Ependion AB

Hello, and welcome to the Bayer Electronics Group Q3 Report 2021. 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 Pia Samuelsson, President and CEO, and Joachim Lorrain, Executive Vice President and CFO. Speakers, please begin your meetings.

Okay, thank you very much. And first of all, welcome to all of you listening in to our quarter three report 2021. And the way I see it, we have a positive report to present. And I will directly go in and say that the most important for us is that we could see that there is a good and stable demand situation still in the market. And that is, of course, the most important starting point. It also means that we have an order intake for the second quarter in a row that is passing half a billion. And those of you that follow us know that we have sales normally in a region of 400 plus. And if we then have an order intake in the level of 500, that tells something about the future, if I put it that way. We also, a couple of more words about the demand situation, is that we can see that on the order I take, but also the different type of customer contacts that we have, we see still that there is a good demand from most of the markets. If I talk about geography, I mean, Asia-Pacific has been strong for a while. Europe came for us last quarter, and we now also see some good signs coming up in the U.S. A year ago, it was a little bit not that good when it comes to, for instance, the train segment because there were delayment of projects and so on. But basically, now we can see that most of the segment we're in as well is also starting to place orders, as we have seen the last six months. So overall, I would say there is a stable, positive demand in most of the market. That is really the main message. And once again, I mean, we can also see on the order intake that it's equally spread in a positive way between the entities, Bay Electronics, Vestamo, and also Corenex. And that means also that we had a sales increase in the quarter. We are stating here that it's 23%, but also, as we said last quarter, we still had a backlog because of the component shortage situation. And we state that we roughly 10% of the sales, we could have had 10% higher sales in a situation with no component problems, if I put it that way. We are coming in a little bit also, if I take a couple of words on, we'll come into the component situation a little bit later, but still that is far from solved. It also means that we, after quarters in the pandemic, back in 2020, we can now see the EBIT start to come up to more and more healthy situation. We are showing an EBIT of $32 million, and that is a margin of roughly 8%. And it's been, and most of you know also that our target is at least 10%, but if you know, we're starting to come very close to the target, by the way. and which is, of course, compared to how it was one year ago, a very good and positive situation. A couple of words also on the different entities. Vestomu, they have also, during a long time, have had a stable situation, and they have, of course, been affected by the pandemic, but still they have been on a profit all the time. And this quarter, the good news on the order side was that Stader, a German train manufacturer, placed a good order. And it's not only the order in such, but it shows that they have been choosing us for their future trains. And that is, of course, also positive because in the next couple of years, hopefully we will get some more orders from that company. We bought a company, the German company called ALTECH, took in, they are in our numbers from 1st of April, and they continue to develop in a good way, and it seems to, I mean, we are quite happy that we bought it, and we can see that it will be a very good fit going forward, and complement the technology, especially on the train side. As you know, they are very good in onboard communication systems, as well as Wi-Fi onboard. Then I would say now in quarter three, it's Vestamo that has had the toughest situation because of the component shortage. And I foresee that that also will continue, but I also foresee that with step by step we will improve. But we don't foresee that for Vestamo that we will be out of the problem in the near future. One, the other positive thing is that we could see Bay Electronics. Once again, I mean, Bay Electronics has been fighting for several years. They were up in really good figures end of 2019. And then they had probably came down again 2020 because of the pandemic. But now they have started to come back and show profit, which for Bay Group is very important that both Vestome and Bay Electronics started to perform. So personally, this is probably the most important thing in the report, is that Bay Electronics bought some money again. And we can see that that will continue going forward. And as you can see on Bay Electronics, both quarter two and quarter three, they have a good order pace, which is good. We can also see that the CoreNX, some of you know that more and more Bayer Electronics works together with CoreNX. And we can see that the product offer fits very well. And we can see now that more and more customers appreciate that. And so once again, I'm happy about the future for Bayer Electronics and CoreNX going forward. A couple of words on the component situation. This of course creates, and a lot of you that is in this call, I know you follow other companies and you read a quarter reports in a lot of places here. But of course, we see that some specific components, then there is a shortage of those ones. You can then see that some actors take advantage and increase prices very heavily on those components. And you can also see that some is then putting some of the components end of life quicker than earlier. So it creates a lot of problems, but also a lot of work for supply chain in the different entities. Basically, in my position, I'm saying like this. We have a very professional organization, and they are handling this situation in a very good way. But still, we have situations where we have basically most of the product manufactured, but then we are missing one or two components, and then we have to wait to supply until we get that product. And this is, of course, a problem. Secondly, it's also there is frustrations around the transportations. And also, I think all of you on this call is well aware of that situation. But it means also that you can't all the time you can trust that you get the deliveries exactly as forecasted. And that is, of course, means that we take actions in different ways. And then what we do is that we try to increase inventories in order to be more safe going forward. And that, of course, increased inventories, that affects the cash flow, and that is why we don't have a positive cash flow that we normally have. But I think it's a strategic decision for us, and we have taken that for the whole group, that we need to prepare ourselves for component shortages the next couple of quarters, and therefore we buy more components and put them in the inventory side. I foresee that if you go another two or three quarters ahead, probably the inventories will go down, and then cash flow is coming back. So I see this as a sort of a short-term effect. If we then continue and look at the slides, you can see on the order intake, and this I would say, if you look at the left side in the order intake here, you can see where we are coming from, and that slide shows already from Q1 2018. And as you see, we had Q4 2018, we had one quarter with a 450 order intake, and that was actually a big order from Vestamu that hit that quarter. But after that, we have not more or less been over 400, and then the pandemic came in 2020, Q2, Q3, and now you can see that end of 2020, it started to come back, And Q1, a little bit increase, but now Q2 and Q3, we are on the level of 500 million order intake, which is, of course, very, very good for us. Compare that with sales level of 412. Then everybody realizes, looking into this, that if we go forward, we will probably become closer and closer going forward to, not only all the way up to 500, but, of course, we will be able to increase sales going along with better component supply. So basically, best figure for us this quarter is the ordering take at 500. Second, most important, is actually Bay Electronic starting to earn money again. And then, as an effect of this, is of course that the backlog increased to the 850 million. And I would say a year ago, that backlog was down to 450, I think, something like that. So we have a very, we have a, quite good situation there. So by that, I'm handing over to Jay Wakim to go through the group.

Thank you, Paul. I will then take us through the numbers for the group and our three business entities. We start with the group, and as we all understand from past statements, it's a significant profit improvement, but still the component shortage impacts our ability to deliver. Order intake of 502 million, sales 412, and an EBIT of 32, corresponding to a profitability level of 8%. As Per said, the level of impact of the component shortage is around 10%. During the quarter also, we have seen a pressure on the margins due to the fact that we have been forced to buy components where we short-term have higher prices. We need to go out on spot markets from case to case to secure our ability to deliver. And by doing so, we need to pay much more, in some cases much more, than we normally do for these kind of components. That puts pressure. We have, in previous report, also informed that we have adjusted our prices. There is a time lag between the fact that we implement the prices and the fact that we will see effects in the book. And very much given the fact that we have already order confirmed orders. That is of course problematic to go back to customers and change prices, et cetera. So we have a time lag here. During the quarter as well, we have had a wave of a COVID loan that we received in the US already Q2 2020. That one we have then been forgiven and in the quarter, and that affects the result of about $9 million. And what we say is that the kind of impact that we had on the margin of the component cost increases, we partly offset that with the fact that we have got this waiver of the loan. Then, looking at the activity level, I think you all know that we introduced a cost program in 2020. That, in combination with a balanced approach on activity levels, we have been able to maintain a reasonable level of the costs, impacting the bottom line. We also want to highlight that we have had relatively small but negative impact of currency on the EBIT of just above 1 million negative in the quarter, then mainly transactional variances. Bottom line, we end at almost 22 million at the net income level. As Pao said, free cash flow, negative 21 million in the quarter, due to the fact that we have been forced to increase our inventories as Per laid out earlier. Vestimil, here we state a positive market development and strong order intake. The order intake of 290 in the quarter, sales of 203, and an EBIT of 26, corresponding to 12.7%. earlier in the quarter sent out a press release on the Stadler order of about 50 million and of course that one is a good one to note in the quarter but also underneath on other markets there is a general market pickup and so it's not only Stadler order in the quarter. We see it in in other customers and a wider, not only in the rail side, but also track side, we see a positive development in the market. As said, sales have been hampered by the component shortage situation, and we do have some tough challenges in Vestum, as Per pointed out before. The profitability came in on a decent level, the 12.7%, giving the fact that we have a good cost control in Vestamo. Eltech acquisition has continued to develop well, and we have also in the quarter continued to launch new products for the energy segment. Final comment here on Vestamo. We are also now in the quarter in opening up a new sales entity in Spain, actually, where we see good opportunities in the markets of train, trackside, and energy, and this entity will focus then on the Iberia region. Bayer Electronics, as Per said, It's good to see a profit on the bottom line for Bayer Electronics. It's a good profitability improvement, and it's driven by the added volume, as we have been stated many times during the last years, I would say. An order intake of 192 in the quarter, the sales of 186, and then an EBIT of 15, or 8.3%. If we look at the regions for Bayer Electronics, we saw already in last quarter that APAC or the Asian region, we've seen a good traction and it continues. We are happy now to say that the Amer region is also showing a good development, while U.S. still, it is on a low level, but it's still improving, but still low compared to what we've seen before. There's more to come in Bayer Electronics. The component shortage has limited sales also in Bayer Electronics, but here we see some signs of improvement for Bayer Electronics in the quarter. The cost increases that I talked about earlier on the group level is as valid for Bayer Electronics. where the waived COVID loan is basically compensating for the time lag that we have in the price increases. And as we have stated before, we have continued with the cooperation between Corenex and Bayer Electronics, and that develops in a good way. Then finally, we have Corenex. We do see a growth in Crenix and a result improvement, but still we are just below zero in this quarter. We had an order intake of 25 million, a sales of 28, and an EBIT of minus 0.7. If we comment on the order side, compared to last year, it is in the growth, but if we look sequentially, it's kind of moving sideways compared to Q2 on the order side. And that is mainly because of the fact that Taiwan had another impact of the COVID, which led to that they had to introduce COVID restrictions during the summer, quite rough ones. And that led to some postponement of projects that we otherwise would have expected to get. But still, we want to state that the pipeline is promising in CoreNX, so there's no general concerns, you could say, from the market perspective in CoreNX. Also, in CoreNX, the component shortage has limited the sales, and by that also, of course, the profit generation. So, Last quarter we were just above zero in CoreNX. Now we came in just below zero. You could say that we are hovering around break-even in CoreNX at the moment. And also here, of course, needs to be stated that the cooperation between Bayer and CoreNX is working well. That kind of concludes the numbers. Then it's over to you, Paul. Thank you very much, Joakim.