes. So let's continue a little bit on what Mats discussed in his last question here with steel prices and your own price increases. Is there a risk that if steel prices start to go down here a little bit, that end customers tried to negotiate lower price increases from your side. I mean you have these sort of index prices in most cases. But do you see a risk that they will start pressuring prices?

Kenneth, not really. I mean we follow the same mechanisms. Whether the steel price goes up or down, so it's mathematics. And the idea of those compensation clauses is that the raw material effect itself will be neutral over the cycle. So no, I'm not really worried about that.

Great. Then you also mentioned price increases for transportation, payrolls and energy and so on. And I guess there, you don't have much index. It's more of a negotiation to get compensation for such costs. Is that correct?

That's correct, yes.

Okay. Good. Yes. But all else equal, the balance between your own price increases and at least steel price increases should look much better in the third quarter than in previous quarters if steel prices sort of flattens out or go down.

That's a logical assumption, yes.

Great. And then you mentioned also, yes, looking at your targets for 2024, you're targeting sales of SEK 5 billion and you might be a bit behind that now. And you then also mentioned that you're really interested in finding an acquisition in North America. What would an acquisition in North America had from a strategic point of view? Why can't you acquire something in Europe or Asia, for example?

It's a matter of scale. We are in North America, and we're serving a smaller number of customers in North America. And in order to really be competitive in that market and be profitable in the market, we need to reach a certain scale. And by scale, we mean both more vertical integration, which we're looking for in an M&A target as well as scale leverage on the raw material purchasing side, which is significant because today, we're not getting competitive raw material prices. And that's such a big portion of our cost. That definitely that will help us. We're not excluding acquisitions somewhere else, but our primary target is North America because we see the need for it.

And with the customer base that you already have in North America today, if you had more production capacity, do you think that you can expand business with your existing customers?

It wouldn't be a solution.

Okay. But also you say that in Europe, you have Ford as a big customer, for example. And I think you have some business in North America. But if you were to acquire a company and get more production capacity, do you think you can expand your business with Ford, for example, in their North American business?

Possibly. But we're primarily targeting to also help our expansion into the non-auto segments acquisitions. So we're primarily looking for companies that will give us also a diversification of our customer base and the customer sectors.

Okay. Good. And that would then imply that it could be a smaller, yes, smaller partners than what you're supplying in the automotive industry today?

It could be either or. It could be either, it could be more or bigger or the same. But the dimension is not the primary criteria, I would say.

Okay. Yes, sounds interesting. Great. And finally, when I look at the numbers and compare to my estimates, you had higher sales. I was positively surprised by the sales growth in the second quarter, but margins were a little bit lower, and they were a bit lower than last year. And you would say that it's mainly those cost increases for steel, logistics, payroll, energy that explained the lower margins year-over-year.

Yes.

Thank you. There are no more further questions at this time. I hand the word back to the speakers.

Thank you very much for listening in to our quarter report, and I hope to see you soon again.

Thank you, everyone. I wish you a nice summer.

Thank you. Bye.