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.

Just a slide on the strategy, and I would not now go through our whole strategy in a short, but I want to point at a couple of things. One is that we are now, with the different products and the different entities, we are in a situation where we have... high level products with so you can call it a high-tech product in our industry both when it comes to hardware and software and and with now the latest product from vestum coming out for the energy market we are now in a good situation like that and also if you come to the second point is that as i've said many times now when we are specified at customers And we now know that we have in the different segments that we're working with, we start to have a good spec situation in the customer side. And we now see that they're putting orders in. And we state also that we have not recurring business, but we call it repetitive revenues. Meaning that if you look the next three, four, five years, when our products are specified in the customer's products, then as soon as our customers are selling their products, we will sell our products. And I think that's quite important to note. A couple of closing notes, comments from my side otherwise, is that we have said now we are very happy on the order intake, but don't also miss that the order intake is good for the quarter, but for the first half year, actually, we have an order intake on 9.32%. And that is also, of course, a record, and that's good. Joakim has, in a good way, explained the cash flow situation the way I see it. As soon as we get the possibility to supply our products, then, of course, the cash flow will improve because then inventories will go down, and we have that very much in place. Supply chain issues. Well, we have components now and then, but as I said, We have a strong organization in place, and we are working with that, I would say, every day, every second day, in order to make it as good as possible. And even though here in Sweden we are a little bit going into sort of vacation mode, in a lot of places in the world that's not the case. I mean, they are not on vacation. And also, meaning vacation is not that you're away, you're going in. Our people in this country, supply chain. They go in more or less every day and look into the situation. So, we are on top of it, if I put it that way. The pandemic as such, we don't foresee that we have a demand problem. Now, we can see more or less on the markets and geographic market where we are present, U.S., North America, U.S., Europe, and also the Asia-Pacific. You can see that the With some small exceptions in Taiwan, I would argue, and that's to comment. Otherwise, customers around the world are really up and running in all units. The only challenge we still have is that we don't foresee that we will be able to travel as we did before coming into September, October, November time. We see that There will be some more time before we can go to Asia-Pacific and so on, probably within Europe and within the Nordics. But otherwise, we can see that there will be a little bit of constraints on that side going forward. By that, you can look at our voices and you can see that and also what we're saying is that there is a good potential for us second half of 2021 to have a better result than we have been supplying the last couple of last quarters, the 2021, 2020, and we're now looking forward to start to present better and better results the next 12 to 18 months with the order intake that we have and with the backlog as such. So if there is no other big disasters coming up, we are looking positive, we have a positive view on the rest of the 2021. And by that, I then open up for questions.

Thank you. If you have a question for the speakers, please press 01 on your telephone keypad and you'll enter a queue. After you're announced, please ask your question. Our first question comes from the line of Markus Elmerhul from Eric Penzerbank. Please go ahead.

Yeah, hi. Can you hear me?

Absolutely.

Hi, good morning to you both. I have a number of questions. The first one, a couple of housekeeping questions. Eltech, what was the contribution of that on sales in the quarter? If you could help us with that.

Unfortunately, I don't think we can do that, Marcus. We haven't been writing that in the report. Okay. We can do the following. We said when we announced the acquisition that they had a sales on the level of 65, 70 million. And it has been a little bit, and then you can divide that by four, and then it's a little bit better in the quarter. Then I think I've given an indication. But we haven't given any exact figures.

Okay, okay. But that's helpful. Then on the price increases, when were they implemented? So I get the whole thing that your backlog is most pure prices, but when were they implemented? Was it during the quarter? Did you start implementing already in Q1?

Some started already in Q1, but it was mainly during Q2 that we had gone through all the units. So that's the short answer.

And will there be some spillover effects also in Q3, or are you basically done?

There will be spillover effects in Q3 the way I see it, but you will probably see a higher margin in Q3 because of the price increases. But still, all of people that have been around for a long time, when you're sitting down with customers where you have contracts, sometimes you go into sort of negotiation, but if you have customers that placed orders end of quarter four last year, And then we are coming back in Q2 this year and wants to have increases in existing orders. Of course, there is a, you can call it some frustrations in that discussion. But on the other side, the good news is that this is the component shortage is a world problem. So now it's all for customers just to get supplies. So normally we get price increases through in a good way. So yes, Q3 you will see improvement and Q4 we will be done.

Okay, and on the supply chain problems and the shortages, is that the main reason why we're seeing best removes margin being under pressure? Or are there other things as well?

Okay. Yes, I mean, you know us well enough to see that it's volume sensitive. So the more volume we get on the top side, then, of course, margins improves significantly. Slight effect also on currency, actually, that we have the currencies mainly hit investment when it comes to those sites. But otherwise, that's the comment I have.

Okay, okay. And then finally, and then I'll get back in queue, could you share with us some feedback from the products for the power distribution were just released, I assume. I mean, I guess that's specified, etc., Any initial feedback on those products you would like to share?

No, but that's why if you now could see, you can't see me, but I was smiling a little bit because we had a good, now, but the feedback, when it comes to, I would say all three units, but if we now talk about Vestamo, we have product in Neratech, for instance, you have product in Virtual Access, but also in Bay Electronics. you normally see that the customer, they like the product. And sometimes we have internal discussions about that. We should get the product out quicker, but on the other side, when they're coming out, they're normally very robust, they are good, and they're definitely meeting expectations. So yes, the customer likes the product, but then we should be aware of, when it comes to the energy sector, that that is slightly some new markets for us, a little bit different way of selling. And it's also, first you need to get the product specified and then you need to get them, they need to order them. So I would say that you can see, I hope to be able to talk about improved sales in energy sector from 20, first of 2022 and then 23 and 24 and so on. And as I said before, I think that market segment will probably outperform the train side when we're coming to 25, 26 somewhere. So that's why these products are so important, by the way.

And how long does the specification process take?

It's difficult, but sometimes it could get quick. And quick here, we talk three, four months. But normally, I would argue that it's six to 12 months. That's the normal situation situation. You know, you supply the product, they are testing them, they do protocols and so on. And so six to 12 months, it's a normal procedure.

Okay, okay. Okay, thank you. I'll get back in line.

Thank you.

And the next question comes from the line of Mark Joseph from Red Eye. Please go ahead.

Hello, can you hear me? Absolutely. Hi, Mark. Hi, Mark. Good morning, good morning. Very good questions from Marcus. I have a few additional ones. How much visibility do you actually have over the supply chain situation right now?

I could answer like this. We have a very good visibility on 90-95% on what we are doing here. I mean, our own capacities most of the assembled printed circuit boards, components, and so on. But then we have bad visibility on 5, 6, 7% of the components. And the problem is, of course, you need all components on our product. If we have one or two components where we have bad visibility on, then of course we have a problem. But also on the components where we have a shortage, We start now to know, to have a good visibility, but so far still, we had too long lead times on some of the components, so we are working extremely hard to improve lead times on some of the components. This is, I mean, you can get lead times on three, four, five months, and we, of course, want to have one or two months. But I don't know if that answered your question, but this is a little bit the way we... This is the situation. I don't know if you have some other comments here.

I think the situation as it is, and this is not only for us, I think the visibility in the industry is harder now. We are in a tougher situation, and our organizations, they are really on top of it, They work every day almost with the main suppliers. We have management calls with suppliers to make sure that we get priorities, et cetera. So these kind of things are happening all the time. And the situation is challenging, of course, but as Per said earlier, we believe that we, in general, we believe that the situation should be improving the coming quarters.

I could add one more thing. What you do when these situations occur is also that you take some of the R&D people and we perhaps delay some projects one or two months, and then they need to concentrate and redesign some of the PCBs or whatever in order to get other suppliers in, so to say. That is also a thing that you work with in those situations.

And it sounds very easy. Why don't you do that? But in some cases, you have certifications with a certain design and certain brands or variants of components. And if you, for some products, for some certifications, you are not allowed, basically, to change a component without recertifying the product. This is something that we are working with the product management organizations, they are looking into this all the time so that we are able to come to a better situation. As you understand, it is a tough situation for our organization, and as Per said, we are really working hard, and they are doing really, really well in our organization.

Yeah, okay, understood. And you talked a bit about the power distribution. You had new switches there, and that is a slightly new market. How are you doing marketing in that segment right now? Have you started, and how is the response?

The marketing now has been a lot on, of course, digital marketing in different ways. We had plans during 2020 to be in several exhibitions around the world in that industry, including the speakers in different conferences and things like that. That, of course, was more or less postponed, all of them, but we have been improving our digital way of marketing, but it's also, you still have good opportunities to take customer visits digital, and that has surprised me positively. We have, of course, and we have a central group in Westeros that is really targeting different customers around the world where we are in discussions and also sending products for specifications and so on. But marketing as such is two things, digital marketing, and it's also calling, I mean, Teams Zoom meetings with customers, I would say. That's the two ways of doing it.

The industry are aware that Vestamo is entering into this segment for sure.

All right. And one last question. You talked a bit about the increases of prices. And how is the general response from the customers, not only from people that signed an order in Q4, but in general?

Generally, as I tried to indicate, nobody likes price increases. And we have had a, I would say, rather long period with more or less, it's not deflation, so we're not too high inflation, and you can call it stable price situations. Now that has changed. But now I would say that most customers realize that we have a situation with increased prices when it comes to components. So normally they accept the price increase. Then, of course, there is always discuss how much. But the important thing now is that if we can guarantee supply of products in the same time, then normally you get the price increases through because supply of products are now more important than the final percentage on the price, if I put it that way.

All right. Thank you very much. Thank you. Thank you.

And we have a follow-up question from Marcus Elmerud from Eric Penzelbank.

Please go ahead. Yeah, hi again. A couple of things. Firstly, another housekeeping question. I don't know if you're able to say, but could you help us a little bit what the impact of the supply chain issues was on EBIT? You're talking about 10-11% lower sales. Is it mainly the sales or I assume there are higher costs in there as well? Any indication would be helpful.

No, but the indication is on, if you look at 11-12% and we say that's close to 50 million in sales. And as seen in our annual report, we can see that we have a gross margin in the area of 50%. Yeah. I think we have indicated quite close what it could be, because we don't have the lower levels, for instance, to be able to supply these ones. So that goes more or less directly down. I think we have been clear enough there. Okay. Okay. I think I don't know if you lost the line here. What happened here?

Yeah, I lost the line. I'm back. Sorry.

No problem.

I missed you somewhere at the 50% gross margin.

Yeah. And as I said, I mean, the 50% gross margin, it means if we don't have 50 million on sales, then you're no more than on the EBIT line. Yeah.

Okay. Okay. Okay. And then one final question. So talking about supply chain risks, and I mean, these are unlikely to go down over time. Now there are problems, but can you tell us a little bit about your thinking, how you're working to mitigate these risks long term if you are trying to find new suppliers on the local markets within Europe or to mitigate these risks?

Yeah, I think that everybody that is in this business, of course, are looking into that. How could you do in order to improve the situation next time you're coming into things like this? And of course, second supplier, third supplier and all of these things is things that you work with. And we will probably be better in having, how should I put it, qualified and certified suppliers already done even though we don't take that much. And it could probably be that instead of having one or two, it will be two or three going forward. So that's the type of things you do. But we have to keep in mind that when the whole market is doing, I mean, we are not Apple or Intel or whatever. We are a small company in the total world. And so when these situations occur, we will have a problem also going forward. But of course, The way we, I think my taking from this is that we could have been better in having pre-certified alternative suppliers. And also, as you indicated here, perhaps I think one trend I think will be the next couple of years is that you make sure for the whole industry that we are not only having the suppliers in China, Taiwan, and Asia Pacific. I think that will be a trend that you a little bit go back. You have suppliers in Europe and also in the US the next couple of years. So you have the geographic spread a little bit more than then. Because there has been also transportation problems, even though they are small enough, but they were bigger before. So yes, we will have more alternatives going forward.

One point to make, Marcus, so no one gets the wrong impression here. The problem is not internal. Capacity-wise, for our... factories and supply units both in Bayer Electronics and Investimo we have good capacity that's not the limit it is the supply situation that is causing these problems our capacity is they are able to handle a much higher level of volumes than we are floating through today and that is important to note and we also highlight that in the report so No one gets the wrong impressions here.

Yeah, I understand. I've heard anecdotes about ports being closed in China on the back of more COVID outbreaks. So it's not... It's a global thing, so you're not the only ones. But finally, maybe one final one. You wrote in the report that you see a cautious upturn in North America, and it's quite slow and gradual, and you see more upturns in Europe, for instance. And this is a little bit of a contrast to what we're seeing overall when North America is actually quite strong. Is there any specific segment to stick out here, or could you elaborate a little bit on that?

That is a good question. Yeah, we have a little bit different situations compared to some others. Historically, we were very big into oil and gas when it comes to Bayer Electronics. The last years, we have been step by step moving over also to more energy, meaning, so generally speaking, to solar energy, but also windcraft and things like that. And that has been taking some time, but also actually some oil and gas is coming back now. I mean, with oil price coming up to 65, 70, 55 dollars and so on, then there's starting to be more actions on that side. Secondly, Vestamo, they are in the U.S. mainly supplying to the train side, train industry. And we got orders coming in now. As we said, this 36 million order was from the North America side, but it was not supplied yet. Now we get an order. So the supply has been a little bit lower to the train sector from the Vestamo side. So that's why that's the two major, I would say, effects on that one.

One thing to have in mind on the US side, we're still on a low level, and the potential is quite good. So moving forward, and with the fact, as Pat pointed out many times, we have a good specification situation with many of the American customers, and some segments in the US is going really, really well. Going in the right direction, we see, but we are quite confident that going forward we could see a better situation also in the U.S.

Okay, perfect. Thank you very much. That's all for me.

Thank you, Markus.

And as there are no further questions, I'll hand it back to the speakers.

Okay, then thank you for a lot of good questions today. And then I just want to I wish those of you that will have some sort of holidays have a couple of good weeks. Thank you very much for listening, and hopefully we will talk to you again after Q3, and then hopefully we have transformed some of the audio and take it into sales. Thank you very much. Thank you.

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