Ependion AB

Welcome to the Bayer Electronics Group conference call. For the first part of the conference, all participants will be in listen-only mode, so there's no need to mute your own individual lines. And afterwards, there'll be a question-and-answer session. Today, I am pleased to present Per Samuelsson, President and CEO, and Joachim Loren, Executive Vice President and CFO. Please begin your meeting.

Thank you very much. Everybody welcome to this quarter report where we will present quarter four for 2021. We will do as we normally do. I will go through a summary of the quarter and the year, and then Joakim will come in and go through the financials for the total and for the different entities. And then I'm coming back with a sort of wrap-up, sum-up in the end of the call. First of all, if you look at the slide, I hope you can see it, everybody. You can see that we, and if you see the report as well, that we are quite happy to announce and to show that we have a continuous growth during last year, and the demand situation continues to be very, very good. We passed two billion in order intake, and compared to the size of our company, that's a big number. And also, quarter four was close to 600 million in order intake. And those of you that follow us knows that we were quite happy with the 500 level quarter two and quarter three, which means that now the quarter four have taken another step up. I will give you a couple of minutes on the demand situation because this is, of course, the most important thing in the report here. We said when the pandemic started, I would say quarter two, when we announced quarter two, I think it was 2020, and it started to be, you can call it the downturn because of the pandemic. First of all, we never believed it would take this long. That's one for certain. But we said already from the beginning that the objective is to keep product development on a good level, that we should continue to work close with customers, even though it was digital. We also said that our objective is to keep sales organization and service organization intact so we could get out of the pandemic in a good way. And the internal objective was to, how should I put it, get out of it in a better situation than we got into it, if you understand what I'm saying here. We started to realize that that was a good strategy, I think, beginning of last year. And we can see now during 2021, we have got several, and I would say it's more than 10 different big customers that have been coming to us and thanked us for the way we have handled the situation. And you can also then see in the order intake during the year that it's a very good order intake, as I have said. Of course, there could be some sort of change of behavior when customers are ordering, meaning that they are perhaps placing a little bit longer-term orders compared to how they did it before. But it's not a big thing, and I would say that if we talk to customers, you can see that they, in their turn, have a good demand situation and that they deliver more or less the products directly when they get our product in. So we can see that there is a good quality in the order intake as well as the backlog that now is up to close to 1 billion when we go out to 2021. I would state and say that there is at the moment and at present and with all the information we have today, there is a good demand situation. It's also important to state that it goes all over the regions, meaning Asia Pacific, Europe, as well as the U.S., It's contributing in a good way, and it's also in all the three entities, and within the entities, also within the segments. So we can see that there's a good spread in the order intake over the year, which also gives good feedback. The challenges has, of course, been, as we have said a lot of quarters now, that the component situation has been a sort of problem because we can't get as many components as we want to. And we also took a very conscious decision mid of last year that we should do whatever we can to make sure that we get the components so we can deliver to our customers. And before trying to get heavy increases on prices to the customers, so we concentrate on getting materials. During quarter four, we see that we have an increase of cost on components that is 20 million. And that is, of course, not good because it hits the result. However, we have during the quarter also gone through all customers with new negotiations when it comes to customer prices. And we are ready with all markets, all customers. So when we go into 2022, you will see step by step during quarter one and quarter two, increased prices to the customers, which means that we will compensate those 20 million step-by-step during the beginning of this year, 2022. So once again, margin will definitely step-by-step increase during the first half of 2022. And you can all go back and forward how you should handle those situations. We took this decision and we concentrated on trying to get get material for the customers before having the quick price increases. If that's right or wrong, but that's what we have done. Also, another comment here is, of course, that we, having said this, we were successful in increasing sales in quarter four. So the increased, we compared to before, we were on the 400, 420 level. Now we got up to 460 level. And hopefully we'll be able to increase the sales going forward in 2022. One other comment here is that we're happy also to announce that we're starting to give dividend again. So the board will take that as a proposal to the shareholders. And that is, of course, I think it's a good signal that we start to be a company paying dividend again. I have already said and commented on the segments, and I will say that the sequential sales increase also was roughly around more than 10%. But if we then take into account the component cost and adjust for the extra cost, we are now close to the 10% profitability on the EBIT margin in the quarter. There are also one other thing I want to take up, and that is that we have a breakthrough order in Taiwan where Korenix and Bay Electronics together has been fighting to get into a very important customer over there. And it also proves for us that the combined offer that Bay Electronics now will do together with Korenix, it works. And that is, of course, also quite important for us. During 2022, there will be a big focus on continuing on the price management and, of course, also on the component sourcing, so we can continue to increase sales quarter by quarter. But I also want to state that it's still – we are not through the component shortage, so we foresee that still the first half of 2022, there will still be How should I put it? Shortages on the component side, and that could also be, how should I put it, price increases because we need to buy on the spot market, as we have been doing the last six months. Here we have some slides, and of course, those ones you want to show every day in the week. And if you can see that at Q4 on the orders on the left side, you can see that if we have been moving around 350, 400-ish, and then you can see that quarter two, 2021, it started to increase up to the 500, and now we are up to the 600 in quarter four, and that is, of course, quite happy to see. When you then look at the sales, I have said a couple of times before that normally it takes a couple of quarters before the order intake transfers into sales. But you can see very clearly that now also sales are coming up to at least the 450 level, and hopefully we will be closing up and coming closer to the 500 level once we come further into 2022. And as I have already stated, the backlog is now up to close to $1 billion. And when we started the year, it was a little bit more than $500 million. By that, I hand over to Joakim, and he will now go through some of the figures for the group.

Hello, everyone. As Paul said, I will take you through the finance numbers. And you see the heading there. as Pat stated, record volumes, but the component cost limits the profitability leverage that we have been talking about many times before. Order intake 597, sales of 466, and an EBIT at 22 million for the quarter. As Pat said, it's been a conscious decision to focus on the supply And obviously, it pays off, as you can see, that the sales in the quarter is still up 30% compared to last quarter. And the price increases that has been implemented and done. There are lead terms before we see that in the numbers, and that's why we see the somewhat low profitability in the quarter compared to where we want to be. Added to this, we have had some headwind with regards to currencies. It's actually 7 million in the quarter, relatively high. One part of that is actually the Turkish Lira. As you know, we have a Turkish entity, and we've had a deterioration of that currency, and that has actually impacted us quite significantly in the quarter. Overall, the activity level has somewhat increased in the quarter. Some travels have been done compared to where we have been earlier in the year. Some fairs have been taking place. So somewhat higher activity, but not any dramatic increases in the quarter. The bottom line, net income positive, almost 11 million for the quarter. In terms of cash flow, you know that we have had tough times during this year with increased working capital as part of focusing on deliveries and making sure that we have some components and forcing ourselves to take some spot purchases of some components. Now, in the fourth quarter, we came to a positive cash flow. Still, however, the full year is still somewhat negative. And the final point, As some of you remember, we bought the company Virtual Access in 2019. There we had an earnouts set up. That has been finalized in this quarter with a result impact of zero for the quarter or for this transaction. That was Group. Let's go into Vestamu. Strong demand. As on the total, and it's been a record order level in Vestamo and for the full year, but still the challenge with supplies is, of course, also impacting Vestamo. Order intake, about 300, 317 to be exact. Sales of 234 and an EBIT of 22 for the quarter. And We should maybe say also that in the 317 million of order intakes that we've had in Q4, we have not had any of the larger orders. And with larger orders, we talk about 30, 40, 50 million Swedish krona. So it's widespread. It's all the segment, as Per pointed out, and that is, of course, a strength. We've had a challenge to source components, but I still want to highlight, if you look at the graph in the left corner, you see that there's been an upshift in delivery in the last quarter. So we have been able to increase the deliveries to our customers, but of course then to the fact that we have been forced to pay somewhat higher costs for some components. We want to state that the Eltech acquisition that we did by 1st of April in this year, sorry, 2021, continued to develop in a good way. Let's move on to Bayer Electronics. Kind of similar heading here. I mean, we have a wide order growth also in Bayer Electronics. and we've also been able to step up the deliveries in Bayer Electronics. Order intake, 234 million, the sales of 208, and an EBIT of 11 million. Also here, all segments, all regions are going, showing a good strength, and also in Bayer Electronics, we have had some higher costs for some of the components that has been impacting the profitability in short term for in the quarter. In terms of activity level, also in Bayer, we've had somewhat higher activity level, but no drama and it's been balanced. But somewhat more moving around and meeting customers, we start to do that. And we have been talking about the cooperation between Carenix and Bayer, and I think the order that Per mentioned before, and that we even have on the front page of the report, giving a good example of we are doing the right thing to cooperate. And as communicated during the quarter, we will have a joint reporting of Bayer Electronics and Carenix as of beginning of 2022. So that's the structure going forward when it comes to the business entities. So let's move on to then Carenix. It's almost a double order intake in the quarter. It's order intake of 52 million in the quarter compared to the 26 that we had last year. The sales of 29 and an EBIT that's just below zero. So the breakthrough order, 24 million actually, is something that we are very happy to to conclude that we have been able to take. Also in CoreNX we have had some component shortages that's been challenging us in our deliveries compared to what our customers would like to have. And also here we have the time lag in the price increases. And that has then led to that we end up just below breakeven and not in black numbers. That kind of concludes the go-through of the numbers, and I hand over to you, Pat, to take the concluding notes.

Thank you very much. Well, once again, if we try to do a summary of the report and the situation, it is a strong demand, and I would argue and say that the customer focus that we have had in the pandemic strategy from the beginning, it really pays off, as said here. So that I'm very happy that we did it that way. Uncertainty on component situation remains. And it's just a short term. I mean, we don't know when this will open up, so to say. But at least we can see that there will be an uncertainty first half of this year. And then we'll see what happens. Of course, we'll comment this every quarter, as we have done before. You can hear a little bit my voice is that we have a positive look at the demand situation and that we see that we look quite positively of 2022. But however, we are of course also aware of that we have a global political tense or problems when it comes to Russia, Ukraine, China, Taiwan, and so on. And of course, if things happen there, then, yeah, as I don't hope it will do, But, of course, we are on to that and follow that very closely. We also need to be aware of that if you look at possible inflation and the interest rates from different – what can happen on interest rates, and then, of course, that effect on business climate. I think that is a little bit more long-term, but that is, of course, also important. But whatever what we can see and when we talk to customers here and now, we see that there is a good situation, demand situation going forward in 2022. We have, of course, the increase of delivery capacity in focus. If you look at it for the next six to nine months, our sales level will be totally set by how much we can deliver. So at the moment, it's not how much we can sell. It's actually how much we can deliver. So, of course, we have a lot of focus on getting components in place and so on. When you look at the order intake on $2 billion, then of course you can ask a question, do we have capacity longer term to deliver those levels? And the answer is yes. We are still in our facilities operating between two to two and a half free shift levels, so we have more capacity to take out in more or less all places where we produce. So capacity shouldn't be a problem when it comes to that situation. I have already said that on the price management towards our customers, we have done a lot of actions now before the end of last year. And when we now go into 2022 and continues, there will be a lot of price increases that will kick in during quarter one and quarter two. And I think that is important because when you then will see quarter one, two, and three, in 2022, you will see that the margins on the EBIT level will go up, which is more important, most important in the end of the day. And that also means that we are quite confident and confirm our targets on the entities that they should have at least a 10% organic growth and also have a potential to reach the 15% EBIT. And once again, those of you that follow us closely knows that there is a sort of a threshold. And when you pass certain volumes, the margins go directly down to the EBIT level. And I think that is, we can see that very clearly. So, and I also want to say one other statement on 2022, and I'm also looking forward for 2022 to see to Bayer Electronics, together with Korenix, to come into a profitable situation. You can see end of the year that Bayer Electronics started to come back to profit levels. And I would argue and say that there is one unit where we have a good potential for growth on the profit side during 2022. By that, before I open up for questions, I just wanted also to state and to see that there is, yeah, you can see here, there is a new CEO managing director taking on from 1st of March. I will be 65. this year, and even though I don't feel like that, I have to look at the passport and that's the situation. But the most important thing is that we have internally investor, Jenny Skjødal, is extremely capable, so I'm very, very happy to hand over this very nice company to Jenny Skjødal. Because of what I have said, I also want to state in the outlook that Bayer Group, as we said, has a good potential to achieve better financial results 2022 compared to 2021. And as we have said a couple of years, there are all good fundamentals that we should continuously be able to improve results going forward. And by that, I want to open up for questions.

Thank you. If you wish to ask a question, please dial 01 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial 02 to cancel. So once again, that's 01 to ask a question or 02 if you need to cancel. Currently, we have one question lined up. That's from the line of Marcus Omrud of Erica Pensabank. Please go ahead. Your line is open.

Hi, gentlemen. Marcus Adler here, PetroBank. A number of questions. Firstly, what made you change focus on delivery in this particular quarter? Was there anything in particular driving that to do that now?

What we realized, Marcus, was, of course, that we have realized that for a long time, but it was more and more obvious for us that To be able to secure deliveries for the customers during quarters to come was one of the key factors in order to get a good order intake from customers. So we focused even more to, how should I put it, get whatever components we could get around in the world on the sports market. Yeah, so the more we could prove to our customers that we have delivery capacity for them during 2022, that we, of course, realized what the key factor for us going forward. And so, therefore, we concentrated more on that and also in discussions with customers compared to short-term really get the prices up in quarters, if I could. I don't think that was the answer on your question, but that's the way we saw it.

Yeah, no, well, it was and it wasn't, so it's good enough. So if I read you right, we've been talking about in Q2 and Q3 about how much the shortage of components have been punishing sales, and I would assume that with the strategy that you have now, there's no such impact in Q4.

That's not really, sorry, perhaps we haven't been clear enough on that one, so it's good you take it up. There is still a shortage in the quarter, I would argue. Especially in Vestamo, but also a little bit in Bayer, we could have delivered quite more. I think we are still on the same 7% to 9% level when it comes to... We could have been able to deliver quite more in the quarter if we would have had the components that we needed, if I put it that way. So there is still a backlog on that side, yes.

So if I understand you right, then you focused on increasing the deliveries, but there's still a shortage. But then that rather led to the 600 in orders because the customers were more secure in putting in the orders because they know you could deliver. But the kind of 7 to 10, I think we talked about 20 million in the last quarter, that kind of level is still there.

No, no, you're complete. That's a good summary, and I agree to what you're saying there. Okay, okay.

Excellent. And then in the Taiwan order for the large semiconductor manufacturer in Taiwan, how do you look at this order? Given what's going on in the semiconductor investment arena, could we see this as a kind of a test order that you expect there to be more, or how should we look at this?

Now, this is... No, but this is definitely a test order, even though it's a very big test order. And if you look at the potential for the next couple of years in that industry, if we do this in a good way, we already now see possibilities to get follow-up orders in 2022. So yes, this is sort of a little bit compared to when we got into Otis a couple of years ago. I foresee that this will be with us for a lot of years to come. And there is a very good potential on that one. Yes, definitely. And of course, as you said, quite an interesting industry to get into. So we are very happy for that.

Yeah, I mean, lots is happening on the back of the situation. Then just a couple of more, if I may. Have you, given what's going on in terms of the shortages and delivery problems, etc. Have you seen any impact on demand at all? One would assume that if this would continue, let's say, then at some point in time there would be a negative impact on demand. Have you seen that? I haven't seen that anywhere, but it's just interesting to hear what you see on the ground.

No, still not. We are, of course, very close to that discussion. that discussion and close with the customers, but we haven't seen that yet. No, there is still a demand that is quite high and we haven't seen it affecting it downwards, but I totally agree. You need to watch up and it could come, but we haven't seen it yet as we speak.

Okay, it's good to hear. One final one for me. Within the what's called sjukfrånvaro, the The number of people being sick has been shooting up in the beginning of the year. And then I think we saw some of that in Q3 as well. Could you update us where we stand? Do you see this as a concern, especially for the first quarter?

Yes, of course, it's a concern because what has happened in the last month on the COVID side is, of course, dramatic. But it's To give you a number, it peaked in, you know, our factory in Vestermoste, where we have manufacturing, peaked on 7% sick leave. That's not that high, it's too high. Now that has gone down again. So to give you an example, we haven't had 20-30% away on that side. So the short answer on that, no, it hasn't affected us negatively so far. We have the same situation, I would say, that hospitals and schools have is that people stay home because they are in quarantine, but they're normally not sick. They could work from home. And, of course, when it comes to manufacturing, they need to be in place. And as I said, we had 7%, 8% when it peaked in Stevasonby. That's the highest levels we have had. Okay, okay.

All right. Well, that was my question, but I still would like to take the opportunity to thank you very much for the time we've been working together and wish you the best of luck in the future.

Thank you very much.

Thank you. Our next question comes from the line of Mark Husted of Red House. Sorry, please go ahead. Your line is open.

Hello, Pat and Joachim. Hello. I have a few questions The first one is, of course, of the component shortage. Is the group of certain key components that is in shortage shrinking, or is it more or less constant compared to Q2 and Q3, or is it new kinds of components?

First of all, I would argue it's constant. It hasn't changed so much now compared to Q3, Q4. But then, of course, when you get some sort of key components, then all of a sudden you're missing some other components. So it's not exactly the same components all the time. So I think that's the best answer I could give you. It is volatile on that market. And I would say that when you build a switch or whatever it is we're doing, then I would say we have 80% of the material to build it, but then we are missing one or two components to make the final assembly, so to say. And that's what is so frustrating all the time. And the problem is also related to that. Even though we have commitment from suppliers that we will get certain numbers every week, then all of a sudden we get the information we can't do it. And then on top of that, of course, there are still some sort of problems on the transportation networks. So There are challenges, and there will be challenges, but as you can see on inventories, and of course we are trying to buffer up on different ways, so that's why we have the cash flow negative in 21, and that's also why we have higher inventory, because we try to buffer up in order to be safer and safer going forward.

Yeah, and a question then on the gross margin in 2021 as a whole. How much do you estimate that the gross margin has been impacted by cost increases and spot market purchases of these components?

This is, I'm trying to think about the percentage, but we stated that it was roughly 20 million extra cost in 2021. in quarter four. And I would argue, I would say that probably, but I need to look into that before I give you a more certain number. But quarter four, we said in millions, it was 20 million. And then you can calculate yourself on the margins there. Then the reason I'm hesitating is that you also have a sort of a mixed situation if you look at the back. So I need to look at that. But I can't give you a straight number, better number than that.

Yeah, but it's fine, yeah. And then on price management, I have a question. Could you comment a little bit on the gross margin of your new product launches and on pricing in general, especially since your software share is increasing? Is the gross margin on, for example, the Merlin range or on the new Bayer Electronics products higher than on historical product launches or acquired products of a similar character.

What happens now is that when we now look at the order intake last six months, last year, and now beginning here, you can see that on the bioelectronics side, it's more and more X2 products, X2 Pro, X2 Extreme, as you know, and they give us the mix will also make the margins improve during 2022 because there are some older products that we had in Asia-Pacific that is moving out, and then there are some newer products on the X2 series coming in. So there will be also an element of a better mix going forward. And then, of course, the new products, we, of course, try to be very clear on that they should have a good margin already when we start to sell it. So, short answer on that, Mark, is that, yeah, I think the mix and also the already negotiated price increases with customs will improve the margin step-by-step during 2022. All right.

Yeah, interesting. And another interesting thing then in the report is Kronix's breakthrough order, and What was the deciding factor giving CoreNICS the win together with Bayer Electronics over the competition?

I would say two things. One is actually that I know what happened is that there was tests with also when I had competitors in place, but our setup worked more or less directly because this is a complex setup where you also be able to send information I mean, it's the connectivity as well that is quite important here. And you work with a vacuum and all these things when you have these type of factories. And the setup, when they were setting up our system and also talked to our people, they were impressed on the technology level on the people as well. But the most important fact was that our system worked more or less correctly when they tested it. And then also, we found here that the combination of the competence from Bayley Chronix with the competence from Corenyx was a very good fit. I would not say it was lucky, but it was, and the competitors didn't have exactly that setup, so that was a combination of those two. It was not, the most important thing was not price here, it was that it worked. So that, of course, is... That was good for us.

Okay, interesting. I have two, three more questions, if I may. So it looks like Vestamo is able to attend many trade fairs again, and I've seen them, like on Ausrail, TechAdvantage, Emlit Europe, a lot of these trade fairs. posting about it. How important are these trade fairs for your medium-term order intake and perhaps especially for new product launches that you are launching?

I would say and argue and say that exhibitions, they are good, but they are not vital. I think you can always, I mean, for medium-term, I don't think they are vital. From exhibitions, there is always back and forth if you need them or not. uh but but i think that that now there is a big demand after the pandemic to meet and to so that there they have a big impact when you people want to meet again so to say and then of course when you launch a new product that's a good place to to get a new product out in a very good way but i would say also that the pandemic has learned the whole industry to also work more digital so it means that via other platforms, you can get out with new products better than we did a couple of years ago. So I would say that we'll see if you have a lot of exhibitions five to 10 years from now, but I will not stay to see it, by the way, but we'll see, we'll see.

Yeah, and a last question. Is it possible to more or less quantify how big much of your order intake is follow-up orders from already won design wins and new sales. It would be really interesting to see if your customer base is ordering more and more and more and how much it is because it looks like you have a wide order growth from the impact from it.

That's a good question, Mark, but we don't have a good information to go out with here right now. because we have been discussing also to take design wins as a very important factor, as you know. But we don't have, at the moment, a good follow-up system, so we dare to go out with external information on that one, to be very clear. But I would say that the order intake we have is, of course, a combination of already designed wins when they continue to order but also some new customers, so it's a combination. But basically, most of our orders is coming from existing customers. I would argue and say that probably 85-90% of the order intake is from existing customers. So that's the absolutely most important factor for us, that existing customers are ordering more. That's for sure.

All right. Thank you very much for taking my questions and wishing you the best, Pat. Thank you very much. Thank you. Thank you, Mark.

Thank you. Once again, if there are any further questions, please dial 01 on your telephone keypads now. Okay. There seems to be no further questions coming through at this time, so I'll hand back to our speakers for the closing comments.

Okay. Thank you very much for listening. For me, as some of you know, this is my last quarterly report for Bay Group. On the picture here, you can see that I'm handing over to a very competent Jenny Sjödahl. I just wanted to say that I have enjoyed every minute, even though we have had problems on the way, but this has been the most inspiring job I have had since 1981. And even though I don't feel it myself, it's time for me to do something else. But also, I know that if you look the next five years, I'm sure that Jenny will do a better job. So I think it's a very good timing to hand over to Jenny. And I don't need to wish her good luck because she doesn't need that. She has competence in a way. But once again, thank you very much for listening. And I will, of course, being a shareholder, follow Bay Group for a long time to come. Thank you very much.