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.

A couple of comments quickly that I want to state is that we have discussed, I mean, when you have the component situation as we have, and you get heavily price increases on the supply side, it's, of course, important for us to pass those cost increases over to our customers. And we have already talked about time lag when you increase prices, but we can now foresee that Q4, but I would say mainly Q1, the next two quarters, you will see price increase effect on the top line as such. So I think it's important. It will come step by step the next six months, and you can see it. And the way we see it, we will also continue to increase price. So probably, not probably, it will come new price increases end of this year, beginning of next year in the different entities. And it's never fun to do that, but you need to do it, and then we are onto it, and I would say that the salespeople are handling that in a good way. During Q4, I will not go in to put the forecast on Q4, but we are in the situation. If you look at the order intake and the backlog, I mean, the level we can perform in Q4 is more or less depending on how much we can deliver. And we don't have any big restrictions when they come to total capacity. I mean, we have installed capacity in all entities to deliver at least on the 500 level on a quarterly basis as such. So it's very much now depending on how much the component shortage will affect the quarter. However, I state that I think we have a better situation for Q4 compared to Q3. That's how much I dare to say going forward. But as you also know, is that we are quite volume sensitive. And you can see now that when Bayer Electronics started to come up to a little bit another level on sales, they directly started to earn money. And we can now foresee, and it's the same, by the way, with Vestamo, but they are on a higher level. And it's a little bit the same on CoreNX. So for us, of course, now the big drive is to continue to increase sales every month and every quarter. And we have now order intake and backlog in order to do that. And then there will be quicker effects on the EBIT. And those of you, once again, that follow us, knows exactly what I'm talking about. And then cash flow. Quick word on on Korean X also there is a very good pipeline when it comes to projects on On but all both in Taiwan, but also some other places So I foresee also now when it starts to open up a little bit again Hopefully we will see some some good orders coming in on Korean X as well in the near future When it comes to outlook, I mean, the only slightly change we have done is that now the group view, I mean, you have seen it before, full year 2021, we said it should be better than 2020, should be, but now we say it should be significantly, can't be better. So that is what we have stated in this situation, and that gives us sort of perhaps a small hint on what we believe going forward. So summary, order intake on a good level. Demand is there. Bayer Electronics starts to earn money and complement Vestermay in a good way. Cash flow negative because of inventory buildup, but that is to ensure that we can start to deliver, even in the component shortage situation. We will still have component problems in Q4, but probably not that much as Q3, if I put it that way. And that... concludes our presentation, and then I open up for questions.

Thank you. And if you do have a question for the speakers, please press 01 on your telephone keypad, and you'll enter a queue. After you announce, please ask a question. Our first question comes from the line of Marcus Almagor from Pensabank. Please go ahead.

Hi. Hi. Can you hear me?

Very well. Hi, Marcus.

Okay, very good. Very good. Nice numbers, I'm going to say. If we start by the profitability and the EBIT, so, I mean, we talked before about the order intake is significantly higher than sales, and then once you get the orders coming and converted into sales, then you would see EBIT sort of lift up, which is what we're seeing now. And we're also seeing order intake is still significantly higher than then EBIT, so all that then sales. So is there any reason to assume that we wouldn't see the same kind of effect as that sales is converted as well? That is, this should continue, right?

Yeah, I mean, yeah, a short answer, yes, it will continue. I mean, it's a little bit like you call it the old zero-based budgeting is that we have a cost level. That will probably slightly increase Q4 because now we start to travel and go to exhibitions and things like that again, especially in Europe. But we are, as soon as we can get more sales, as we take from the order, take into sales, then, and you can, we have also said that we have normally gross margins on the level of 50% something. then you can calculate yourself that a lot of that will come down to the EBIT line as long as we, so that is, you're correct, and I just confirmed what you're saying, Marcus.

Mm-hmm, mm-hmm. And I mean, simply all else equal, so, well, I mean, you've already answered that, I guess. I mean, 10% of, 10% higher sales if components would be there, and then a gross margin of 50% on that is basically what the effect in EBIT that we're missing. Yeah, exactly. Um, My second question is on Bay Electronics, where sales is coming up and all the intake is continuously strong. Any specific areas which are sticking out?

No, not really. It's more overall. I mean, I think that in the beginning of the year, Asia-Pacific was there quicker. And during the quarter two and three, and mainly three, we can see now that in May our Europe is back. a little bit to start to close up to the 19 levels. And I think that is probably the most important thing for the quarter, is that the European business is performing in a good way. But otherwise, I would say it's, generally speaking, in most markets that have increased, it's not one specific market, the two markets. It's more generally speaking, and... We also could see now that there starts to be good signs also. There is some increases in the U.S. already, but we now foresee the next six months or the U.S. to come up to a little bit better level. And they normally in the U.S. sell more of the X2 extreme products that we have higher margins as well. So therefore, I hope, I'm looking forward to that actually.

Okay, okay. And in terms of end markets, it's the same thing. It's a broad recovery. So no specific end market, which is, very strong. I assume that shipping prices should be very strong. We saw the order intake numbers keep coming up in the shipyards, etc.

Generally speaking, it goes all along the four major segments in the Bay Area electronics. I would say all of the segments are quite okay.

Okay. My next question is about the energy segment. You said you released some new products in that segment. Anything else you can share with us in terms of momentum and interest etc.

So what we can see is that now you're specifically coming in I think to the Vestamo business as such and we can see now that they have done a very good well in introducing the new products. Probably a little bit slow into sales because of it's difficult to sell to new markets if you can't meet customers and But I have done a very good job with the product, but also digital selling, if I put it that way. But I would foresee that during the second half of 2022, we can talk about more substantial changes, sales into the energy segments with new products. But I think most of you that follow us, if we have new products coming out that have been coming out the last six months, for instance, Then to get those specified at customers and get them in, it takes six months, 12 months, 18 months, and so on. So it will take some time. But I have said several times that wait another three to five years. Then I think the energy segment will be passing the train segment, by the way. There is very good prospect into that segment.

Okay, okay. Excellent. One final question about the components. You said that a little bit, but you are In electronics, you said you see signs of some easing of the difficulties. Is that a general comment that you also see in Vestibule? Or is it, I mean, are there any signs that this is kind of starting to resolve itself or work through or however you want to put it?

The short answer would be no. We don't see that it We see still a lot of complications and then we said mainly in the vestibule segment saying but then of course you try to work it through You're trying to find alternative suppliers you do some change of specification into the products so you need to do you do all these things and you Buy very expensive some of the key components and put them in inventory So that's why you can see in the sales numbers win system by electronics that they have been passing most of it but we have still a situation of When I were younger, we talked about just-in-time deliveries and things like that, and that we can't talk about at all at the moment. So it's a little bit to grab the components you can get. And I can't see that we in the next six months have a normal, stable situation. But we have been better and better to handle this rough situation. That's why I think we can handle it in a step-by-step, better way. So as you can see, we are selling For over 400 million, I think we will sell more quarter four, but we could have sold even more. But once again, I mean, you can read all different reports and you can see that there is a long way to go before we are there. Then, of course, on top of that, you have these transportation problems as well that also affect the supply chain. But it will take a long time before we're coming back to sort of just-in-time deliveries. That's the way I see it.

Okay, perfect. Well, thank you very much.

Thank you.

And we have one more question from the line of Mark Schuster from Red Eye. Please go ahead.

Hello, Pat and Joakim. Hi, Mark. Hello. I hope everything is well with you. You have already touched upon some of my questions, but... The first one, you have now two quarters in a row of an order value exceeding 500 million. Could you elaborate a little bit? How much is the order intake boosted by the fact that your customers might place orders for delivery longer time ahead than usual because of the longer lead times?

Hmm. That is, of course, a good question, and it's not easy to have an easy answer on it. But I would say this. There is an overall good activity by the customers. We were more afraid of inventory buildups, I would say, beginning of the year, if you look at the big customers that we're supplying to. And now when we try to investigate and talk to our customers, do they really use our products and so on, we can see that the products that we are supplying are not ending up in their inventories. But I'm sure that there are some effects somewhere of this. But generally speaking, I will argue and stress the point, I think that most of our customers are really having a good demand situation themselves. And we can see also that there is a push from, or pressure from our customers that they want to have more supply than we could supply. So that also tells, and they don't want that because they put it on inventories. So I would definitely state that the way I see it is that there is an overall demand on that level from the majority of our customers.

All right, all right. And a question also on the ordering intake for Bayer Electronics specifically. You said that it was general demand, European order intake had increased, but Asia-Pacific has been a strong area during 2021. So I've read in some Q3 reports that the Chinese demand is very strong, especially in the industrial market. Do you see the same thing for Bayer Electronics right now?

Yeah, we see that. We see that. But now we are not that big compared to other people over there or other companies over there. But yes, we definitely see that there has been for at least from the beginning of the year, there has been a good demand situation in China. That's for sure. And obviously, when it comes to infrastructural things, that they are building a lot over there and we can see that there is a demand and we can see we are landing orders. And by the way, More and more also from our good product in the X2 series. That is also important to note. So earlier, a couple of years ago, it was more of our low-margin product over there. But it starts to be a better and better mix there as well. That's also good news.

All right. And one last question. You talked a little bit about it, that you see the power distribution segment being perhaps the largest sales segment in a few years. Now, when you are out meeting customers again at trade fairs, how is the response on the new product lines such as Merlin?

So far, I mean, it has been very well received. And the important thing now is to get those products into tests so we can see that when they're checking up the products technically that they're meeting the demands. But I'm quite sure that they will do that. And so we are quite, that will be very interesting to follow that side. And I think that the more you read about the energy sector and whatever goes on politically, I mean, renewable energy in different ways, wind, solar energy and so on, it's coming more and more. And then they need equipment like this in, for instance, the substations around the world. So that's why I'm so optimistic of this segment, if you take another three to five year perspective, because a lot of countries need to change this type of equipment and their substations all over. And that's why, of course, it starts with good products. So yeah, I'm quite happy about that.

Okay, thank you very much for taking my questions. Thank you. Thank you, Mark.

and we just have a quick follow-up from some pencil bank. Please go ahead.

Yes. Hi. Hi, Marcus. Again, just wanted to, to follow up on that last point on the, on the energy second substations. So just on the ground where you discuss these with your customers, I mean, is this based on, on you said that this needs to happen. Everybody knows that this needs to happen at some point, but, Where are we in that journey? So how are your customers discussing this right now? Because we read in the papers about, you know, difficulties with energy and we have, you know, a lot of energy up north in Sweden and not too much in the south, et cetera, et cetera. So everybody knows that this needs to happen. But where are your customers in this? So is it at this, are we at the point where this is rationale, so this needs to happen? Or are we approaching a point where this has actually happened? It would be, Interesting to hear some color around that.

I'm sure that there are other people that are more experts than me, but the way I see it and also from where we are sitting in Bayer Group, I think it hasn't really started to happen in big yet. You can see still that the Swedish discussion, but also in other countries where the energy prices are very high. And one of the reasons is that they haven't really the capacity to distribute energy within countries and between countries. in a good way. So there I need to do more. And for instance, down here in South Sweden, if I buy a car and load it as a Tesla, for instance, and then I load it with, it should load up the battery, it will be coal craft from Germany that will be used on the electricity. So there is a big step to go. And that's why I'm always saying three to five years ahead, because before they have specified exactly what to do then to get projects to do it and then really do it it takes some time so i would see that it sequentially it will increase step by step uh hopefully starting second half of 2022 and i'm not only talking for our products but but once it starts then i think it will it's not a never-ending story but then it will be five, six, seven, eight years to go because there is a lot of demand to change a lot of things in the world. But I would say on your question, Mark, that's a good one. It hasn't really started yet. That's the way I see it.

And how long does it take? If we stand here today and you're launching new products and They started to do specifications, et cetera. How long does it take to build a substation? So when should we realistically see orders from this?

But I think it's two things, Marcus. First of all, I don't think you need to build completely new substations. You normally need to upgrade some part of it and some sort of equipment, for instance, the switches and things like that. So therefore, it could go rather quick once you start. because normally that tries to utilize the existing energy transportation places or whatever we call it. But then of course that will be a completely new one as well. But generally speaking, it's more also to have the technical solution as such. So there are normally system integrators into this as well. Short answer there, Mark. First of all, you need to decide, now we do it. And secondly, exactly what type of technical solution. And then once you're specified, then I'm sure that in a lot of the big companies, they will utilize the same solutions in a lot of substations. So once again, it's not that you need new substations. You need to upgrade a lot of the existing substations. I think that's important.

Okay, so basically once Once we're there, once it's specified, we can see quite lumpy, quite fast, rapid uptake of bills.

Most of the business we have, Marcus, on the Total Bay Group is that once you are specified with the right type of product, then normally they will continue to order from us. And that's what we see now. I've seen the last couple of years, actually. Okay, perfect.

Well, thank you very much.

Thank you. Thank you.

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

Yeah, first of all, thank you very much for listening and all of you and also for good questions and a good discussion. And now we will continue to try to work with supply issues in order to get all the products out from the group. And otherwise, we are looking forward to the next couple of quarters and wish you all a very good day. Thank you very much. Thank you.

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