Bufab AB (publ) (BUFAB) Earnings Call Transcript

Good day, and welcome to the Bufab Q4 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Mr. Erik Lunden. Please go ahead, sir.

Thank you. Good morning, and good afternoon, everyone, and a warm welcome to Bufab's year-end report for 2022. My name is Erik Lunden. I am President and CEO of Bufab Group, and I'm sitting here together with Marcus Soderberg, my CFO. I will start today's presentation to go through the Q4 summary and then jump into the year-end result of 2022. After that, I will leave the word over to Marcus for some financial highlights. And after that, we'll go through the different segment performance in the quarter. And at the end, we'll sum up the presentation with the outlook for 2023. And then, of course, we'll have a Q&A session at the end. If we then start with the Q4 summary, Page 3, we end up with a very stable end of the year and a very strong year for Bufab Group. If we start to look at the top line, we had a strong growth in the quarter of 30% mainly driven by the latest year's acquisitions. If you look at the organic sales, we were up 1%, impacted by weaker demand in the end of the quarter and strong comparative figures. Order intake was slightly higher than net sales. And if you look at the different segments, it was segment West reported strong organic growth and weaker demand in segment East and UK/North America. If you look at the profitability point of view, higher gross margin explained by a favorable business mix and lower share of operating expenses due to continued good cost control in the group. And looking from an EBITA point of view, it was a strong improvement, plus 43%, corresponding to operating margin of 11.7%. I was very pleased to see that we strengthened our cash flow in the quarter. Operating cash flow improved and expect this to continue also in the coming quarters of 2023. We then continue on Q4 and -- sorry, on Page 4 and looking at the full year results, '22 was a record year for Bufab Group. We delivered our highest sales, operating profit and earnings per share ever. Net sales increased 44%, reaching almost SEK 8.5 billion, and 12% was organic growth. Order intake, in line with net sales, and I was very pleased to see that all segments was contributing to the growth. We also had very strong EBITA in the year and increased earnings per share. EBITA increased to 42%, corresponding to a margin of 11 7%, and earnings per share increased by 29%. And Board the of Directors of Bufab Group proposes to raise dividend to SEK 4.75 per share. If we look at some other highlights of the year, we made 3 strategic acquisitions with a combined annual turnover of more than SEK 1 billion during the year. And we also continue our work with -- when it comes to sustainability. During the year, we were validated on the SBTi in our goals, and we'll continue working on improving our way we work with our CO2 emission during 2023 and onwards. We also feel that we are in a good position for continued long-term stable growth and profit growth for Bufab Group for 2023 and onwards. Having said that, I will leave over the word to Marcus for some financial highlights. Please, Marcus.

Thank you, Erik. So we'll continue with turning to Page #6, and you will see a table of the financial highlights of the group. We start at the top, and you can see that the order intake was slightly higher than net sales in the month. Total net sales increased with 30%. Out of the total growth of 30%, most of it actually come from acquisition. About 21% came from acquisitions. We also had some favorable currency effects. Approximately 8% out of the total growth came from that. And as Erik said, initially, the organic growth was 1% in the quarter. Organic growth for the quarter was mainly driven by a strong development in segment West, who actually had another strong quarter. The organic growth in segment East and segment UK/North America was, however, negative for the first time for quite a long time. And the reason for that is several things, really, a weaker quarter in general in terms of demand, but also, on top of that, very strong comparable figures in the Q4 2021, and we'll talk more about that when we dive into these segments. The gross margin, if we change to that, increased somewhat in relation to the comparative quarter. The high gross volume was mainly attributable to improved business mix versus the comparative quarter. If we look at the operating expenses, you can see that those declined slightly versus the comparable quarter. But if you adjust for remeasured additional purchase consideration who had a positive impact of approximately SEK 3 million in the quarter and a negative impact of approximately SEK 14 million, SEK 15 million in the comparative quarter, it's -- then you can see that the share of operating expenses actually increased slightly to 16.6% versus 16.2%. So nevertheless, even if we adjust for this, we still see quite good and solid cost control in the group, even though volumes are slightly going down. All this together, strong growth on total, in combination with somewhat higher gross margin and somewhat reduced operating expenses, our overall EBITA increased with 43% in the quarter, corresponding to SEK 242 million. And operating margin also, as you can see in the report, had a good development and ended up in 11.7%. Adjusted for remeasured provisions for additional process consideration, the EBITA increased to SEK 239 million versus SEK 184 million the previous year, corresponding to an EBITA margin of 11.5% for both of the years. We turn the page to #7 and have a look at the first graph at the left showing our growth track record for the last 28 consecutive quarters. And as you can see, during 2022, we have seen very strong and solid organic growth, and not only organic growth, but also total growth. So both strong organic growth driven partly by price, at least in the first, mainly 2 and also 3 quarters, but it drops off slightly quarter-by-quarter, you can say. And if you look at the right graph showing net sales and EBITA development, as said, already nice development growth-wise for many quarters in a row. But since -- basically, since we launched the cost savings program back in late 2019, we have also seen quite an impressive increase of profitability for Bufab overall of the group. So the positive trend that we have seen now for more or less 2.5 years continued throughout the fourth quarter as well. With that said, we turn the page to Page #8, and we'll talk a little about cash flow situation and also indebtedness, and we start with cash flow. And as Erik mentioned as well, we have been seeing better cash flow during the fourth quarter. Main reason for stronger cash flow in the quarter was that we did not build up inventory with such a pace that we have been doing during the last couple of quarters. And also it is a result of the actions that we took, more or less, in midyear of 2022 with starting focusing on cash flow, so to say. So the development you see in terms of operational cash flow in the quarter, which was significantly higher than the previous 3 to 4 quarters, is a result of that focus. And like Erik said, we expect that to continue going forward. And why is that? The main reason is that we are now -- like we have talked about during the last couple of quarters, we have more or less normalized our balance sheet in terms of net working capital in order to handle the overall conditions on the market with longer lead times and also high organic growth at least during the first 3 quarters during the year. And now when lead times have dropped back considerably, together with volumes, obviously, going down slightly. We're now looking forward to renormalize this and reduce net working capital, to be frankly, also going forward. So like Erik said, we're looking forward to see the cash flow gradually increase quarter-by-quarter going forward. If we look on the right graph, looking at the net debt to EBITDA, as you can see, we have been up on high levels, mainly connected with the latest year's acquisitions. We have been quite active when it comes to acquisitions, made 6 of them during the last 4 to 5 quarters. But it's nice to see, however, that we're now, quarter-by-quarter, like we have did before, reducing down the net debt to EBITDA and, of course, better cash flow. As we saw in the quarter and also hopefully going forward we will, of course, bring down those multiples even further, so that we can come back with the balance sheet that supports our strategy when it comes to acquisition also going forward. So focus on cash flow, focusing on making sure that we land the already made acquisitions and also that we pay off debt and slim down the balance sheet, so to say. With that said, we turn to Page #9, and I will not stay here for so long time. It's just a bridge showing who -- what segment that is actually the biggest contributor to the profit increase. And as you can see, it's basically the same segments in the quarter as it is for the full year. We have had strong development in North, of course, partly driven by the acquisitions in many recent years, Pajo Bolte and Tilka. Also West has contributed nicely, both in the quarter and accumulated for the years, also that partly driven at least by the acquisition of Jenny I Waltle, but also driven by strong organic growth. East has been still struggling a bit, despite an acquisition in CDA Polska in the first half of 2022, but are facing maybe a bit more challenges volume-wise, which we will talk about later as well. UK/North America, also kind of a shining star from a segment perspective, also adding a lot to the profit increase versus previous year. So I think I will end there, Erik, and leave the word over to you to continue to talk a bit about the individual segments.

Thanks, Marcus. So if we then turn to Page 11 and start with segment North, and that is our operations in Sweden, Finland, Norway and Denmark. The segment noted a continued favorable growth during the quarter. The total growth amounted to plus 19%, and 1% was organic growth, with the order intake was slightly higher than net sales. If we look at operations in Sweden, Norway and Finland, it was stable demand. And if you look at Denmark, it was a mixed performance with HT BENDIX, which is exposed to kitchen and bathroom industry, have a weak quarter with lower volumes, while Pajo Bolt that we acquired now during 2022 continues to have very strong performance in the quarter. The gross margin was somewhat lower relative to comparative quarter primarily driven by lower volumes and a negative business mix then, especially in the manufacturing companies that we have in the segment. The lower gross margin was fully offset by a lower share of operating expenses, and the lower share of expenses is a direct result of continued effective cost control in the segment. If we then continue with the segment West, our operations in France, Netherlands, Germany, Czech Republic, Austria and Spain, was continued to have very healthy demand in the fourth quarter. Total growth of 25%, 10% organic, and this was driven by underlying demand that was very strong in the quarter and increased market share gains in segment West. We saw that operations in Netherlands, Czech Republic have -- continued to have very strong performance. We're taking market share there, and there's a high demand in those countries. We can see that a few industries, like automotive and park and recreational environments, have very strong development in the quarter. Gross margin was somewhat higher than in the comparative quarter, a result of positive business mix compared to the previous quarter last year. Operating expenses decreased as a result of continued healthy cost control and then also, of course, the higher volumes contributed in a positive way for the segment. East then, that is operations in Poland, Hungary, Romania, Baltic State, Slovakia, Turkey, China and also Southeast Asia, here, we had a favorable growth also in the quarter, total growth of 9%, but organic growth was down 5%. And as Marcus pointed out, the negative growth was mainly coming from a weak development in our operations in Poland and also in Singapore. And here we can see that, for example, the outdoor industry that had a very favorable development during the pandemic now showing lower demand, and that's impacting our sales in East. Our newly acquired company, CDA Polska, had a very strong development in the quarter. And looking at the whole segment, the order intake was higher than the net sales. Looking at the gross margin, somewhat higher than the Q4 last year. And here, CDA Polska is a big contributor as well. And we've also been good at could -- successfully passed on increased cost to our customers in the segment. The share operating expenses increased. That's mainly driven by the lower volumes than in the segment. And in total, operating profit then was flat, while the margin declined slightly. Looking then on Page 14 in UK/North America. It was overall a very strong growth, 61%, but this was driven by acquisitions and the currency. If we then look at organic growth, it was down 4%, and the reason behind this is the strong comparative figures. But also we see less demand for stainless steel products in the U.K. and also the RV industry in North America. We also have some really positive development. Ireland had a really good development. And also good volumes come out from TIMCO that we acquired during 2022. The gross margin was lower than in the strong comparative quarter that we had in 2021, and the lower gross margin was primarily attributed to the acquisition of TIMCO. TIMCO has a lower gross margin than the group overall. If we look at the operating profit, increased while the margin declined slightly in the segment. That was all our segments. If we go to -- let me see now, we are on Page 15 and say a few words about M&A and acquisition that is -- that support our way of growing our business. If we look at our journey since the Bufab Group was founded in 1977, we have done more than 50 acquisitions now. And during 2022, we added 3 companies into the group, that was Pajo-Bolte, TIMCO and CDA Polska. And the work is now ongoing to integrate those companies in a good way in Bufab Group. And so far, the performance has been very good for those 3 companies. Overall, we have added more than 900 employees during acquisitions and a SEK 3.4 billion in turnover. And we will continue to ensure that we have a healthy pipeline when it comes to acquisitions. We will continue to work to be a consolidator in a fragmented market, and I think we are in a good position to continue that also going forward. If we then go and sum up the quarter and turn to Page 17. So if I look at the quarter overall, we can say that we had a strong overall growth in the quarter mainly driven by the latest year's acquisitions. The organic growth in Q4 was hampered by the weaker demand the end of the quarter and also strong comparative figures in the end of 2021 then. Strong results in the quarter due to acquisitions and somewhat higher gross margin and also a lower share of expenses in the group. Looking ahead then and the outlook, given the situation in the market, the geopolitical situation, the macroeconomic situation, there is a lot of uncertainty ahead of us now for 2023, we have seen in the quarter there is a higher caution noted among customers in certain segments. And we have, of course, continued to be preparing ourselves for more difficult times and lower demand in some segments. What's important to note is that we have a very well-diversified customer to the portfolio in Bufab Group with a good diversification, so that is, of course, helping us in tougher times. If we look at the short-term priorities, we will continue to focus on taking market share. A weaker market and tougher market conditions overall is actually opportunity for a strong player like Bufab to take market share. Our customers, they will feel a lot of cost pressure. And a consolidation of seaport suppliers will increase, so this opened up opportunity for us to be active and take market share, and that is a big focus for us for 2023. Of course, also, we will continue working to protect our margins, working on our cash flow and our inventory to be able to reduce our debt going forward. And then, of course, we have many different kind of efficient projects ongoing to improve our productivity, also how utilization overall and the net working capital. That was my final slide, so now we leave the word over for a Q&A session. So operator, please open up for Q&A.

[Operator Instructions] We will take our first question from our participant.

So Johan from DNB Markets here, and congratulations on a strong quarter. So you have some cautious guidance for development in 2023, but could you please give some more details regarding the magnitude of this and the different end markets you see going forward? Are these the same segments as already flagged?

Yes. Johan, thanks for your question. Yes, as I pointed out, we see some cautiousness coming from customers in a few industrial segments. As I mentioned also before, if we look at -- starting with the segments that have a favorable impact in the pandemic, here, we see a clear lower demand like outdoor, for example, but also kitchen and bathroom, and we expect that to continue to be on a lower demand level also going forward. If Well look at also graphical aspect, U.S. also, and U.K. to some extent, we see a little bit of lower demand in some segments. The RV industry also have a positive development during the pandemic. We have seen in the quarter lower demand. And the same thing then go with stainless steel in U.K. So that is what we expect. So we can say that's a combination of some cautiousness coming from a few different industrial segments, but also, you can say, geographical diversity here as well, with both East and UK/North America as the main contributor when it comes to uncertainty.

Okay. And just a follow-up question then. We see the inventory is higher, but the trend is getting better. Now that you talk about a potential working capital release during the next year, could we expect the M&A agenda to resume during the year to compensate for a possible then organic decline?

We will continue looking, as I said, for interesting M&A targets during the year. And we have, as I say, I would say, a healthy pipeline of companies we could acquire. Having said that, we are also coming from, you can say, 12 to 18 months of quite aggressive M&A agenda. We added 3 companies during 2022, and TIMCO was a major contributor. It's a big company in U.K. And we are occupied of -- into getting those companies as well. And in a market situation like we are facing right now, and also with our balance sheet, we will most likely expect lower activity on the M&A market in 2003 compared to what we had in the past. But our strategic agenda has not changed. We will continue to look for attractive targets. And if something comes up, we will find a solution to acquire that company. But of course, we would not expect the same activity as we had in the past.

[Operator Instructions] We will take our next questions from our participants.

Yes. It's Karl Norén here from SEB. I have a couple of questions here. Maybe if we start on the organic growth side, I think it's been clear that we have seen the acceleration of organic growth here recently. I'm just curious about what you can say regarding the upcoming few quarters. Because I guess, when we roll into a new year, is it to be expected that we should see negative organic growth for Q1? Or what's your best guess? And also if you could comment anything on, let's say, the development in January year-over-year would be interesting.

Thank you for your question, Karl. Marcus here. Yes. I guess, the question you're asking is the question everybody would like to have a very good answer on, so to say. It's like looking into a crystal ball, of course, when it comes to demand in the more long run, so to say, I mean. But when it comes to the demand in the more short run, I will say that, I mean, demand dropped in Q4, but we should also remember that we are now, I would say, mainly from the fourth quarter and onwards, facing very, very strong comparable 2 quarters that we should have that in mind and bear that in mind. And we should also know that quite a big portion of the organic growth throughout 2022 is not volume driven. It's price driven as well. That effect is, however, becoming less and less throughout 2022, and it was not that much in the quarter actually. What we expect -- or what we saw in the fourth quarter that stands out a bit was that the December was a particularly weak month, and that's not really uncommon when there are uncertainty in the market. We saw that -- some of that came back in January. So you need to look at those 2 months together, so to say. So it's basically like we said in the report that the uncertainty is there. But the same, more in the long run, it's hard. But at the same time, the order intake was slightly up in the fourth quarter versus net sales, not much, but slightly, and that normally gives us quite a good view of that, at least the coming couple of months, so to say. But we also know that when volumes slow down, and if it continues to slow down, we will normally get hit a little bit more in the short run due to inventory reductions from some of our customers. We saw that in the fourth quarter as well, and it might be -- so that we see that in the coming quarter as well. But to speak frank, it's very hard to say anything about the future outlook, other than that there is an uncertainty, and now we are starting to see lower volumes, but the order intake in the quarter was strong. So it's not like falling out of a cliff or anything like that. And it is actually, like Erik said as well, there are certain industries that stands out with particularly lower demand, but there are also those who are favorized by the actual climate, and those are going strong instead. And you see that basically, when you look at our segments, some are strong, some are not strong. And the reason for that is that the individual companies in Bufab Group are, in many cases, more weighted into specific industries than on an average level, things like that.

Okay. That's a good answer. And then if we look on the margin side, another hot topic here. I mean, if I look historically, I mean, Bufab has -- before the dynamic, you did slightly below 10% in EBITDA margin during the last year. So then you did kind of a cost reduction program during pandemic and an efficiency program, et cetera. I'm just curious on what do you think on the margin side. I mean, even in a weak year now, if this turns out to be weak year, are you confident that you will be able to maintain a margin above 10% given that during -- or before the pandemic actually, you did not really reach this level? Or is Bufab now at the, sort of, say, a new normal level? Would be interesting to hear your thoughts on that.

Yes. I think you can put it like this. When it comes to guiding margin-wise going forward, that's nothing that we normally do, and we will not do it in this case either, so to say. But to answer your question, I guess, you can put it like this that we have put up a target saying that we should reach a 12% EBITDA margin at the end of 2023 in more of a long-term perspective, if you understand what I mean. That should be 13% in a good year. It could maybe be 11% in a worst year, if you put it like that. But were -- that's what we are guiding for. We are looking forward to delivering 12% sustainable going forward. That's what we can say. And if we now go into a market which is weaker, of course, we need -- we have some actions that we can do and also are already working and preparing with -- when it comes to reducing costs, et cetera. But that's basically what we can say about that.