Ependion AB

Welcome to the Bioelectronics Group conference call. For the first part of this call, all participants will be in listen-only mode, and afterwards, there will be a question and answer session. Today, I'm pleased to present Jenny Sjöddal, President and CEO, and Joachim Loren, Executive Vice President and CFO. Speakers, please begin.

Thank you for that. Hi everyone and welcome to this quarter one conference call for Bayer Electronics Group. I'm sitting here today in sunny Malmö with Joakim Laurén, CFO of Bayer Group. And as you probably know, I am new in this role since the first of March. So I just want to start by giving you a short introduction of myself. Then I'll move on to the business update After that Joachim Laurén will be giving some more information on the financial performance before we move on to the concluding notes and then we'll open up for Q&A as well. So let's get started. So a few words about myself. I'm an engineer by education. I joined the Bayer Group. and Vestimo actually, one of the business units back in 2016, and have since 2017 been heading the Vestimo business unit. And prior to joining Vestimo, I spent almost 19 years in ABB. And as I mentioned, since 1st of March, I've taken over from Per Samuelsson as President and CEO of Bayer Group. So let's move into the business update then. In the report that we have just released, you can see that we have a continued strong customer demand and order at the record level for the quarter, 662 million Swedish kronor. That is a sign of a continued strong customer activity and a strong demand that we see in basically all geographies and all our different segments so that's a positive thing obviously and we do see a slightly changed order behavior from some of our customers because of the longer lead time some of our customers and especially in the Bayer Electronics business unit are placing order a little bit further ahead so there is a slightly impact of that in the quarter, but we don't consider that impact to be very big. We say that it's probably less than 10% in the quarter. Sales-wise, we see a similar situation as the last couple of quarters. We do still have challenges with the supply chain situation and especially the access to electronics components. Despite that, we have increased our sales level in this quarter compared to last year by 25%. And we do think that if the situation had been more normal in terms of the component situation as well as the COVID situation in China, which has impacted our delivery somewhat as well, we could have shipped around 50 million Swedish kronor more and invoiced that in this quarter. I'm happy to see an improved earnings trend. We are still not at all where we want to be, but we can see a clear improvement compared to both the same quarter of last year, which was very weak, but also compared to the fourth quarter of 2021. And what I'm particularly pleased to see here is that we are starting to see our price increases compensating for the higher costs that we have seen now for a couple of quarters and both business units in their group are working really hard now on implementing and pushing through price increases and that is really one of our key priorities and we are starting to see an impact of that now in our gross margin, so that's also positive. As I mentioned, the component shortage situation remains. And we also see some delivery disturbances already from the China COVID lockdowns where we have issues shipping to Chinese customers, obviously, and it's also impacting the supply chain of goods coming out of China. Of course, with this somewhat difficult situation in the supply chain, Our production units are also struggling somewhat to deliver stuff, and we are not running at an efficiency level that we would normally do in our factories because of this. Looking at the Russia-Ukraine war from a business perspective, we have very limited financial exposure related to Russia and Ukraine. Only a few orders from the different business units have had to, we are not shipping obviously anything to these countries right now, but it has a very limited financial impact on us. If we look a little bit deeper into the two business units, as you know, from 1st of January, the third business unit, Korenix, that we had in 2021, has now been put together in the numbers of Bayer Electronics, and those two units are now operating as one unit, so that's why you don't see it here. But if we start with Vestimo, we see a continued strong demand across our segments, both from our trained customers, but also in the other segments that we are working with. And we also see a high activity level among our customers and in our sales channels overall. Vestimo, as you might know, are focusing on robust and high quality products. These products contain, in some cases, special components in order to achieve the specification that our customers require. And that also means that there are some special components that are somewhat harder to find in this difficult market situation than more standardized components. And that is continuing to hamper our delivery capability in Vestimo. And we expect that situation to continue in the coming quarter and quarters, I would say. So the profitability level of Vestamo and Joaquin, we'll come back to that in a minute, is on a decent level, but it is impacted by this situation. As I mentioned, the price changes start to contribute, which is a positive sign as well. Regarding Bayer Electronics, very happy to see a record order level in this quarter, driven again by all segments and regions. Bayer Electronics has a little bit better situation in the supply chain than Vestimo. They are using more standardized components and so they have less impact from this electronics component shortage but they do have still an impact and also as I mentioned because of the lockdowns in China. But also in this business unit we are increasing prices to our customers and I'm very pleased to see now that the profitability level of Bayer Electronics, which has traditionally historically been way, way too low, is now stepping up significantly and they reached the profitability level in the quarter of 8%. So this is something that we look very positively upon and there is more potential definitely in this business unit. So looking at then the top line, so to say, in terms of order intake and sales, if you look at the quarter one 2022 compared to the previous quarters, you can see the high order level in the quarter, 59% up compared to the same quarter of last year. But you can also see clearly that the sales development is lagging behind, so to say. We had a decent level in the quarter, but not where we should have been in a more normal supply chain situation. And this also means, of course, that we are building up our backlog further. It is at an all-time high of 1.2 billion Swedish kronor. And that is more than double the level that we had the same time last year. So with that I will hand over to Joakim to deep dive a little bit more into the numbers.

Hello everyone, this is Joakim speaking and as Jenny said I would like to take you through more of the numbers. We start with the upper left corner. for the group. We had a sales of 440 million and an EBIT of 28 million for the quarter, giving an EBIT percentage of 6.4. In the graph below, you can see the trend. Obviously, we do see a positive trend, and as Jenny said earlier, I mean, it's still not on the levels that we want to be on, but the trend is going in the right direction. And as said, the The sales in the quarter was impacted by the component and the lockdown in China. And we have mentioned a level of 50 million that could have been if we have a more normal situation. As also said, the price increases that we talked about the previous quarter, that we see a positive contribution on in China. in this quarter and the trend is improving. Currency is with us in this quarter, it's about 5 million that is on the positive side for the quarter and the main thing is transactional variances of that. The net income is also positive, plus 16 million. What is tough for us is the fact that we need to take some special actions in terms of sourcing components and also the fact that we are not having the most efficient supply chains, given the situation on the component side. And the cash flow is unfortunately negative in the quarter, very much driven by working capital increases. That concludes this group. Let's take a further down look in Investimo. And the heading, I mean, you see that it's the same kind of message. It's the component shortage that limits the sales growth here. We had a sales of 228 million and an EBIT of 22, giving an EBIT of just below 10% for the quarter. And looking at the trend below on the sales and orders, clearly the backlog is increasing. And if we look then at the sales in the quarter, the 22%, that includes the fact that we have LTEC, the acquisition LTEC that we did first of April last year. So they are now in the numbers. And if we compare to Q1, the increase is 13% in the quarter. Jen has already talked about the challenging situation on the component shortages. We do see the positively impact also of price increases, as said earlier. And that is then, of course, contributing on the profitability in the quarters. In terms of activity levels, we are ongoing in Vestamu with the WeGrow strategy, where we look at new offerings, especially for the energy segments. And we see that with a positive view going forward. And also important for us is, of course, cyber security and IT security. We have, in the quarter, also had a certification of the Vestimo entity of ISO 27001. That is Vestimo. Let's take a look at Bayer Electronics. And as Jenny said earlier, Bayer Electronics now includes also CoreNex, as we previous years have been presenting as a separate business entity. But now they are included in Bayer Electronics. The sales was 214 million, the EBIT was 17 or the 8%, as Jenny said earlier. And we do see that it's positive that we see a step up in the profitability for Bayer Electronics compared to where they have been the last years. It was to mention the fact that we do have an all-time high order booking in Bayer Electronics on the 360 million. There's no major big orders. It's widespread across segments and regions. We are seeing a hampering of the sales level due to the component shortages and the fact that we have the China lockdown or the COVID lockdown in China. It is, of course, good with 8% of Bayer Electronics in the profitability, but it's not where we should be. The trend is in the right direction, but the ambition is higher than that. That kind of concludes the financials, so back to you, Jenny.

Yes, thank you very much. Just to summarize the message here, as you can see, the strong demand continues and we have a promising pipeline in combination with high activity levels in our sales channels and among our customers. Very positive also now, of course, that most countries have opened up after the pandemic and we can start to meet customers face-to-face again. We can participate in fares and so on so that's a very very positive situation i would say predicting the future is always difficult but i think it's particularly difficult right now because of the uncertainties that we are all well aware of the russia ukraine war of course the kobe lockdowns in china from which i don't see that we have seen the full consequences yet and also the overall inflation level that is continuing to increase. So all this means that it's very hard to tell what the business climate will look like for the rest of the year. But we feel confident in the fact that we have a good offering, we are delivering on our strategy, we have our customers out there and a big share of recurring revenues as well so that makes us cautiously optimistic for the remainder of this year. We have mentioned it several times but it's really because it is one of the biggest challenges that we have right now, the disturbances in the supply chains which makes it very challenging actually to convert this nice order book that we have into revenues and profit and that is really the key priority for the whole organization right now to navigate in that situation and really try to get as much volume out as we possibly can to our customers who are of course needing our products which is very positive. But all in all, I think that the group as such has a good potential to continue to improve the profitability. We have seen the start of that already in the Bayer Electronics business unit, so I'm feeling quite optimistic about that. And the outlook, again, very difficult to predict right now, but our view right now is that we do see a potential to achieve a better financial performance now in 2022 than in 2021. So with that, we would like to open up for questions.

Thank you. If you have a question for our speakers, please press 0 and 1 on your telephone keypad and you'll enter a key. Once you are announced, you can ask your question. The first question is from Marcus Almarud, Eric Penserbank. Your line is now open. Please go ahead.

Hi, Marcus Almarud. Can you hear me?

Yes.

Hey, Marcus.

Hi, Marcus.

Hi. nice to see the order intake continuing to go very, very strong and to perform strongly. My first question is about the 50 million that you have been talking about when you have been snagging for some time to convert the order book into sales. Just wanted to check if something has changed with the rationale with the 50 million of sales, which sales would have been 50 million higher if under normal circumstances, which will kind of at 50-ish percent gross margin give an additional or incremental 25 million of EBIT. And that will give me an EBIT margin in normal circumstances of over 10%. Has something in that equation changed?

Good question, Marcus. I mean, we still believe in the leverage. We believe in the the volume leverage that we have been talking about before. And what you're stating is absolutely an assumption that you can make. And that is also why we want to be open to the outside to understand that the volume, the invoicing volume, It is the situation of component and which is new, of course, with the lockdowns in China due to COVID. That is the result or the fact that we are having sales of, you could say, only 440 million when we have order intakes of 660. So the assumptions that you are doing we can confirm there's nothing that has changed compared to what we have stated before.

Okay. Because it also seems like the, I mean, if I look at the book to bill or if I look at the curves that you have by business, you can see that the spread between order intake and sales is increasing. Is that because demand has accelerated or is it because the problems have accelerated or what's behind that?

I think it is mainly due to that the demand has increased. I mean, we have seen several quarters now with an order intake level that we have never been even close to in the past. So I think that is the main reason. The sales level remains basically the same. It has not gotten worse, but it hasn't improved significantly either. our capacity to deliver remains relatively stable and the demand is increasing and that is why you see that spread increasing as well I would say.

And just to be clear you haven't seen any cancellations or anything like this on the order side?

No, no cancellations so far.

And is it possible to say anything about are they evenly split between the business areas or is Is Vestimo more affected by this than Electronics is?

Actually Vestimo is more affected by these issues than Bayer Electronics and the main reason for that is that Vestimo's offering contains more special components you can say, components that are specially designed for Vestimo to achieve the compactness and the robustness and the temperature specifications and so on of the Vestimo products. So that means that we are a little bit more, in the Vestimo part, a little bit more vulnerable to these capacity issues that the component suppliers are having because they tend to focus their limited capacity on more standardized components, components that are running in higher volumes and so on. Whereas Bayer Electronics, due to the nature of their products, are using a more standardized set of components with a little bit less demanding specifications, you can say. So that, I would say, is the main reason why Bayer Electronics is doing better in this respect than Vestimo.

Mm-hmm. Mm-hmm. So a bigger part of the 50 would be investor move. And just to kind of use the same rationale as my previous question, are the gross margins, are they roughly the same?

In between the businesses or what we have seen before? I mean, what was clear and what we were quite... transparent about in the last quarter in Q4, we had an impact of lower gross margins as we were forced to buy components on the spot market and we could not see the positive impact of increased prices in Q4. Now in Q1, we do see the positive impact of the price increases. So in that sense, we do see an improved margin.

Okay, okay. And on the price increases, finally, is it possible to say how much of the announced price increases are already in there? And also, you were talking about, I mean, you do actively work with price increases, so I assume there is more price increases to come as well.

Yes. Your first question, I didn't quite get it. How big share of the price increase is that?

Yeah, that has already impacted. So let's say, for instance, you had, I mean, are there more of the already announced price increases that have not affected results yet or are they fully reflected in Q1?

Okay, now I understand your question. No, it's definitely the case that we have not seen the full effect yet. of the already announced price increases. So there's more to be had, so to say, from those price increases in the coming quarters.

Okay, and I assume that they will... Have they been more recent, or is it more that you actively work on a case-by-case basis?

Yeah, we work definitely on a case-by-case basis, both on implementing the already announced price increases, but also... In general terms, making sure that we, for new orders and new customers, have a price level that reflects our cost level, so to say. And we are constantly analyzing the inflation and further cost increases to make sure that we can make further price increases if and when needed.

But it's not like you had

one book price increase first of January and then now you can have another one first of April it doesn't work that way it could work that way we did increase our prices quite significantly from first of January that increases is now being implemented and we are analyzing the need for for further increases but nothing has been decided yet okay okay okay perfect thank you very much thank you Marcus

There are no further questions at this time, so as a reminder to ask a question, you have to press 0 and 1 on your telephone keypad. There are no further questions. I hand back to you, speakers.

Yes, thank you very much to all of you, and yes, talk to you next quarter.

Thank you. Bye-bye. Bye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.