Ependion AB

Ladies and gentlemen, welcome to the presentation of Bayer Electronics Group ABQ2 2020 reports. Today, I am pleased to present Peer Samuelson, President and CEO, and Joachim Loren, Executive Vice President and CFO. For the first part of the call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. Please be aware the call is being recorded. Speakers, please begin.

Thank you very much. This is Per Samuelsson. Welcome all of you to this Q2 report from Bayer Electronics Group in the middle of the summer. I can tell you some sun is coming up now, at least in the south part of Sweden, so that's good. First of all, we will go through this as we normally do. The headline for this report says, Fault Actions Mitigate the Effects of COVID-19. while maintaining a focus on future growth. That covers the presentation, more or less, what we will go through. Everybody realized that the COVID-19 situation has been hitting us. And I would say that Q2 is probably the quarter where you can see it the most. And therefore, we can see that there are impacts and there is drops in the sales in the different units and different ways, and we will go through that. But I also already now will say that we have taken a lot of very quick actions during, I would say, from February and onwards, which means that taking down costs and cash flow and so on, not taking down cash flow, increased cash flow, which means that we are in a very good situation when this, so to say, crisis is over. If you look here, I mean... As I said, we expected this situation for Q2, which means that there are lower activities in sales and order intakes in this quarter. But fast actions, including then the restructuring program that we announced last quarter, have then been well-received and well-acted. There have been good actions in the organization. which means that we have taken down the cost significantly during this quarter. And we can also see that the organization have adapted very good into the digital interaction. And even though, as everybody realized, there is no travels, we don't meet customers physically, it has been a lot of digital meetings the last three, four months. And I personally, I didn't believe that was possible, but that's very, very good. And it also tells us that the activities at the customer side hasn't gone down. And it also means that when we're coming into the end of the year, we can see that we haven't lost that much when it comes to sales time. So we still believe that when we're coming to the end of the year and hopefully at least the economic effects of the crisis has started to get over, we are in a very good position going forward. Objective for Q2 was to have at least a small positive EBIT and we came in with that. And also, as everybody understands, we have been focusing a lot on the cash flow situation because we need to have a good financial stable situation when you're in these types of situations. And here I must say that the whole organization has acted very, very good. So we are in a very good financial situation as of today. And then we also very early and also those of you that listened to us last quarter after quarter one, We said very, very directly that we want to make sure that we are, when this crisis is over, that we are in a very, very good situation coming out of it. So we have also been spending a lot of time with customers that also we have been continuing on the development side. And we have made sure that also the supply chain is in good shape. So it means that we haven't lost time from those perspectives. This means that we are in a very good shape when this is over. We then go into the next slide. A couple of words on each entity. We have, during the last years, in our reports, been stating that if there is coming low economy going further, we normally can see it quicker in bale electronics and querenics, and a little bit slower down in the vestamo, and that's exactly what we see here, especially in Q2. Vestero has gone down a little bit, but not that much. And they have then also, by good cost control, been able to protect EBIT margin around a little bit more than 10% in this quarter, 11.4%. Then you saw a further drop in Bayer Electronics and Carenix, but you can see in both those units that those two units have also been taking down cost a lot, which means that they have done the best of the situation, if I put it that way. We also, going forward, when we look into the future, we foresee that if you take the end of the year, if you look at customer activities and where we start to see where we start to be specified by customers, and we expect orders to come back and increase, you can say, I would say after summertime, then we can define summer, but let's say after August somewhere. And that's all the indications we get at this moment. But of course, if this pandemic that is going on in the world will get a sort of a second hit, then we have a different situation. But at the moment, you can see that in Asia-Pacific areas, we are at the moment okay. And we have seen the last part of Q2 that Europe starts to pick up, country after country. So that looks okay, given the situation. And then we have U.S., that is the problem at the moment, that we still see low activities because of the situation in the United States at the moment. Once, and we have said, once the crisis starts to fade off, we will be in an even better shape than when we went into it. We have been, of course, then taking down some costs a little bit. We are more effective. We don't need that high increase in sales before we are in good shape again. A comment I could also say is that in a normal situation, we would, of course, not be happy with this quarter result. But given the situation, I must say, from my perspective, it's okay. When we look into this in March, April, it could have been much worse, to be very frank. A couple of things when it comes to the COVID-19. I think everybody realizes that, as everybody's doing, people's health and safety is first. And then we have been, during this quarter, having a lot of people been working from home. And you can see, all of you, that that works. You can do it. But, of course, a long-term scenario, that's not good because, at least in our company, people want to meet each other. So we start to be in a situation where more and more people will come back after summertime if no dramatic thing happens on the other way around. workplaces and, of course, distance, safe, we wash their hands and all of that. That is, of course, obvious. We have also, when it comes to the different type of packages around in the world, I mean, many countries have different, you know, support packages for companies. And we have been using those when we think it's valid, so to say. We see that we have been able to, for instance, in Sweden, to cope a lot. So we haven't gone down so much in time, and we haven't been asking the government to pay us because we think that if it really will be bad at the end of the year, then we will really use it. But we want to use it when we need it, if I put it that way. But totally, you can see in this slide, and we've seen it in report, we have gotten some sort of cost support from the different countries with a number of roughly 5 million, and we also have got liquidity support on roughly 25 million. And as I said here, no court dates have been applied for in Sweden yet. And as we see today, we don't see that we will go into it if it continues as we believe. Then we have also had a very good and early discussion with the bank. And we have an additional credit facility in place if we need it. But at the moment, we don't see that we need it. But it's there if we need it. And that's, of course, very, very good. Yeah, and last point, Bay Group will always adapt its cost levels. So what we say is that if we see any more negative things coming in the future, then, of course, we will adjust costs and do other actions. And we have, you can call it a plan B and plan C if that will come up. But once again, at the moment, we don't see that coming. Joakim, we'll later on go into each unit, but you can see that this quarter, if you look at the order intake as well as the sales, you can say that they are both order intake and sales are lower. Then you can call it lower compared to Q1 and also lower to the corresponding quarter last year. But once again, that was expected coming into the Q2. And then we can always discuss if it's higher or lower than expected. But this is roughly what we expected going into this. And I would say that the backlog, if you look at the overall backlog, is roughly on the same level. I mean, it says 107% versus last year, 95% of that if you look at organically. But overall, we haven't seen a dramatic drop in the backlog. So we are still in a healthy situation. going into the second half of the year. By that, I'm handing over to Joakim, and I will come back to do some conclusions. So please, Joakim.

Hello, everyone. This is Joakim. I start with going through the overall group. The headline is similar to what Per said earlier. I mean, we have an impact of COVID-19, as expected, going into the quarter. but we have taken down costs and done actions to dampen the effects. The order intake, $335 million in the quarter. The sales, $358 million, giving us a small EBIT of $7.9 million for the quarter. As I said, we have taken down the costs. We use the term significantly. Part of that is, of course, coming from the restructuring program that we launched in the previous quarter. If we compare our overhead cost mass, Q2 compared to Q1, we have taken down 13%. So it's relatively high numbers here, but that then gives us the EBIT that we talk about. We should... Also notice that we have had the currencies against us. We have a negative total currency impact on the EBIT level of 7.5 million. So we have an uphill also when it comes to currencies in the quarter. If we look at the financial net, that is also relatively negative for you that look lower down the profit and loss sheet. That has also been impacted by the FX, and unfortunately, we come out with a very small negative net income of 0.8 million. As Pam mentioned earlier, cash flow has been positive in the quarter. I think, as stated, the organization has taken on the tough situation, and we have managed our cash in a good way. and despite the relatively low profit, we still have a positive cash flow in the quarter, where Vestamo organization actually has been the biggest contributor to the total. But again, all across the organization, we handle our cash in a good way, and that's something that we are quite happy with. And with this positive cash flow, we have managed to in the quarter actually lower our net debt during the quarter. So let's slide into the three business entities, and we start with Vestamil. The heading is well-performing. We state that, I think, giving the situation with the COVID-19 and deliver an EBIT of 11%. I think that's well done for the organization. Order intake, 199 million. sales 189 million and an EBIT of 21.6. If we look at a comparison to Q2 last year, we have increased orders, we have increased sales, but of course we have then a contribution from the two entities that we acquired last year. So organically, there are some drops on the orders and also on the sales. We should also note that in the quarter, we have not booked any larger orders in Vestamo. We have some mid-orders that we normally have, but no larger orders in the quarter. When it comes to the entities, Meratech and Virtual Access, We have had, or we have, ongoing activities, integration activities, where we now state that Neratech is fully integrated. We have even also changed the corporate name from the company to Vestamon Neratech AG. And we're ongoing when it comes to virtual access, the Irish company. Both entities contribute to the bottom line and... We even state here that Neratec, they shine somewhat, and that's nice to see. It's a good organization, and they have performed very well in the quarter, which we are very happy to notice. Then finally, you that follow us, you know that we have been focusing in Vestamo on the new segments, power distribution and trackside. We are continuously working with that, and there are products and solutions coming continuously and more will come later on in the year. Let's go into Bayer Electronics. Here we state significant affected by COVID-19. Bayer Electronics, they had an impact already in the first quarter. We see a further impact also now in Q2. If you look at the order intake, 121 million, the sales 153 million, and an EBIT of minus 2 million for the quarter. For you that remember, you might remember that in Q1, we have relatively high order intake in Bayer Electronics, and there we should be aware that some customers placed some orders in the end of Q1 to secure deliveries in Q2. So, we need to look at orders combined Q1 and Q2 for Bayer Electronics. Looking on the regions, as past stated earlier, it is U.S. or America that we see the highest drop, while MAI is still down, but not in the level of the Americas. And Asia is down. basically almost flat. So there are big variances in the regions. We have, for quite a long time, talked about the phase-out of the old product families. That has continued during the quarter, but we are getting close, and soon we are finalized in that process. When it comes to costs, a big chunk of the restructuring program was implemented in Bayer Electronics. That has been implemented, and we see the effects. And with the cost reductions, it's still negative, but it's not dramatic. I think we were able to adjust in a good way, I would say, in the business entities. Finally, as you might remember, end of last year we announced the agreement with Otis, the American company, the elevator company. That is ongoing according to plan and we will start doing regular shipments now as we speak basically in the month of July. And that will then contribute for the second half of this year. Corenex, the small entity, continued impact of COVID-19 also in the quarter. 20 million of order intake, 19 million in sales, and an EBIT of minus 3 million. Corenex experienced a really tough drop already in Q1, and basically Q2 has remained on the similar level. We do see a higher activity on the customer side in China and Taiwan. but that is not compensating as we have quite some volume from CoreNX also going to the Europe market and Americas. We did do also cost reductions here, and we have dampened the loss. Later in the quarter, we have more balance between the sales and the cost situation, so we're going in the right direction, but still there is this loss of 3 million. We should be clear that we have maintained a relatively high activity level on the development side, where we have redesigned basically the hardware and the software into a modular approach. And we have started to release some products, and there will be more coming during the rest of 2020. And finally, the cooperation between Bayer Electronics on the sales side with CoreNX, in the European market. That is continued and hopefully we will see good effects of that going forward. That concludes the total and the business entities and hand over to you, Per.

Thank you very much. Quick summary. First of all, as we said, COVID-19 impact in the quarter has been, you can call it significantly, And we estimate a drop on roughly 20% on sales in the quarter. And that is, of course, a big number. Having said that, you can see that Vestamo is still on a very okay level. And we can also see that the actions that have been taken in Bayer and Krenix also make it possible to come back to profitable situations. quicker than we would have been doing in the situation earlier because of the cost cutdowns and also higher efficiency. But it's also there that for Bayer, for instance, we have now, as Joakim mentioned, step by step we are ready with the change from old products to the new ones. And when it comes to CoreNX, when we go out of this year, they also have a very good product portfolio going forward. So when, and I'm not saying if, I say when we have a quarter that is with good and normal financial situation, I dare to say that then we will have a good profitability also in those units. And we don't see this year as a lost year. Perhaps you can see it's a lost year when it comes to growth and profitability, but there has been a lot of other things going on at this year and also this last quarter. And I would say that the customer activities, as I said before, is one of the most important things. Once again, I didn't believe that was possible to have those high customer activity in a situation like this. But that's well done by the organization. If you look a little bit going forward, we're stating the reports. that we don't see short-term, and by that we mean the next couple of months, dramatic changes. I mean, now we have still COVID-19. Perhaps I should also mention that the oil price situation when it comes to U.S. has some effect. But we also see when we get different messages from the customers that we foresee that when we're coming out of the summertime, as I said, they have started to say that I will place orders in a better level again. So at the moment, I'm quite optimistic when it comes to the end of the year coming into Q4. So once again, we should try to have this level for a couple of months and then start to speed up again at the end of the year. And I hope that will be the situation going forward. But as we say on the outlook side, we don't want to give more precise statements because of the situation, and I think you can understand why. By that, I then want to open up for questions.

Thank you. If you wish to ask a question, please dial 01 on your telephone keypad now to enter the queue. Once your name is announced, you can ask your questions. If you find it answered before it's your turn to speak, you can dial 02 to cancel. So once again, that's 01 to ask a question or 02 if you need to cancel. There'll be a brief pause now whilst we register any questions. Okay, we've just got one question in the queue so far. That's from the line of Harvan Hanna of Redeye. Please go ahead, your line is open.

Hi guys, thank you for the presentation. If you start with the customer activity, you mentioned that it hasn't changed that much. So is the lower sales numbers and order intake numbers a result of longer sales cycle or more hesitant customers? How should one think about that?

I think you should do it like this, Haman, is that what has happened during the quarter, as everybody knows, there has been a lot of companies that have been closed down. A lot of people in our customer side haven't been at work. And even though people have been working from home in a lot of places, there has been lower activities at the customer side, if I generalize over there. And which means that if you're not at work, you don't place orders. And also that a lot of the customers have had lower activities when it comes to manufacturing and things like that. I mean, if they take down one further of an activity, let's say that one month has been closed and two months has been open, then you more or less lose one third of the business if you see what I'm after. But once they are coming back, then, of course, I start to order again. And then you can call it part of our business is project-based. And, of course, what you do then, then you postpone some of the project, you delay some of the decision points because a lot of people are uncertain But that's what we mean. That's why you see the sales going down in the quarter as such. But when you then talk to the different customers and ask them, should you close the projects? No, we will continue the projects. Once they are back in the offices and in the factories full time, so to say, then you can see that they start to discuss ordering and things like that. I mean, once again, if you close down things, then business gives down. That's what happens.

I can add also that, for instance, in Bayer Electronics, we have customers that we know have specified us in their designs, but they have not then placed orders yet, giving the situation, but we know that we're in. So once the wheels start to turn again, we will be there and we will get orders. But right now, we don't see that. So what Pa was saying, I mean, there's still activities. We still work together with the customers and our engineers are working with our customers' engineers to do the specification. But orders is to come once the wheels start to go again.

And I think, Havan, this is the central question. So that's also, if I could elaborate one minute more here, because I was quite, I mean, when we were sitting in March, April, I was quite worried that we should be more silent with discussions with customers because, and customers then saying, we wait for the customer with a good discussion. Let's postpone the meetings later. until after this COVID-19 is more in a better situation. But that didn't happen. So in reality, in a lot of the regions, the number of customer discussions increased, by the way. And of course, they didn't travel, so the salespeople could take more calls. And the customer side, they really wanted the calls in different ways. So that's why I'm a little bit when it comes to the speed of coming back. Okay.

Yeah, that's clarified a lot. Thank you. Yeah, and as usual, a question of the pipeline, I guess you answered it somewhat. But do you still find it healthy? Or are you seeing any, let's call it worrying trends?

I try to be transparent in these situations. We go through every month with every unit. We look at the total pipeline in the different units. The pipeline is in a very healthy situation. You can put it this way. We really want the pipeline to go down a little bit because we want the pipeline to be transferred into orders, if you see my point. We have a very good definition. It's It's only pipeline if it's quite a possible order. It's not just wish list. So now the pipeline is still on a quite healthy situation. Yes. Thank you.

And I guess one last question about cost reductions. If the situation would get even worse, do you feel you have... enough room of further cost reductions to mitigate such a scenario? And have you planned for that already?

Yeah, I shouldn't say of course, but yes, as I said, we have a plan B, plan C, you can call it. And what you do is that we have a lot of people from ourselves and downwards that has been into these situations before. And what you look into, now we have been taking down, I mean, you realize that travel costs and some people we have taken away on the administrative side and some, yeah, like a consultant's variable cost and so on. But if this will be worth, then the next step will be to go on, of course, if we have lower volumes, then it will hit the supply chain, then we will take down on that side. Then if it could be, if it would get worth, perhaps we then need to take down the ambitions on the development side. So then we have to take it step by step. But so far, with positive cash flow, with the pipeline as we see, we don't want to do that because a lot of opportunities going forward. But yes, if this will be very nasty and bad, we have more things to do on the cost side, yes. Okay, got it.

I guess I have one last one. I'm curious if To which extent profitability has been affected by delayed deliveries from subcontractors or any other supply chain issues? Have you seen anything?

Some of that during Q1, not so much during Q2. So that's not a major issue for us at the moment. Okay.

Okay, that's it, guys. Thank you very much and good luck.

Thank you. Thank you. Once again, if there are any further questions, please dial 01 on your telephone keypads now. OK, if there are no further questions coming through at this time, I'll hand back to our speakers for the closing comments.

Okay, thank you very much. Then I want to thank everybody for calling in. And from us, we really wish you a good summer. A lot of people need a couple of weeks, I think, including us. But we will be sure to come back in very good shape. And we are very focused and make sure that we come back to a good situation. So once again, thank you very much and enjoy summer. Thank you.

Thank you.