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

Hello, and welcome to Bulten's presentation for the half year and second quarter of 2023. My name is Ulrika Hultgren, and I'm the SVP for Corporate Communications and Investor Relations. Presenting the report are Bulten's President and CEO, Anders Nystrom; and our CFO, Anna Akerblad. As usual, you will be able to ask questions after the presentations, both on the web as well as in the telephone conference. And on the agenda today, we have Bulten in brief, market development and the results for the second quarter and in focus for the rest of the year. I will now hand over to our CEO, Anders Nystrom.

Thank you, Ulrika, and we turn to Slide 3. As most of you know, Bulten is a supplier of fastener solutions. Our primary customer group is light vehicle and commercial vehicle OEMs. But customers categorized as automotive suppliers and customers outside of the automotive industry are continuing to grow their share of our business. It's important to know that we don't just supply hardware. To many of our customers, we are a partner for product development support, innovation, procurement and logistics. Bulten's 3 largest customers are still Ford, Jaguar Land Rover and Volvo Cars. They are and will remain important, but we have a number of new customers with strong growth in our base, and that's something that we welcome. The 2022 full year sales reached close to SEK 4.5 billion, which is a 20% year-on-year growth from 2021. The vehicle production outlook provided by Global Data shows an issue to issue increase in forecasted vehicle production volumes for 2023 calendar year. Despite high inflation, interest rates and somewhat deteriorating consumer confidence, the outlook shows a solid growth for the remainder of 2023 of around 6% for light vehicles and just above 8% for heavy commercial. This means that the global production trend for '23 for Bulten's customer mix is 6.2%. Bulten's actual year-on-year growth is significantly higher, which can be attributed to market share gains as well as customer mix. Global Data forecasts a somewhat slower market growth in 2024. Next page. Record high demand is very positive, but a combination of factors have created a constrained situation among particularly automotive fastener suppliers in Europe. Reshoring our previously offshore production, in combination with a shortage of skilled labor, longer-than-normal lead times for new production equipment and increasing demand from customers, has caused growing pains for much of the fastener industry. This is particularly true for Bulten, with the rapid organic growth we have experienced over the last quarters. In relation to our automotive customers, we're obliged to follow their production schedules, which has led to extraordinary measures in our value chain in terms of air freights, overtime and external contracted personnel. The negative impact of these measures in the quarter is approximately SEK 60 million. Next slide, please. We're determined to mitigate these issues that occurred in our production during quarter 2 by a number of actions. One, containment action is to run production during the normal Swedish summer shutdown period. Permanent solutions are to increase staffing through hiring and training of new operators and add critical machine capacity. The start-up of our new surface treatment in Poland has been very timely, as external surface treatment services are now in short supply as well. And therefore, we accelerate the production ramp-up in Poland. None of these actions are a quick fix. But during quarter 3, we should have a balance between capacity and demand and if -- in a position to produce without extraordinary measures. Next slide, please. The price for steel wire rod, which started to decline in quarter 1, has now stabilized at a high level. As long as it stays flat, raw materials do not impact Bulten's margins. So there is no significant impact on raw materials in quarter 2. Next slide. Move to Slide 8. During the quarter, we have executed on previously announced European efficiency actions, the closures of the warehouses in Arendal, Gothenburg and the manufacturing plant in Pembroke, U.K. are underway, to be concluded in quarter 3. The capacity constraint previously mentioned has been subject to much management attention, given the impact on Bulten's bottom line. Next slide. The agreement to acquire the Singapore-based fastener distribution company, Exim, is a real milestone in the development of Bulten. The acquisition of this well-managed company in the vibrant Southeast Asia region opens up whole new market sectors and a new geography for Bulten. The combined strengths of Exim and Bulten provides very exciting opportunities for profitable growth, not only in Southeast Asia, but globally. In real terms, the addition of Exim in the Bulten family is the start of a new, exciting segment for Bulten, where we can leverage our knowledge as a manufacturer in customer sectors which previously had limited connection to these resources. It paves the way for a new industrial segment in Bulten, together with our other nonautomotive business. And with these words, I'll leave the stage to Anna for the financial results.

Thank you, Anders. On Page 10, you can see an overview of our quarterly sales the last years, including 12 months rolling sales. Sales volumes increased in the quarter with over 40% compared to the same period last year. Bulten delivered the sixth quarter with sales above SEK 1 billion, with strong sales growth in all sectors. Next slide, please. According to the waterfall, you can see the positive growth in rolling 12 months in all customer groups. And on the right side, you can see that as a proportion of the year-to-date sales as of June, sales to other industries outside automotive has decreased in percentage compared to last year. However, the absolute sales value has increased compared to last year. Our main customer group, OEM light vehicles, had a good growth in the quarter and amounts to 69% of total sales. Next slide, please. The second quarter delivered an adjusted EBIT of SEK 58 million, equal to 4% EBIT margin compared to last year of 5%. Transaction costs related to the acquisition of Exim has been adjusted for. The EBIT margin is not in line with our strategy target. And as Anders already mentioned, this is mainly related to capacity constraints in European plants, which have caused increased costs for air freight, overtime and contracted personnel. The EBIT impact in the second quarter amounts to approximately minus SEK 60 million. Next slide, please. On Page 13, you can see that our adjusted earnings per share amounted to SEK 2.2 in the quarter compared to adjusted numbers last year of SEK 1.32. Next slide, please. The cash flow from operating activities, including change in working capital, amounted to SEK 46 million in the second quarter. Cash flow from investing activities amounted to minus SEK 33 million in the quarter. Bulten has increased the cash position in the second quarter compared to last year. And we have decreased our net debt excluding liabilities compared to last year. Next slide, please. Our adjusted key indicators for 12 months shows a positive trend, both compared to last year's rolling 12 months and full year 2022. Our adjusted return on capital employed, including financial lease, is at 12.5% rolling 12 months. Our adjusted net debt and adjusted EBITDA ratio is at minus 0.7% at the end of the quarter. And our equity assets ratio, excluding financial lease, is at 51.9%. Next slide, please. On Page 16, you can see our financial targets as well as some of the guidelines regarding relevant key figures for Bulten. Comparing with the same quarter last year, the growth in sales is over 40%. The margin is affected by the capacity constraints in the European plants, and the return on capital employed has improved over previous numbers. In the table to the right, you can see some guidelines for some other key figures, we are very much in line with these guidelines. Our 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, our rolling 12 months are at a level of 19%, which is positive. 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, the rolling 12 months level is at 4.1%, including construction of the new facility in Poland during last year. 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 we are in line with these guidelines. And now back to you, Anders.

Thank you, Anna, and we turn to Page 17 to look at the rest of 2023. The #1 operational focus right now is to increase the output of our European plants to balance it with the unprecedented demand. This is crucial to quarter 3 earnings. We're also executing on the strategic transformation of our European footprint. The closure of the acquisition of Exim and the immediate kickoff of an ambitious development plan for Exim is the most significant strategic focus throughout the rest of 2023. And for the avoidance of doubt, the plans to develop our industrial presence in North America through the right M&A activities there also remains important. These plans are not impacted by the acquisition of Exim. The commercialization of TensionCam, while being in its infancy, continues through collaboration with external partners being close to the potential customers of this technology. Turn to Slide 18. Finally, it's appropriate to remind everyone of our strategy and our financial targets, which we stand by: to be a SEK 5 billion company, delivering 8% EBIT and 15% ROCE in 2024. The capability is definitely there. The growth momentum is in place. The very rapid growth has caused issues in the last quarter, which we are working to resolve in order to come back to targeted margins. And that concludes our presentation, and we're ready for questions.

[Operator Instructions] The next question comes from Kenneth Toll Johansson from Carnegie.

Yes. So it's Kenneth here. I have a question on the results. If we compare the second quarter results not with second quarter last year but with the first quarter, then we saw that sales were only up some SEK 29 million or only 2% higher than the first quarter, but still, adjusted EBIT were down SEK 59 million. So what was the -- sales were not up much, but EBIT just dropped very, very much. So can you compare the difference between the first and the second quarter, please?

Hi, Kenneth. Yes, of course. As we mentioned in the presentation, the second quarter was affected by the constraints in the European plants. So the SEK 60 million that we are referring to is directly hitting in the result, of course. So that is the difference between the quarters.

Yes. So in the first quarter, did you have much higher sales outside of Europe then than in the second quarter?

No. And let me try and explain. I see where you're coming from, Kenneth. The constraints issues were compounding during quarter 1 as well. But the extraordinary measures that we had to introduce to keep up with deliveries struck in quarter 2. So that's just timing constraint or a timing factor. So yes, I see what you're -- where you're coming from. Our sales were quite close in quarter 1 to the sales in quarter 2. But the constraint issues were compounding, as well as the product mix was changing as well in quarter 2 compared to quarter 1. And the constraints are related to the product mix as well in terms of dimensions and surface treatments and things like that. So there are some very logical explanations for that.

Okay. And you started -- you write in the report that you're hiring more employees, buying new machines and then ramping up production in Poland and so on. So those activities started in Q2 already. So you think they will have a positive effect in Q3?

Yes, they've been going on throughout quarter 2. Correct.

Great. Great. Do you dare to give any estimate for Q3? I guess that the problems will not be completely solved from July 1. But will it be sort of a gradual improvement and maybe no problem at the end of the quarter? Or do you think it will stretch into Q4 as well?

Now what we're saying is that we will have a balance between capacity and demand towards the end of quarter 3. So it will be a gradual improvement.

Great. Okay. And then also a question on the acquisitions you make. I have 2 questions. Let's start with the first. What kind of margins are they operating at? Are they significantly higher, therefore, than Bulten is operating at the moment?

Exim has very healthy margins, and they will be blending up, for sure. The exact numbers, we're not going to disclose at this point for 2 reasons. We don't own the company yet and second one is for competition reasons. So the margins won't be disclosed at this point.

Okay. And once you own the company and you start delivering from your own factories in China and also Taiwan, you think that will increase your margins?

To the extent that will supply Exim from our own plants in Asia, of course, that will increase utilization of our Asian facilities. And that will be good for our margins, yes.

And another thing more strategically that I was thinking about. Right now that there are more import duties on fasteners from China coming to Europe and that has sort of increased demand for European-produced fasteners in Europe and so on. Don't you think that there will -- that will lead to more of an overcapacity if more of the Chinese production of fasteners stays in Asia and are sold in Asian markets so that you might experience more competition in Asia on fasteners?

Not really, because there's freed up capacity in Asia right now due to the fact that their export business is shrinking. So generally, you can say there's more of a capacity surplus in Asia than we've seen in the past.

Yes. But that could also lead to price competition and so on, if Asian and Chinese players want to fill their production capacity.

To a certain degree, but it will be a limited impact on Bulten's business because primarily, the export out of China has been in the nonautomotive sector. So the classic IATF-certified fastener manufacturers in China are not as hit by this as the ones that are more general industry.

Okay. Okay. But with the acquisition you make now, that is outside of automotive primarily. So that's where there might be more competition coming up.

Actually, it's a good thing, because remember, Exim is a distributor, not a manufacturer. And distributing inside the Southeast Asian region. And having a supply base in the region, which would then have more capacity. So actually, this equation works both ways, and it's actually a big advantage for us.

So what might be -- yes. So of your operations that might be affected might be the Chinese plant for fasteners that you have had since a long time. But that is a very, very small part of the total Bulten Group, if I'm correct.

It is. But the domestic market for OEM fasteners is very stable. So I don't have any of these sort of macro factors being a disadvantage at this point for our plants in China.

And you have -- for the plants you have in China, you have quite, I should say, long delivery contracts to automotive customers you have there. So they shouldn't be immediately affected, I guess?

Correct.

The next question comes from Mats Liss from Kepler Cheuvreux.

Well, coming back to the Exim acquisition there. And currently, you don't sort of distribute anything through their network, is that right?

Mats, to be really particular about it, because we actually have a couple of part numbers that were selling to Exim today, but the business between Bulten and Exim is very minor and it's marginal today.

But I guess the -- you have sort of known the company for quite some while and it has been on your list for potential opportunities to grow your own business, I guess, in the Asian market?

We've known about them for some time, yes. And the contacts were established through the business relationship that we've had since some time.

Okay. Great. And you also mentioned that the sort of strategy to grow in the North American market still remains the same. But do you expect to do that -- I mean, you don't see that the financial position are sort of hindering you to do that? It's more -- I mean, the gearing will still be good? Or I mean, could you give some flavor there, if sort of, yes, opportunities are still achievable and you don't see anything that would affect that opportunity?

We still have a strong balance sheet and a strong cash flow. And the intention to look for industrial target companies in North America is still there because it's definitely a way for us to strengthen our competitiveness and our customer exposure in North America. So that ambition still stands. And it's all about finding the right target.

Okay. Great. And then just to get a feel of the cost development during the quarter, that extra cost, I guess. Did it sort of -- was it spread evenly during the second quarter and continue to be on the same level in July and August? And then you mentioned a more balanced situation will be in -- towards the end of the quarter, is that right?

That will be a gradual improvement from that...

And the third quarter is normally sort of a slow seasonal quarter. And should we expect it to be on the same level or be affected by the costs that you currently have? So it will be somewhat slower than -- it continues to be a tough year-over-year comparison for a sequential comparison.

Well, as you know, July and August are shutdown months for our customers, and that gives us some breathing space, and it will help us to balance the capacity and get caught up on operator training, machine installments and things like that.

Okay. So that's what you meant that you will run your operation during the holiday season. It's not sort of that you -- we should expect you to continue to -- or deliver more than normal. It's more a thing to get -- well, your structure in order and start fresh in September?

Yes.

Which means that we shouldn't expect the third quarter to be, well, maybe a bit softer than normal then?

There's always a seasonality, as you know. And I mean, historically, third quarter is always affected on the top line by our customer summer shutdowns. And it's reasonable to expect that for this Q2. But in case of -- or in terms of catching up on capacity versus demand, that shutdown period would definitely help us.

And looking just at the order number, it's very strong. And I guess you have -- normally, the orders that you have during the quarter is delivered during the coming quarters. So it seems that customers maybe are trying to fill up their inventory and be more prepared to handle the order backlog. I mean you will be running the production during the third quarter also?

Yes, we will.

Yes. Okay. So it's a balance? No? Okay, great. Yes, that's about it. I mean I looked at the financial net also, you had some currency gains there. Should we expect them to reach also in the third quarter? Or are there more to come?

That's a good question. It depends, of course, on the currencies. It's -- we have a majority of loans in euros, and this effect is due to the Polish zloty that has strengthened towards that. So I think we will see how the currency develops.

The next question comes from Kenneth Toll Johansson from Carnegie.

Yes. So you're growing much quicker than the underlying automotive production. So -- and you're right also, that you take market share and that your customers want to buy more -- your customers in Europe want to buy more products that are produced in Europe. But can you talk a little bit about the increased business? Is it existing orders that are growing? Or do you take new orders? And are those with new customers? Or is it old customers, but more orders? And are those sort of FSP contracts? And talk a little bit more about the dynamics with your customers in Europe, please.

Okay. We're winning business with new customers. Yes, for sure, we are. And since those customers are growing from a low level or basically from 0, percentage-wise, they're showing a very strong growth. Our traditional customers, right now, we do have a favorable mix and they seem to be doing well. They have fresh product lineups. And we -- especially the existing FSP projects that we won a couple of years ago and that we're now ramping up, they're performing very well from a volume standpoint. So there's a combo of both new and old customers in that mix.

Got it. And are there a lot of new contracts out in the market that you're bidding for? Or...

Yes, we are. They seem to be smaller packages than before, and that's why you haven't seen any big announcement from us in the last period. But we're winning at a very good rate, but they seem to be smaller packages.

Okay. Great. Yes. It's always nice when demand is very strong, even though it's hard to deliver on it. It's better that way than the other way, I guess.

Certainly so.

The next question comes from Johan Skoglund from DNB Markets.

I have 3 quick questions here. So number one, then just to shed some more light on the supply issue dynamics. Is the shortage similar for parts that you produce yourselves and parts that you mainly trade? By that, meaning standard components that you don't do any manufacturing on?

Yes. The capacity constraints are spread pretty equally. So they occur on both sides of that divide, as you mentioned it.

Okay. And on growth, I'm sorry if you already mentioned this during the call, but could you give any more color on the price and volume components in that?

Can you specify the question, please, so I'm sure what you're asking?

Yes. So it leads into organic growth year over year. I mean, are there any big price hikes in the growth components, or is it mainly volume-driven?

It's both. There is an element of raw material adjustments that come into play. Yes. That's true. So there's both volume. So in actual tonnage, we're increasing production and sales, but there is also an impact on the top line from raw material adjustments.

Okay. So with stabilizing steel prices now, are customers more reluctant to agree to price hikes?

It's contract-based. So when raw materials go up, we adjust them by index. If they go down, we adjust them down by index. So we're basically applying the contracts we have.

[Operator Instructions] There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

So, yes, and we don't have any questions on the web. So we would like to thank you very, very much for listening in and for the questions as well. And we will speak to you soon. I don't know if you want to say anything before we end, Anders?

Sure. Well, I want to say thanks, everyone, for listening in. Thanks for your interest in Bulten. We're certainly looking forward to quarter 3, which will be an exciting quarter with a number of main events, not the least, the closing of our acquisition of Exim. And starting the new journey with a more diversified Bulten than you've known in the past. So I certainly look forward to report out the quarter 3, and your interest in that. So thank you very much, and I wish you a nice summer.