Bufab AB (publ)

Hi everyone and a warm welcome to Bufab's Q3 report. My name is Erik Lindén and I'm president and CEO of Bufab Group. And together with me here, I have Helena Häger, acting CFO. This presentation will be recorded and by attending to the meeting, you agree to the recording. I will start this meeting to go through our Q3 highlights, and then I will give the word over to Helena to take us through some financial details. After that, I will go through some regional highlights and some group news before we end up the meeting with some of the quarter and the Q&A. So if we start then with some highlights of the quarter. Overall, I am very pleased with our performance in the quarter. We continue to execute very well on our strategy and it continues to give results. uh something that was very positive to see that was was that we finally got some organic growth 1.4 percent first time in two years primarily driven by increased market shares the market though contains uncertain with big variation depending on geographical areas and customer segment demand was still strong in energy agriculture and food medical technology and defense but weaker demand in mobile home, trailer market, and also in construction and furniture. We ended up having a very nice gross margin in the quarter, record high on 32.7%, and we now have eight consecutive quarters of gradually improved gross margin. Our operating margin adjusted ended up at 14.2%, which actually is in line with our financial targets for 2026. If you look then on our cost base, the underlying cost base was changed in the quarter compared to Q3 last year, just for one offs. And I think we are good in managing our cost base overall. And we continue to invest in growth at the same time as we take good cost control throughout the organization. Something that was very nice to see in the quarter was some new customer projects across key segments like defense, infrastructure and general industry. And I'll come back to that. I'm also very pleased that we managed to finalize the acquisition of Novia Group in early October. And I have also one slide on that later on. I will now leave the word over to Helena for some financial highlights, please.

Thank you, Erik. So let's look into the financial highlights, starting with the net sales. We can begin by noting a 2% increase in net sales in the quarter, bringing the total to 1,917,000. Even more notable is that we can see a positive increase of 1.4% in organic growth, as Erik mentioned earlier. And that is driven by our increased market share and also the impact of higher prices resulting from US tariffs. And the organic growth is also being driven by all regions, with the exception of Ireland and the UK, which is of course positive and with the Americas making the most contribution. The change in net sales is also influenced by a negative currency impact of 4.4%. And it's coming from the strengthening of the Swedish Krona against most currencies, but especially the US dollar. And that has then led to a revaluation effect. And also the increase in net sales is explained by the acquisition of Vital, which has then contributed with the 5%. Let's move on to the margin. As Erik also said, we are pleased to see a significant improvement in our gross margin, as well as a record high operating margin in the quarter. The gross margin for the quarter reached 32.7% and an improvement from 30.6% in the previous period. We are also pleased to notice that the gross margin increases across all the regions. The gross margin is then of course contributing very nicely to our record high operating margin, giving us an adjusted EBITDA margin of 14.2%. when looking uh moving on looking at our operating expenses we can see that the cost level is consistent with last year when we do adjustment for one of items the primary one-off items include the capital gain from the divestment of land and home home one last year and also cost from divestment within component solution group in us and that happened this year and then we also have an effect of the operating expenses in vital is also explaining the difference and additionally we had a re-evaluation of earn out in the third quarter last year And also worth mentioning on the positive side is that we have benefit from a favorable currency effect. But we also continue to focus on cost control while investing some of the savings into growth initiatives. Our primary focus, I would say, is investing in people and our facilities to support and also drive the growth further on into the future. The cash flow from the operating activities amounted to 293 million SEK corresponding to a cash conversion of 108%. and the cash flow from operating activities was slightly lower than last year quarter mainly due to the reduction in inventories and not being as significant as in the comparable period so the inventory levels Subsidiaries have normalized, you could say, after the pandemic years. And we also see some inventory build up taking place during the year. And that is mainly in order to improve the service level to customers. But also we see a build up of inventory for new businesses that will come next year. And then finally, the net debt against EBITDA ratio has shown a positive trend this quarter, decreasing to 2.3%. And in the current month, we anticipate an increase in net debt to 3.0 due to the acquisition of Novia. However, our estimates indicate that we will continue to improve this ratio, and we expect the next step to reach approximately 2.7 by the end of Q4. Thank you. Over to you, Erik.

Thanks, Lena. I will then take you through the region highlights, and I will start with the region north and east. The total growth in the region was minus 2.1% and organic growth was positive, 0.5%. We saw strong development in BU East and also in Bufa Finland and stable demand in general industry, while furniture and kitchen, for example, in Denmark and the energy sector in Nordic remained weak. Gross margin was strong, up by 3.9 percentage points, driven by improved value sales, custom product mix, and consolidation of purchasing savings. In addition, carriage effects had a positive impact on the gross margin. Operating expenses increased, 27 million compared to last year, but the difference was mainly explained by revolution of earn-out and one-off effects in connection with divestment of Bufablanden Hallborn, but also negative currency effect and inflation. Adjusted operating margin improved to 14.6 compared to 14.2 last year for the region. If we then continue with the region Europe West, here the total growth was 20.5% linked to the acquisition of Etal and organic growth was positive 1.7%. We continue to see very strong development in the Bufa Czech, also followed by Bufa Spain, driven by market share. Demand in energy, defense, infrastructure continue to be strong in the region, while automotive and construction continue to be on low levels. Also here, the gross morning was up 0.3 points driven by price adjustments. Operating expenses increased by 80 million year-on-year, mainly related to Vital, but also investments in some customer cases linked to growth in the coming years. Adjusted operating margin ended up at 12.7% for region west. If we then continue with the Americas, the total growth amounted to 3.6% and organic growth was 12.6, driven by tariffs revenue. and the demand was stable in america's on a quite low level for mobile homes but also for the automotive industry for csg we divested a small manufacturing unit within csg in the quarter and that expects to continue to have a positive effect or for the possibility for region americas in the coming quarters our gross model increased 6.2 driven by improved customer product mix, general price adjustments, but also the effects of tariff. If we estimate the short-term effect of tariff, it's estimated to be half of the gross profit level in the region. But even despite support from the tariffs, we see very strong development in Americas on a gross margin point of view. Operating expenses increased by 1 million year-on-year, but adjusted for divestment within the CST group, the operating expenses decreased for the region. And all in all, the operating margin improved then to a strong number of 22.2% versus 12.5% last year. If we then continue with UK Island, and UK Island is the region that now are challenging the toughest market conditions, I would say. The growth amounted to minus 9.6% and organic growth was negative 4.1%. In the region, we see continued low demand in the manufacturing and general industry, impacting both APEX and Bufab UK. For APEX that are operating within stainless steel, very low prices in the market and that impact their performance. Team Prodo holding up volumes and profitability well in a very challenging market. Gross margin increased by 0.2, mainly driven by sourcing savings for the region. The operating expenses for the region was in line with last year, and the adjusted operating margin was 10.7%. Then finally, we have Asia-Pacific. Here we had a total growth of minus 7.4%, but a positive organic growth of 1.3%. Bifid Shanghai and Bifid India continue to show strong organic growth. in areas such electronics, marine, rail and energy. Gross margin improved for the region by 0.8 due to purchasing savings and also good work with value-based pricing in the region. Operating expenses decreased by 7 million year-on-year, primarily driven by positive currency effects. The adjusted operating margin then improved significantly to 14.3% for the region. I will then take us through some group news that happened in the quarter, but also in October. And I will start with the great news about the acquisition of Norway Group that we see as a very important strategic platform within the Bufab Group going forward. Nova Group is a German expert provider of global sourcing solutions and it fits very well with our strategy. The group has a turnover of 50 million euro in 2024 and profitability significantly higher than Bufab's targets for 2026. Their operation in Germany and Switzerland with sales in Europe and US and also assembly in China and Vietnam. What NOVA do is that they provide customers with sourcing solutions, engineering expertise and assembly, which creates clear customer value and will be a good addition to our portfolio in terms of offering. They have an interesting profile in terms of markets and customers. They are strong in medtech, energy, sanitary and general industry, for example. And we are also pleased to see that Marcus Bauer will continue as MD for Novia Group also going forward and also be a minority shareholder in the group. And we managed to finalize the acquisition in mid-October. So it's now in our books. So why then Norway Group? For me, this is in line with our strategy and fits perfectly well in our plan for the future. As I mentioned before, Norway brings important new capabilities to Bufab through their engineering expertise, also how they work with assembly and technical services and a very interesting place in the value chain. It also expands our footprint in Germany and also in Western Europe with a strong and diverse customer base, where I think it could be a win-win both for Novia's growth going forward, but also for the Bufab groups. It also will have a positive impact on our profitability in the group. Novia had a run rate on significantly higher operating margin than our 2026 target. And also, I see Norvia as a perfect platform for both organic growth within this field, but also add-on acquisitions to build a big player within this field going forward. So, I'm very pleased that we now can welcome Norvia and the Norvia team to the Bufab Group. As I also mentioned in my intro, I'm pleased how we're working actively in the market and taking market shares in many regions. One example that took place now in the quarter was the framework agreement that we signed with Babcock, that is one of the leading suppliers within defence, aerospace and security. We won a competitive framework agreement with competition with other seaports suppliers. in a very interesting growth area for us going forward, which is defense. A little bit short about Babcock, it's a big player within this field, has 4.8 billion pounds in turnover and a backlog of approximately 10 billion pounds. And we think that they are perfect type of customers for our services. For Babcock we have the tailor-made logistics solutions that will be on site for them and it's now up and running actually but hopefully more to come in the coming quarters. And as I mentioned we believe that we can streamline and support Babcock on the procurement and efficiency overall and it will be a win-win with this partnership. One important enabler for us is sustainability. In the deal with Babcock, but also with other customers, we see more and more, especially in Europe, that our strong position within sustainability is a key enabler for us to take market share. One strong recognition for our work with sustainability was that we got the Platinum Ecovados rating in October. and for me this is a positive signal and achievement that we are in the top end when it comes to sustainability within the sea parts industry. I will then finally sum up the quarter and say a few words about outlook and our priorities going forward. First of all would like to highlight once again that i'm pleased in the way that we are delivered delivering on our strategy um i think that our strategy gives clear value to our customers and that is also paying off now in the in the organic growth but of course also in our gross margin and the operating margin we delivered a record high gross margin and adjusted operating margin Even if we then adjust for the tariffs in the short-term US, we still have a record high gross margin and operator margin in the group. So I'm overall pleased how we work with that. We'll continue to have a strong focus on cost control, but at the same time invest in key areas for growth. It could be customer cases, but also, of course, in infrastructure in sales. It puts us in a strong position while the market rebounds. Because the market is still tough out there, it's uncertainty in the market. But all in all, we are still positive about the future. We will continue to focus on things within our control and put us in the best possible position when the market rebounds. So to sum up, continue our work with our strategy, that is to continue to be active in the market and take market share. uh of course continue with the gross margin journey that we are on we still have much work to do here and continue strength from that margin but also then be cost efficient overall in the organization to end up on a strong operator margin and ensure that we continue delivering a strong cash flow focus on our networking capital and inventory That was all for today. I will now leave the floor open for Q&A, please.

So welcome to this Q&A session. I would like to ask you to use the function raise your hand if you have a question and don't forget to unmute when it's your turn. We start with the first question from Johnny Yin. Please ask your question.

Hello. Good morning. Can you hear me?

Yes.

Hi, just a couple of questions from my side. I think I'll start with a quick one on the gross margin in America. I mean, you mentioned already that roughly half of this strong gain stemmed from temporary effects from tariffs, so I suppose it's roughly three percentage points, but can we expect the tariff effect to disappear completely already next quarter, or could this effect remain a little bit ahead as well? That's my first question.

It can remain a little bit ahead as well, so that will be a gradual decline and then as mentioned there are still a lot of other works ongoing to gradually improve also the gross margin in America so it will be two factors here one decline due to this the tariff effect but also gradual improvement with the work the team is doing both in ABS and CSG.

Yeah, yeah. OK, I suppose that's more structural. So this temporary effect will gradually disappear coming. Correct. Yes. OK, that's clear. And then moving to a region west margin, a beta margin there is down 100 bps despite the inclusion of vital. And you also showcase organic growth in that region. So and higher gross profit. So could you explain a little bit what happened there on the beta margin and how should we view that going forward?

Yes, we have some higher operating expenses in the quarter for the West. We have quite significant investments in growth in the West. That's impacting the numbers in the quarter. That will benefit positively for the region in 2026 and 2027. That's impacting. And then, of course, there is, for some companies, a little bit tougher situation in the market. There's impact in the performance. But I would say that I'm all in all not that concerned about the situation in the West. I think they have the cost level under control.

Okay, understood. There wasn't any unusual high cost in that segment this quarter that is...

not should not be extrapolated or yes they will not be on the same level going forward okay can we say something about the magnitude of those costs in the quarter no not really but no details but some of them is investment in growth that will okay gradually disappear yeah yeah okay

Then one on North and East Europe. I mean, gross margin is also very strong in that region. Could you maybe elaborate more what is driving this? Is there any temporary FX effect that is fitting you with a strong or a weaker dollar? Or like how much is structured, would you say? And are there any temporary effects there?

The majority of the improvement is driven by the good work they're doing in the region with the custom product mix, sourcing, saving and so on. But they also have a positive currency effect for the region in the quarter. So it's both contributing, both good work but also a tailwind loss of the currency effect.

Can we pinpoint the magnitude of the currency effect in this quarter from the margin?

And the bigger effect is on the other areas, not on currency.

And then one final on outlook and demand here. I mean, you're now back on organic growth trajectory. And I also, I mean, you recently press released the DAPCOC contract and I feel like you have some momentum in the business now. And this contract, I suppose, is also a result of you having long discussions with customers before signing. Can we expect more of these type of contracts announced going forward? And can we expect this organic growth to continue here in Q4 and onwards as well?

Yes, when it comes to our activity in the market and market share gains, I'm positive with the development in 2025. I think we've secured several important projects that will pay off in mailing 26, 27 and onwards. uh with the new uh way we are working with our customers where we do often tailor-made solutions come to logistics solutions and so on uh there is uh the good thing is that then you get a bigger part of the cake uh but also that drives initially bigger investments to make it happen uh and we expect more of those to materialize in in top line in 26 i would say mainly um so that is positive the market overall i think still remains on a cautious level so i hope to see us delivering organic growth by being good in the market and to see some hopefully this trend to continue that's what we're aiming for

Yeah, interesting. We'll see. But just one final, I mean, I think you usually don't press release new customer contract wins like this one. So was there anything particular reason why you chose to press release this? Or could you say something about the size of this deal?

I can't talk about any numbers, but there are a couple of reasons why we did the press release. First of all is the size of the deal and potential. The second is that we see... defense as a very interesting focus for us going forward and we have secure interesting projects in this area in 2025 and thirdly is the way also that we provide service and solutions to our customers in a case like Babcock where we do I would say significantly helping the customers with efficiency and and way of working and also cost total cost when it comes to sea parts so there are a couple of factors why we choose to do this and then of course also that in this case the customer also are positive and willing to do this as well that impacts

Yeah, yeah, OK, I understand. But is it fair to say one or 2% of sales and then it's beneficial for mix, so it could be even more on?

I will not share any in a detail number. I will just say that it's a good framework that we have signed with a customer that consumes a lot of seaports.

OK, yeah, interesting. Thank you, that was all for me.

Thank you.

Henrik Hinse, welcome to Ask a Question.

Yes, hi everyone. This is Henrik at EPG. So first of all, just one follow-up on the Americas thing. Can you give any guidance regarding how long it will take for the tariff boost effect to dissipate completely from the gross margin?

In the coming quarter, we estimate it to gradually decrease.

But will it still be there in Q1, Q2 or will it be partially there in Q4?

Then I need to have a crystal ball. I don't have it so I can't share that how the market will develop exactly in the Q4.

Sure. And on the organic growth in this quarter, you reported slight organic growth. Now, I was just wondering if you could give any flavor on how much of the net positive impact here is from new customers year on year compared to how the market is developing?

And we see that the main reason for the organic growth is market share gain in different parts of the world. So that is the main driver for this positive number in the quarter.

Okay, yeah, that's interesting. And you have been speaking quite a lot about new customer contracts, not only this quarter, but over the past year. And so I was just wondering, do you expect at some point to see an acceleration in the contribution from market share gains? Can you sort of see that in your pipeline or anything like that?

If we sign contracts like Babcock and Werdestor and others that we have communicated, that will gradually give us a positive impact on the organic growth and market share gains. Then we don't guide on how much this will impact for the coming years. More than that, it will be a gradually positive impact. often how it works is that you build up a foundation with for example solutions in place and then you gradually increase number of c parts from those customers accounts so that is what we expect to happen and on top of that is of course impacting the speed depending on the the market situation and how quick the market rebounds in many areas where it's not that high activity as it was before, for example, with Väderstad and those that are quite low volumes. So no detailed guidelines, I will give you more than that. It will be gradually impacting positively.

But you think it's more reasonable to expect that new customers will gradually start contributing to organic growth rather than that we'll see a step change in growth rates at some point when a lot of contracts start?

Gradually improvement, I would say. That is how it works in our industry. even though that those type of contracts of course start on a higher level than maybe traditional sales that we had in the past but still it's a gradual increase that you can expect okay thank you that's all for me thank you so since there are no further questions uh i hand over to eric to close the meeting okay so thanks everyone for joining today i wish you all a nice day ahead thank you thank you