Ependion AB

Ladies and gentlemen, welcome to the presentation of Bayer Electronics Group AB23 2020 report. Today, I'm pleased to present Pierre Samuelsson, President and CEO. For the first part of this call, all participants will be in a listen-only mode. Afterwards, there will be a question-and-answer session. Pierre, please begin your meeting.

Okay, thank you very much. First of all, welcome to all of you listening to this presentation of Bayer Group. Quarter 3 Report 2020. This is Per Samuelsson talking. If we start to go to the next slide, we can see that there is, and you can see that we have the normal agenda that we normally have, and business update, where it's sort of a summary on the statements on the report. Jay Joaquin will come into the finance and performance, and we will come into sort of the concluding notes in the end of it. And after that, we will have, if you want, a Q&A like that. If we start with a summary of the report, I think everybody realizes, and that's the same, I guess, for all companies presenting a report, Q2 and Q3, we have impact that comes from the COVID-19 like that. And, of course, for us, it has been that we have a drop in volumes during Q3. mainly Q2, and also now Q3. We indicated in the last quarter, and we saw then that Q3 probably will be in line with Q2, and that's more or less what happened. A very important statement for us in this is, of course, that we haven't seen any loss of the customers. So we can see that the volume decreases that we have had it's more or less related to that customers that we have have not ordered as they normally do without the pandemic. We think that some of the customers have a little bit lower capacity because they can't really run the factories with 100%, they perhaps run them with 90%. And we also saw that we know that some of the customers have been taking down inventories and things like that. But the important thing for us going forward is that we know that if we go around the world and also in the different entities, we haven't seen any loss of customers, which also means that when the customers start to order a little bit more and also increase their volumes, we will get the orders again, if I put it that way. We took very early on in March, we started and we took a cost reduction program, and that has definitely had the effect that we wanted to have. We also have seen that we have a stronger Swedish krona, mainly both in Q2, but now also Q3, has affected the result with roughly minus 8 million. But nevertheless, we have going out of the quarter still, even if it's low figures, we have a profit going out of the quarter. When this COVID-19 situation started in March, if I put it that way, February, March, we directly decided that, first of all, of course, the cost thing, but then also we decided to make sure that we Of course, have a good cash flow as possible and also have a good financial position so we can really handle the company during this period. And we also realized, I would say March, April time, that the product development and also to do everything we can to get out of this situation in a good situation was important. And that's also what we have done. We have, after now, the first three quarters, we can see that we had a small positive free cash flow during the quarter as well, but also accumulated for the nine months. And we, as I said before, we have come down on the cost side, but we have done it the way we see it, in a smart way, meaning that we still have an organization in place that is good and motivated. products that is, I would say, better than ever, and we also are organized and prepared to take care of volumes going up the next, hopefully, the next half year. If I go into the next slide, we can see that all three entities, Vestamo, Bioelectronics, and Coenics, they have had impact from the COVID-19, but Vestamo came in a little bit later, And now we start to see in bioelectronics and querenics mainly that we have seen during the end of the quarter three small but significant increases in the order intake. And we also are saying that we can see that signs that the bottom has passed. We believe now when we have gone out of Q2 and Q3 that, as we say, now we see clear signs that the bottom has passed. And we can see that already in the Q3 when it comes to Bay electronic synchronics. And we can also see some signs, but also beginning of Q4 when it comes to Vestamo. We have all the time been saying that the whole strategy is to make sure that when we're coming out of this crisis, when it starts to fade off, we will be in an even better shape and ready for growth. and with the aim as quick as possible to get back to the financial targets that we have, meaning the 7% organic growth, but also the EBIT level of 10%. When it comes to the COVID-19 measures, I will not go through this slide in detail, but I mean, we were sitting actually an hour ago here discussing about this thing. I think we have found out that we have one in the whole organization that have got COVID-19, which is of course very positive, that it's only one and it was not a serious one. And of course we continue with the different things where people work from home, but we also now are back into where more or less in the all offices around the world, definitely in Sweden that people are now also in the office. So I would say 50, 60% working from home and the rest in the office. Otherwise, in Q3, we don't have major effects on result or the financial positions that has to do with things we have got from governments and things like that. So I would say that it's a sort of a clean result. It's clean from COVID-19 supports. We got an agreement of an additional credit facility if we would need that, but as we see it today, we are far from to take that facility in place. With that, I go into order intake, and of course you can see on the volumes the last couple of quarters that the volumes have gone down, both when it comes to sales and the order intake. But the way I see it is that this is very much, as I said in the beginning here, related to that the customers that we have have, of course, then ordered lower volumes, but we haven't lost any customers. And when we now talk and listen to what customers are saying, I mean, they are now starting to be, they have inventory on the right levels. I would say the majority of the customers that we have, with some few exceptions in the U.S., by the way. Otherwise, I would say that most of those customers are now starting to go back into order, to put normal volumes into our order books. And that's, once again, why we state that we have passed the bottom. With that, I'm passing on to Joakim, and we're coming into the financial performance.

Hello, everyone. This is Joakim. I will now, on a couple of slides forward, give you the financials and comment somewhat on those. And I will start with the group perspective. In the heading, we state that, as Pat said, COVID-19 has for sure impacted our earnings. and so has the currency effects. So if we look at the numbers, the order intake was 310 million, the sales was 335 million, and the EBIT was five million. Clearly, as stated before, the currency impact that we have on the EBIT of a bit above eight million is mainly transactional variances. And the major part of that has actually hit Bayer Electronics, even though it has impacted Vestamu and Carenix as well, but the major part is actually hitting Bayer Electronics. As Pat said, we have launched the restructuring program in early part of the year. We see clearly that the effects of that has paid off, you could say, and we see reductions. And if we look on a sequential basis on the overhead costs, we reduce the overhead costs further 7% from Q2. So, yes, we lose on the top line, but we also handle our cost positions all across our organizations in a good way. Bottom line, net income, also positive. or an EPS of five euro per share. Of course, low levels, but this is how it looks. Per said also that we have had a positive cash flow, and it's actually the third quarter of this year. Every quarter up to now, we have had positive cash flow, even though it's small numbers, but still on the right side. So that concludes the group. Now we'll talk Vestamu. In Vestamu, we have for sure also here seen impacts of COVID, but we want to state that the strategic focus that we have had in Vestamu is still there, and it's still the main target that we have for the organization. The orders, they were hit for sure. We had an order intake of 164 million in the quarter. The sales was 182. and the EBIT was 15.6. When it comes to the order situation, as Pat said earlier, we have had negative impact in the quarter as our customers are deferring the investments and reducing stocks, et cetera. However, what we see in the pipeline and going forward we do see good potentials. And this then is also part of the qualification of our statement that we believe what we see today that the bottom has passed. The EBIT was then the 15.6 in the quarter. Of course, a relatively low level compared to where we come from. But again, it is an impact of the lower volumes of COVID, of course. We want to highlight for you that are following us that the two acquisitions that we did last year, Neratech and Virtual Access, when it comes to Neratech, we are basically done. It's fully integrated. We have changed the name of the entity, et cetera, and that is something that we put behind us and look forward. So that's all done in a good way. Virtual access is ongoing, basically on plan. And we want to state that both these entities, they contribute well in the quarter.

You also, you who follow us, you know that we have a lower activity levels in general.

We have maintained the focus on these segments because we believe in these. There will be good growth there. And this is, of course, something that we have continued to do in this quarter as well. And another point that we want to also emphasize, that we continue to invest in the longer future. We did inaugurate an extension of the production facility that we have in Stora Sundby, Sweden, the production plant.

for supply chain setup going forward.

That was Estimil. Bayer Electronics. Here we see that we see a further impact of the COVID, but also we want to state that there are clearly signs of bottom-out. Order intake, 128 million. Sales, 136 million. And unfortunately, a loss of 4.5 million for the quarter as such. The drop of the sales is an effect of the pandemic. And if we look on the regional side, it is mainly in the U.S. that we see the high impact. And I think we all know and we all follow the uncertainties that we have in that part of the world. And obviously, it has impacted us in Bayer Electronics in the third quarter. When it comes to orders, if we look at on a sequential basis, we do see an increase in Q3 compared to Q2, driven very much by good development in Asia, where we see good traction in many markets. And that is, of course, comforting. The restructure program that was put in place, it is also, of course, impacting or helping to mitigate the loss of volume in Bayer Electronics. And if you look on a sequential basis here as well, we lower the overhead cost in Bayer Electronics in Q3 compared to Q2 with another 10%. So we try to mitigate as much as we can. to lower the impact on the result line. We have had some kind of redistribution of the restructuring cost for you who read the report here clearly. You can see that the excluding restructuring is lower than the EBIT on the bottom line, and that's redistribution within the group. We want to highlight that The agreement that we did with Otis by end of last year, we are into regular shipments now as planned and in this quarter and that is expected then to gradually increase going forward. That cooperation works well and there we have seen less impact of the pandemic actually. And finally, the cooperation with CoreNX that we have talked about earlier in the reports and presentations, that one continues. And we believe that there will be good effects out of this kind of cooperation between Bayer Electronics and CoreNX. CoreNX, yeah. They were hit hard in Q1 already. Q2 wasn't too good. Q3 is actually somewhat better, but we state continued impacts. But also here, we want to state that we see signs of bottom-out. Order intake was 22 million. The sales was 20 million, and the loss was just above 1 million on the EBIT line. As stated, the Q3 orders were actually better than Q2, so the science of bottom out is actually qualified by that. Still, of course, on very low levels, but we are not thinking. We are heading upwards when it comes to the order side. It is, if we look regional-wise for GRENIX, it is Asia where we see the positive development, while in U.S. and in Europe, we still see relatively low traction for CoreNX. So that's how it looks in the third quarter. As we stated on Bayer Electronics, the restructuring programs, that has given the intended effect, and we continuously also in CoreNX lower the overhead costs trying to mitigate the loss of sales, and the EBIT was around 1.4 million for the quarter. We have talked before about that we, despite the tough situation, we have maintained the longer perspective in CoreNX. We have invested, you could say, in rearranging this the product offering, both the hardware side and the software side, with a modular approach. And that is continuing. And now as we come to the end of the year and going forward, we will see gradual launches of new products in the market based on the new design. And of course, this will help us going forward, and it will help us also when it comes to the cost side on the products. And the cooperation here between Bayer and Corenex, it is continuing, as I said before. And the focus is the sales channels, mainly in Europe and US, and then also coordinating supply chains, making use of each other so that we can increase efficiency. and also maintain or even create a better customer experience in the way we supply our goods. This basically concludes the financial part. Per, I'll hand it over to you now.

Thank you very much, Johan Kim. A couple of words then. Before I'm coming into the points that I have on the slide here, a couple of words on the COVID-19 situation. As everybody understands, I'm far from an expert on what will happen and what's going on and things like that. But one thing we can see now is that perhaps in March, I believe that this will be start of a pandemic and then it will be an ending. And perhaps I was too naive. I thought it will end, let's say, September, October, November time. But we now know that that will not happen. And it goes in several areas the wrong direction. And we can also, so what we are saying now is that the organization in Bay Group, we need now to learn how to live with this situation. And coming into 2021, we will can't, as we do now, refer too much to the COVID-19. We need to make sure that we, going forward, that we will have an increase in sales, that we will reach the targets of the 10% EBIT rate, also with still some sort of pandemic going on, because we know now that the travel will not be back as normal during next year and so on and so on. So once again, what we are now doing, we are preparing our organization for a sort of a new normal. And if then this will end quicker than we now believe, then that should be sort of a bonus, if you understand what I'm saying. What we now have said, and what we have said all the time the last six, eight months, is that we should go out of this with a stable financial position. And that we definitely have. We have more or less the same financial position now as we had when we started this year. We have now started to be, I mean, some of you that have listened to me before knows that three, four years ago, we had a sort of a product situation where we had a lot of products that were close to end-of-life situation in more or less all entities. Bayer Electronics are now definitely ready with the X2 transition, and we now have product lines in Bayer Electronics that is working in a good situation, and it's one system, if I put it that way. Bestomo has a strong offering in train, as you know, but also now on the track side. And we are very close also to finalize very good product development into the energy sector, which means that we have an alternative traditional network products is quite in a good situation. And as Joakim referred to before, Corenix is also now have done their job, which means that all three entities will have a very, very good product portfolio going into 2021, which is very good. We said before that we haven't lost any customers. And for me, in my position, that's extremely important because when the customer starts to go up again and we see now signs that that is happening, then we know that we will get the orders. And that is, of course, extremely important. And on top of that, we can see in our pipeline that there are also good possibilities to actually to catch some new customers. which means that with a lowered cost base, it will be a little bit, if you understand my point, easier to get up to the 10% EBIT target because we have lowered cost base. And now coming into 2021, then as we said, financial targets, they are in focus. It means that if I come back to what I started this with, that the whole organization should now realize that even if we still have pandemic situations going on next year, we should still be able to reach our financial targets. That will be the most important thing for us going forward. But of course, it starts with to get the volumes up. And as we said, we have said now it's bottom, the bottom, we can see that the bottom, we have reached the bottom. And now we hopefully will see better orders and after orders normally come sales. And then we will have easier to reach the financial targets. So that's a little bit concludes our presentation. So you can see that we have the uncertainty of course continues. But as I've said, we don't dare to have to precise forecast on the near future, but once again, we think that we have reached the bottom. Thank you very much. Then we're handing over to questions.

Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. And the first question comes from the line of Mark Schuster from Redeye. Please go ahead.

Hello, and thank you for taking my questions. I have a few questions about the product portfolio going forward. You said that the one-box solution was very important in order to secure the North American train customer. How much are your bolt-on acquisitions like Neurotech and

virtual access adding to these uh one box solutions if you could brief a bit about it that's i understand the question when it comes to one system or whatever that's referred to at bay electronics when we call have the x2 series then when it comes to the acquisitions near attack and virtual access that is related to Vestamo's offering, they are complementing both to the train segment as well as especially virtual access into the energy segment. So it's a little bit different, the two different entities, and perhaps I was a little bit unclear when I talked about that.

Okay. If I may ask a few more questions. Do you see a ray of light with the Coranex new products, the modular approach and the combined cooperation with Bayer Electronics? Do you think this will help the company to break even?

Yeah, definitely. I mean, this is what we could, I tried to indicate there, so that's a good question, is that we have lowered the cost base a lot, both in Coranex and Bayer. And what we can see is that both Bayer and CoreNX is more and more now targeting the same customer segments.

And the last question. Mark, just one more comment on CoreNX. We have lowered the cost base with the the cooperation between CoreNX and Bayer Electronics, we have higher ambitions than breakeven. Absolutely so. They should be on at least the level of the financial targets in the near future. Not meaning a quarter, but within a foreseeable future, you could say, put it like that.

Yeah. Okay, yeah, I understand. And last question. With a new extension at Stora Sundby production plant, have you seen traction in the energy segment and the track side? And could you brief us a bit about the possible future here?

I mean, first of all, I mean, the extension gives us opportunities to, of course, increase volumes going forward. And when you look at, first of all, track, we can see increases in orders going forward when it comes to the track side, that they are closer to the train. And it was a little bit, yeah, understand me right, easier to get orders into the track sides because it was, a little bit similar type of selling as it was on the train side. The energy side, as we have said, takes a little bit longer time because of two reasons. One reason was that we needed to upgrade and do development on products and also get certifications that we now start to get, so the product starts to be ready. Secondly, it's a little bit different ways of selling, so it has been a high effort the last year to educate the sales teams in different parts of the world how to sell and when it comes to the energy segments. And that's why I mean that we will see even more traction when it comes to the track side during 2021. You can see that already end of 2020, by the way. But I think we will see some improvement when it comes to energy segment 22 and 23. Probably with some orders during next year, but we will see some more significant increases, 22, 23, when it comes to the energy segment. And that is what we have said more or less all the time here.

All right. Thank you.

Thank you.

And just as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. And as there are no further questions, I'll hand it back to the speakers.

Okay. Then thank you very much, all of you, for listening, and I wish you a nice day. Thank you very much. Thank you.

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.