Ependion AB

Hello and welcome to the Bayer Electronics Group ABQ2 2021 report. For the first part of this call, all participants will be in a listen-only mode and afterwards there will be a question and answer session. Today, I'm pleased to present Pierre Samuelsson, President and CEO, and Joachim Lorrain, Executive Vice President and CFO. Pierre, please begin your meeting.

So thank you very much, and all of you listening in here, nice to talk to you, and welcome to our quarter two report presentation in a very hot south of Sweden in Malmö. We will do as we normally do. First of all, I just want you to look at the picture on the slide that this is our new product that goes in Vestamo. That's a switch, robust switch that is now certified and goes to the energy market, so hopefully The next four or five years, this product will sell a lot, starting up 2022 the way we see it. But we think it's nice and it's positive that it's ready. We will go, as we normally do, a short business update from my side. Jay Joaquin will go through financials, and then we will have a sort of concluding notes and a short outlook going forward and open up in the end of the presentation for the questions and answers. You probably, you that are on the call, have probably already looked into the report. And we can see, as we state in the first one here, that this is a very clear sign of market recovery. And if I elaborate a little bit on this one, is that, first of all, we have during a lot of years, even though we have had a pandemic, we have been specified in a lot of customers around the world in all three entities actually. And what we now see is that those specs or where we are specified, now customers starting to put orders in. And as you can see at the second headline here, we have an order intake that is over 500 million, 514. And I mean, you see that we have a run rate on sales that is around 1.5, 1.4 billion. And you can see that this indicates a much higher run rate if we can turn around order intake into sales. The good news with the order intake, except also the amount as such, is that it's coming from more or less all geographic markets. It's coming from the different entities in a good way. And also, so if I put it this way, the quality on the order intake is more or less the way you want to have it in my position. And if we then coming in, and we will come into that a little bit more later on in the presentation, but then of course you want to sell this and you want to get it into deliveries and so on. And so at the same time it's quite frustrating then to see that we now have in a lot in our sales unit, but especially in our supply chain, we now have products more or less standing in some corridors around in the factories because we are missing one or two components. And as soon as we get the components in, we can assemble it and we can ship it out. But that gives, of course, a frustration because we wanted to have a much higher sales, and we have an order of books that could give us a much higher sales. And we had tried to quantify in the report how much we can sell, and it's roughly 11%, 12%, as we're stating. And that is close to the $50 million for the quarter, actually. I know all of you that look into us knows then that if we have a gross margin 50%, something like 50%, then you can calculate yourself what that will mean for the EBIT going forward. Now, we also want to state that on the supply chain side, it's very difficult for us to see exactly when we will get back to normal situation. The way I see it is that, yeah, there are some signs that will be improvement in quarter three and quarter four, and there is a lot of good signs, but you never know what could happen. But my overall statement here is that I have a slight positive view on quarter three and quarter four, and especially quarter four, but also quarter three, that we will improve it gradually every month, starting with July and then August and then September. So there is good signs that we can turn around the order intake also going into sales and then of course EBIT. EBIT is a plus and it's an improvement, but of course everybody realizes that we should have a much higher EBIT going forward. We can see in the different entities, and Joaquin will go into that a little bit more in detail, but there is a good order intake in Vestermoe, as I said, and there is one larger train order on the level of 36 million. But the good thing in quarter two for Vestermoe is we can see that also the train sector is coming back. Train sector has been good when it comes to discussion with customers and specifications. but we have had a little bit slow order intake on the train side before, but now we can see quarter two and what to expect for quarter three, it looks quite good again. We also want to mention here that we acquired the company Ailtec down in Germany, the first of April, and they have actually performed very well and have performed a little bit better than expectation in quarter two. So welcome Ailtec, we are happy to have you in the family. Then if I go into Bayer Electronics, once again, those of you that follow us knows that for us to get a good profit improvement, we need to get Bayer Electronics running with profits. And now we have had a second quarter with order intake over 200 million, and we can see that there is steady good demand in the Bayer Electronics, or more or less in all markets. And if we now have sales levels from 160, 165 level, you can all indicate and see that if we are coming up to 180, 190, 200 with the all the intakes we have, we will be in a good profitable situation. And it's a little bit the same situation with the smaller unit Coremix. Step by step we are coming in up to the plus side, which is good. And of course you can realize that now we are very much focused on improving the supply situation. We have teams also, even though we are coming into sort of vacation situation, But we have every second day there are teams sitting up to see if we are handling the supply chain challenges during every week, every month now. And I must say that we have a very good, skillful people in all organizations. I know that they're doing a good job, and that's why I'm positive that we will have a better Q3 compared to the Q2. And by that, we can also look at some on the orders. You can see here on the slides that the order intake in 540 million, and if you compare that with the Q2 2020, but you can also look at Q3 2020, Q4 2020, as well as Q1 2021, you can see there is a good improvement in the order intake. And also, if you look at the right side, you look at the sales. what I now hope is that the sales per quarter, of course, are going to close up to the order it takes. So there is a big gap now from 540 down to a little bit below 400. But this is the whole idea now that we should step-by-step increase sales going forward. And you can also realize that there is a backlog as at the moment is, of course, it's the all-time high, 750 million. We have Never been close to that before. And my final comment before leaving to Joakim is then that we are writing also in the report that there are some price challenges on the component side. And we, of course, then quickly tried to, then of course, not trying to, we are increasing prices to the customers and normally they understand the situation. But there is a sort of delayment in the figures because as you can see with the 750 million backlog, a lot of those orders came in to the old prices. So of course we need to first get some of the orders out with the old prices before we can see effects of the price increases going forward. By that I ask Joakim to go through a little bit around the figures.

Good morning, everyone. I start with group, and the heading is in line with what Paris mentioned so far, strong demand, but the supply challenge is limiting the sales. The order intake, as seen, 514, sales 390, and a bit of 10 for the quarter. And if you look at the graph in the Left corner still, of course, profits on a low level, but we are going in the right direction. And then some of the comments. Per mentioned sales has been hampered with about 11% to 12% due to this component shortage situation. And Per also mentioned the amount 50 million roundabout is what we are talking about in sales numbers. I also mentioned the increased component prices. That puts pressure on the gross margin. We have adjusted customer prices, and it will be compensated going forward. I also want to mention the overall cost level that we have in our group. Last year, in the pandemic year, we took a restructuring program We see effects of that, and we are in our entities maintaining a general cost control all across, and that's important to see. And then with additional sales volume, of course, we will see an effect on the bottom line. Also worth to mention that the currency, we have somewhat of a headwind on the currency. The impact on EBIT is about 4.4 million in the quarter, and it's mainly transactional variances. The net income level on a positive, yet small level of 1.9 million. With the challenges in the supply chain, as Per mentioned, unfortunately we have had increases in our working capital in the quarter. That has led to that we've seen a negative cash flow in this quarter, and going forward, hopefully, we will be able to deliver in a higher pace, and so we can turn around the negative cash flow into a positive one. Let's jump into the business entities. We start with Estimu. Clearly, we see market pick up, and we see some good strong order levels in the estimate. Order intake, $277 million. Sales, $206 million. And EBIT, $20 million, or 9.6%. Pam mentioned we have had one larger order in the quarter. It is from a North American chain operator in line with their frame agreement that was signed with them about a year or a year and a half ago. We do have a strong pipeline in Vestimo, so the confidence level going forward and the fact that we see more traction also in the train sector, that gives us confidence for sure. Pam mentioned about ALTEC, good startup in the group, happy to see, and we are very excited to see the development going forward there. And as for the group in general, of course, the shortage of components limits the sales also in Vestamo as all entities within the group. And as Per also highlighted, we have now launched new products for the power distribution segment. And that is giving us also confidence on a good development going forward. have a look at Bayer Electronics. Also here we talk about the traction in the market, but of course the profitability development in Bayer Electronics is limited by the shortage of components. Order intake, another quarter above 200, actually 216 million in the quarter, sales level of 164, and EBIT of basically zero. Not negative, as we've seen many quarters lately, but now at least on a zero level. The order intake is also, when we talk about Bayer Electronics, it's driven by a very good development in the Asian region, and also somewhat in the European or EMEA. US is improving, but it's still on low levels. When it comes to the component shortage, as I said, it's limiting the sales. And, of course, with the higher sales, we all know, we have said this many times, there is a good leverage opportunity in Bayer Electronics. We have also in Bayer Electronics launched some new products. We have now introduced a new generation of the X2 base product line. And we also want to state that the cooperation that we have talked about for a while now with CoreNX. We continue that one, and it continues on a good level. Finally, CoreNX, positive development, and the result is actually also in black, yet on small numbers. Order intake, 25 million. Sales, 24 million. And the result, 0.1. What we can see in Koreanics is that I think everyone that's on top of the news flows sees that in Asia there are some recent lockdowns due to the Delta variant of the virus. And we see an effect in Koreanics actually on some postponement on projects in Asia due to this. That in combination with longer lead times on the products and the supply situation, that has limited somewhat the order pace growth that we've seen in CoreNX. We'll see how that will develop, but that is what we've seen during this quarter. The fact that we have had or have constantly a good control of our costs in combination with somewhat higher sales at least give us basically zero result for the quarter. Going forward, we have good confidence of seeing a good development for CoreNX. And as I said, the cooperation between Bayer Electronics and CoreNX, we have that on many areas, and then it continues as planned, basically. That concludes my comments on the financial side for the business entities and the group. So over to you, Pat, for concluding notes. Thank you very much.