Bufab AB (publ) (BUFAB) Earnings Call Transcript

Good morning, and good afternoon, everyone, and a warm welcome to Bufab's Q3 report. My name is Erik Lunden, President and CEO of Bufab Group. And together with me today, I have my CFO, Marcus Soderberg. This presentation will be recorded and by attending to the meeting, you agree to the recording. I will start to take us through the highlights of the quarter. Then I will leave the word over to Marcus for some financial highlights. After that, I will go through the performance in each of the regions before we sum up the quarter. So let's start with the Q3 highlights. I'm very pleased to report another strong quarter for Bufab. We delivered strong organic growth and achieved significant improvements and record margins on both gross and operating margin. We continue to execute very well on our strategy with a clear focus on value creation for our customers. We delivered a total growth of 16.6% with a strong organic growth of 6.5%, driven by market share gains and somewhat stronger underlying demand in the market. The demand was particularly strong in electronics, mechatronics, electrification, digital infrastructure, aerospace and defense. The gross margin improved by 1.6 percentage points, which record-high 34.3%. This end up into a strong adjusted operating margin of 15.6%. And almost all our operating companies improved the results with particularly strong improvements for our sisters in Europe, West and Asia sit. I'm also very pleased with the start for DC iron, which we acquired at the beginning of the quarter. The company has developed very well at an early stage, but so far, a very good start and integration process is progressing according to plan. I will now lead the word over to Marcus for some financial highlights.

Thank you very much, Erik. And we'll start by turning to Slide 6 in the presentation, looking at the growth. The growth trend continued in the third quarter. Net sales increased by 15.6% to SEK 2,236 million. Acquisitions, meaning novia in Q4 2025 and Ciro acquired in this quarter contributed to percentage point out of the total. Currency had a slight positive impact with 0.7 percentage points and organic growth was strong, 6.5% in the quarter. And by reporting strong organic growth also in this quarter, we marked the fifth consecutive quarter of organic growth for the group. Order intake was in line with net sales. The organic growth was strongest in Asia Pacific as well as in Europe West, but also U.K., Ireland as well as North and East also contribute to this. It's basically only Americas, where we had negative organic growth. And the reason for this is mainly due to onetime refunds of previously paid custom duties and as well as a slightly lower demand within the RV and automotive markets. We turn to Slide. Even in the presentation, where we see gross margin development as well as OpEx development. And gross margin in the quarter, the margin reached a record level of 34.3%, up 1.6 percentage points year-on-year. All regions improved their operating -- their gross margin. The drivers remain the same basically as in the recent quarters a better customer mix and product mix combined with more value-based pricing as well as some sourcing savings. OpEx amounted to 18.1% of sales. This was positively affected by revaluation of earnouts amounting to SEK 20 million, but we also have a negative impact of SEK 7 million in connection with transaction costs for the beginning of the quarter. Adjusted for those items, focused ratio as a percent of net sales was 18.7%, meaning a decrease of 0.2 percentage points year-over-year. So we continue to see good cost control as we grow. We turn page to Slide 18 in the presentation where we see the operating margin development I guess you can sum it up basically is that the strong top line growth that we saw in the quarter, the high gross margin and a good cost control in terms of OpEx resulted in a record high adjusted operating margin of 15.6% in the quarter compared to $14.2 million last year. Adjusted EBITDA increased by a strong 28% to SEK 349 million. Behind the increase is basically 4 or 5 regions that improved their operating margin. Only Americas not making a year-over-year increase, but they remained on a very solid or strong level of 20.8% despite the lower top line. We turn to Slide 9 in the presentation where we see the development of our cash flow for the quarter. And as you can see, cash flow from operating activities increased to SEK 370 million in the quarter compared to SEK 293 million last year. It's actually marking the strongest quarter so far in 2026. And the increase is mainly paid by what we already have talked about, meaning the improved underlying results. Working capital contributed slightly positive despite an inventory increase due to the organic growth we saw in the quarter. So strong organic cash flow generation despite strong organic growth. We turn to Page 10 in the presentation where we see the development of our indebtedness and net debt versus EBITDA. And net debt versus -- net debt decreased by around SEK 50 million during the quarter to SEK 3,444 million, which includes leasing. And this was achieved despite the acquisition of D.C. Iron in the beginning of the quarter. Adjusted net debt versus EBITDA improved to 2.2x from 2.4% at the end of the last quarter. And it was also actually a year-over-year decrease with 0.1 percentage points. Also that when taking into consideration that we made quite a big acquisition in Q4 last year, meaning we as well as the acquisition of D.C. Iron in the beginning of the third quarter. So we're very happy with the strengthened balance sheet during the quarter driven by increasing in underlying results together with a strong charter that we have seen. With that said, I'll leave the word over to Erik again to go through with the different regions.

Thanks, Marcus, and we will then start with the performance in Region Europe, North and East. Net sales increased by 3.2% in the region, of which organic growth was 3.0%. Several companies continue to develop very well in the region, particularly in Norway, Poland and Hungary as well as [indiscernible] supported by strong market share gains. The more details due to infrastructure electrification remained strong, while construction and furniture industries remain at a low level. The gross margin developed very well, increasing by 1.9 percentage points. This was driven by improved customer product mix, together with our continued focus on value-based selling. The region's cost level increased mainly due to foreign exchange losses on operating receivables, somewhat higher obsolescence costs and also investments in growth. Despite this higher cost improvement in gross margin more than offset the high expense ratio. As a result, net operating margin improved to 15.6% compared with 14.6% in the comparative quarter. If we then continue to Europe West, net sales increased by 39% during the quarter with very strong organic growth of 14.2%. The acquisition of novia Group contributed by 25.2%. The strong organic growth was driven by continued market share gains improved product mix and previously communicated larger projects, which are progressing according to plan. Looking at the demand, we saw particular strength in mechatronics, aerospace, electricity and defense. The gross margin increased by 2.4 percentage points, driven by improved product mix and the higher value added from new projects. The operating expense ratio adjusted for the revaluation of contingent purchase consolidations of SEK 20 million decreased to minus 12.8%. The improved operating expense ratio was a direct result of strong operating leverage on additional volumes, combined with solid cost control in the region. All in all, this resulted in significant improvement in profitability with adjusted operating margin increasing to 15.4% compared to 12.7% in the comparative quarter. Finally, the recently acquired novia Group delivered a stable performance in the quarter for Univest. Then continue with Region Americas. Total growth was negative by 6.6%, of which organic growth was minus 8%. The negative organic growth was due to refunds of previously paid custom beauties, lower demand in the RV and automotive markets and a strong comparative quarter. Adjusted for the refunded custom duties, organic growth was minus 4.3%. Despite lower volumes, with a strong improvement in gross margin, which increased by 3.4 percentage points. This was primarily driven by general price adjustments and our continued successful efforts to improve profitability within the CST Group in the U.S. The lower organic growth also resulted in somewhat higher cost level relative to sales, together with somewhat higher opulence costs for the region. Overall, the adjusted operating margin remained at a strong level of 20.8% compared to 22.2% in the comparative quarter. Continue then with the region, U.K., Ireland. Net sales grew strongly by 20.2%, while organic growth was solid 5.4%. D.C. Iron acquired at the beginning of July contributed with 13.4% to the sales development for the region. TIMCO continued to deliver robust sales despite the weak construction market, while rising stainless steel prices supported a slightly improvement for Apex. We also saw strong improvement in gross margin, up 2.4 percentage points year-on-year. This reflected a better customer product mix, higher price on stainless steel prices and the addition of D.C. Iron which has a somewhat higher gross margin than the rest of the companies in the region. The cost level was higher, reflecting transaction costs for acquisition of novia -- sorry, for D.C. Iron adjusted for these cost operating expense ratio was 22.1% compared with 22.6% in the comparative period. Altogether, this resulted in a strong improvement in the adjusted operating margin reaching 13.8% compared to 10.7% in compared to quarter. Then finally, Asia Pacific. We saw very strong growth in the region with total growth of 22% and organic growth of 28.4%. The development was particularly strong in Bufab Shanghai and Bufab India, driven by -- mainly by continued strong growth with the Energy Industrial Automation Solutions. Gross margin also improved significantly by 6.0 percentage points, reflecting continued value-based pricing and better customer product mix and also purchasing savings. At the same time, the higher volumes provide a strong operating leverage, combined with continued good cost control. And altogether, this drove us a substantial improvement in profitability reaching an operating margin of 21.1% compared to 14.3% in the comparative quarter. I will then go through Group news, and I will start with the customer case. And today, I will talk about our customer nodes. Programs is a market leader within rail and commercial vehicle braking systems with operations in more than 100 locations globally. They have a broad product portfolio and a relative complex parts and technical components requirements within their operations. When KB started to interact with Bufab, they had a clear mission to consolidate their broad supply base and to lower the total cost we about to an early stage a big opportunity to support KB on their journey and create Picoline parts and technical components space. Today, we support KB with end-to-end solutions, covering sourcing, quality, sustainability and logistics and we create clear value through tailor-made solutions that suits KB's needs on each site. We are today 1 of 3 strategic Globe distributors supporting more than 30 sites in total, with big opportunities for further growth into new commodities and also to more sites globally. So hopefully, as the starting point with the growth on together with clouded. I would also like to take the opportunity to welcome you all to Bufab's Capital Markets Day that will take place in Stockholm on December 10. Please, will you by sending an e-mail to sofie.unnersjo@bufab.com, and I hope to see you all in Stockholm in the beginning of December. So finally, I will end this call by sum up the quarter and say a few words about the priorities ahead. To sum up, I'm very pleased with the performance in the quarter. We delivered a strong organic growth of 6.5% and record high gross and operating margin. We have now seen strong year-on-year development in our gross margin for 13 consecutive quarters, and we expect the gross margin to continue to improve during the rest of the year. Looking at the market, the geopolitical uncertainty remains, but we saw some improvement in the market during the quarter. We also see somewhat higher purchasing prices from Asia that we, of course, handle as we normally be in beef in a good way. Looking ahead, our priorities remain the same, and we will continue to execute on our strategy. Take up to gain market share, gradually improving our margins and have good control of our cost base and, of course, delivering a solid cash flow. We'll focus to continue our value journey with a clear focus on improving our customers' product on for our customers and also improving our product mix and also continue our work with implementing value-based pricing organization. Overall, we have a very strong momentum in the organization, and I think we are very well positioned for the coming years to serve our customers in an even better way. That was my final slide for today, and I will now leave the floor open for Q&A, please.

[Operator Instructions] We start with the first question from [ Laura Mohtadi ].

Just a couple of questions from my end. You said that you expect the gross margin to continue to improve for the rest of the year. But as you mentioned, you also see higher purchasing prices in Asia to sort of meet year-on-year or also about this Q3 level? And also, how quickly can you pass the Asia increases on .

As I mentioned, we expect the gross continue that, I think, is based on what we've done, I would say, many quarters and years back actually. It's not a short-term impact. It's long term. working that our system done to gradually improve our gross margin, so that is sustainable. When it comes to changes in the price level from Asia and also even before increases from Europe, that is something that is natural for us to work with and pass on to our customers, and we don't see that impacting us in a negative way. .

Okay. Very clear. And are you maybe able to sort of split out how much of the organic growth that was price versus volume? .

Normally, we do not go into that kind of detail. The only thing I can say is that it's basically a combination between taking market share increased volumes that we saw a bit more now in this quarter maybe relative to the previous quarter 2026 as well as a price component, as I said, but we don't go into these states when it comes to that.

Okay. And on the duty refunds in the Americas segment, can you maybe specify what the EBITDA impact was? And also just on the broader market. Are you seeing any signs of stabilization of the automotive markets? .

Sorry, can you repeat the first question? What did you say? We lost you there.