Ependion AB

Hello, and welcome to the Bayer Electronics Q2 2022 report. For the first part of this call, all participants will be in a listen-only mode, and afterwards, there will be a question-answer session. Today, I'm pleased to present Jenny Schödel, President and CEO, and Joachim Lorrain, Executive Vice President and CFO. Please begin the meeting.

Thank you very much, Ness, and hi everyone, and welcome to this quarter two report meeting. So I will start with a general update of the quarter, and then Joakim Larén, who is sitting beside me, will go a little bit deeper into the numbers. So let's get started. This is what the agenda looks like. Business update, financial performance, some concluding notes, and an outlook. and of course Q&A session in the end. So looking at the second quarter of 2022 we are very pleased to see that the strong customer demand that we have been seeing now basically since quarter two of last year actually continues. Everything starts at the end of the day with orders so we are very happy about that and we did record another Record order intake quarter now not by much but still higher than than quarter one of this year 667 million Swedish kronor And that confirms the growth strategy that we have been working on executing for the last years As you know, we have had some issues with the sales lagging behind order intake and therefore we are happy to see that we managed to reached a sales level in this quarter of 533 million Swedish kronor, and that is the first time that we are above half a billion Swedish kronor. And this record sales level was mainly driven, as you might have seen in the report, by the Bayer Electronics business unit, who really managed to get a lot of products out of their factory in the quarter, whereas Vestimo... was still struggling with component shortages. But all in all, we came in at a good level, which gives us confidence for the future as well. And thanks to this good sales number, we also managed to significantly improve the earnings for the whole group. We landed at 7.7% for the whole group, which is of course not where we would like to be long-term, but it's a step forward compared to where we're coming from. And again, I'm very, very pleased to see that the Bayer Electronics business unit now took this huge step up in terms of profitability. Thanks to their good volumes, we can see that the volume leverage that we have been talking about for quite some time now actually works. And that unit came in with an EBIT margin in the quarter. So we are very happy about that. As I mentioned, the component issues continued to hamper Vestimo sales and especially early in the quarter we had several production stops which we were unable to catch up with later in the quarter. We have a very strong pipeline going forward, a lot of customer activity in both our business entities. We are happy that we can start to see customers again and we are participating in a lot of customer events and so on. So that's very positive. However, we know that the macroeconomic situation is, of course, uncertain due to many different reasons, and we are monitoring that closely, obviously. Okay, moving into the business entities from an overview level, and Joakim will dive deeper into the numbers in just a minute. Starting with Vestimo, we see good demand across all our segments and geographies, and we had a third quarter in a row now with an order intake above 300 million Swedish kronor. However, as I already mentioned, component shortages are continuing to disturb us and due to the lower sales volumes and also high costs for material in the quarter, you could see that the profitability took quite a serious hit in this quarter. However, nothing has changed in terms of Vestimo's business model and the stable earnings capacity that we have, and we are expecting improved delivery capacity in the coming quarters. Again, Bayer Electronics performance very, very strong in the quarter, both order intake-wise, we are seeing a strong demand there, very, very strong invoicing. and with that a significant profitability step up, very close actually to the target that we have set for our business units of 15% EBIT margin. What is very good to see also for Bayer Electronics is that basically all of their competitors in the market for panels are struggling big time in terms of delivery capability, which means that customers are turning to us because we can actually deliver So we are winning market shares thanks to our good delivery capability. Orders and sales on an overview level here as you can see in the graph. A new record order intake even though it was quite close to the last quarter. But you can also see their rolling 12-month level is now above 2.4 billion Swedish kronor, which is of course very, very strong. And sales are lagging behind somewhat, but this graph also shows that there is a significant step up in terms of invoicing in this quarter compared to previous quarters. This means that we have a backlog which is at an all-time high of 1.4 billion Swedish kronor, which gives us a lot of confidence, of course, for the coming quarters. There is a favorable FX effect in the quarters, you can see there in the comments, with the Swedish kronor weakening against basically all other currencies. Okay, with that, Joachim, I hand over to you for some more details.

Thank you, Jenny. We start with group, and as you understand, it was a good quarter, despite the challenges that we have related to the component shortages. The ordering intake at 667 million, sales at 533 million, and then an EBIT level of almost 41 million, or 7.7%. Orders, yes, all-time high. Sales, all-time high. EBIT, all-time high. EBIT level, all-time high. So it was a good quarter for the group, even though it's not what we are aiming for, but it's a step forward in the right direction. We want to point out that we have had favorable effects now with the weaker Swedish krona and lots of sales in U.S. dollars and euros. So we have had a contribution of $8 million on the EBIT level. Of $2 million is translation, and about $6 million is then transactional variances. We talked about the stop in Vestima that we had early in the quarter. I will touch base on that on the coming slide. One challenge that we are facing now with these component shortages. It is the fact that we still have increasing working capital levels. We need to have or take positions of certain sub-supply components and that is raising the capital level so the cash flow in the quarter came out negative of about minus 20 million. Bottom line, net income at 28, and then earnings per share almost at one krona for the quarter. Let's move to Vestamu. Good order bookings, but then sales impacted by shortage, as you understand. 315 million in orders, 219 of sales, and then an EBIT of just below 8 million, or 3.4%. As said earlier, I mean, if we look order-wise, it was the fifth consecutive quarter where we grow, and three quarters, about 300. So it is a good demand situation for Vestamo, and obviously the WeGrow strategy, it confirms that we are doing the right things here. As said, the component shortage led to production stops, and if we look at the 219, And we take away the FX contribution, you could say, of the numbers. It's 1% compared to last year. So it was a low level. And with that, of course, we've had an impact on the result. And we want to point out that in the quarter, we have had extra component costs. and then an unfavorable mix due to the stops in the quarter that is impacting the bottom line of about 13 million. We want to guide you so you understand the impact of this quarter. However, going forward, we are expecting, as Jenny said, gradual increase of delivery capacity going forward in the coming quarters. And we also want to point out that we have changed the prices with a general price increase implemented now the 1st of July for Vestimo. And then let's go to Bayer Electronics. Significant profitability step-up and closing in on the targets. We had an order intake of $355 million, a sales of $317 million, and an EBIT of $44 million in the quarter, or the 14%. For sure, if we look at orders, I mean, we do see a good development on the order side. And we have highlighted in the report also that we have also managed to close some really good orders in the energy segments. But we want to point out that the growth and the traction is wide, and it's basically in all our segments. But we want to highlight the energy segments here. The delivery situation, obviously we have handled the component situation really good in Bayer Electronics, and we managed to get above the 300 million level, and it's an all-time high in sales in this quarter. And Jenny pointed out also that due to the fact that we can deliver, we have competitive delivery times. We are gaining market share from our competitors, and it's good to note, of course. This high level of sales then really confirms what we have been pointing out, that we have a good volume leverage in this activity. And it's, of course, comforting to see that we come up to these kind of levels when we have then sales on the what we have seen in this quarter. We want to point out that the COVID-19 has impacted. We have organizations in China and Taiwan, but still, you know, in Taiwan we have our production entity and in China a sizable sales activity. We have had really good performance. China is one of the stars, you could say, when it comes to growth in Bayer Electronics, and they have developed really, really good. And then our supply chain that is based in Taiwan, despite the fact that they've had quite some restrictions in the quarter, they have still managed to produce and deliver and ship to our customers, which is, of course, very good to see. And the last point here, as we have talked about earlier, we are now integrating CoreNX, the previous business entity, the smaller one, that is now being integrated in Bayer Electronics, and there's more synergies to be realized going forward. That concludes, so over to you, Jenny.

Yeah, thank you very much for that. So to summarize all this then, again, very strong order bookings, and we see continued high customer activity levels and strong pipelines going forward as well. The highlight of the quarter is the very, very strong performance of the Bayer Electronics business entity. And as some of you have seen, some analysts have been calling Vestimo the golden egg of the Bayer Group. And now we can see that we actually have two golden eggs in the group with the Bayer Electronics. That's good. That's good to see. The component shortage situation remains challenging. It's not over. We are struggling, working hard every week, every day to manage the situation. The teams are doing a good job, but we see that these issues will at least persist for the rest of this year, and then we will see into 2023. We are having a lot of focus on managing that situation and as I mentioned before of course the macroeconomic situation is more uncertain than ever but it's the same for everybody and we are of course monitoring that closely. So with that, we do see a good potential to continue to improve our profitability further. As Joachim mentioned, we are improving, but we are not where we want to be yet. So with that, just clarifying the outlook then, our assessment is that the group will achieve a significantly better financial performance in 2022 than in 2021. So that concludes our presentation. So let's move into the Q&A session then.

Thank you. And if you have a question for the speakers, please press 01 on your telephone keypad and you'll enter a queue. And after you announce, please ask your question. Our first question comes from the line of Mark Schuster from Red Eye. Please go ahead.

Thank you, and hello Jenny and Joakim. Thanks for taking my questions, and I have a handful of them. Also congrats to StrongQuarter, of course, not least from the profitability side. So first, the current gains we are seeing from Bayer Electronics, how sustainable are they in the near to medium term? You're right in the report that the business entity is consolidating its market position, by securing deals where competitors do not have the delivery capacity. Could you expand on this a little bit and also on the exceptional Chinese demand? Thank you.

Maybe I start and then you can fill in Joachim. Well, what is happening now is that basically all Bayer Electronics competitors are struggling and are confirming delivery times of up to 12 months. which means that we are seeing customers both in the U.S. but also in China coming to us and ask us if we can deliver these products. And, of course, there is some work involved in changing supplier because you need to reconfigure and make new applications, so to say, for your panel. So it's not like you can switch from one day to the other. But thanks to that, the fact that you need to do some work in order to switch, we do believe that once customers have done that work and started buying from Bayer Electronics, hopefully we can serve them well and therefore we believe that at least a portion of them or hopefully most of them will actually stay with us once they have tried to work with us. So we are quite confident that it's not just a one time off, so to say, but that we will actually gain or win over new customers to this. Then the Chinese demand, Joakim, maybe you would like to comment on that.

We have changed the way we're operating in China some years back, and obviously now we see a good traction. We have a good organization. We have a good offer. We have kind of changed the segments that we're approaching from previously what it was more on the basics and more on the low end. Now we're selling more value-add, which is really what we're offering in Bayer Electronics, also in the Chinese market. And that pays off. Obviously, there's a good demand of our products here. So it has worked, even though we have had quite a lot of close-downs in China. in China during the quarter, but they are managed in a good way. So we believe that that will continue to be a good market for bioelectronics, the Chinese market.

All right. And could you give us an update on the redesigns, especially for Vestamo? How are these activities progressing? And are you able to sell some products today that were severely limited half a year ago?

Mm-hmm. Yes, definitely. I mean the redesigns have been going on for 12 months now and we have redesigned in the range of maybe 20 to 30 different circuit boards so to say to make sure that we could continue to deliver. most of our products. There are a few quite big redesigns that we are working on right now for some important product lines that will be ready by the end of quarter three, beginning of quarter four. So those will be important for us to get done. But I think the work is proceeding well. The R&D team has been working in a very good way to do this. But of course, we have not been able to manage all the critical situations that we have had, which then led to these stops. But given the circumstances, I think that the teams have done a good job.

Okay. And could you also comment a bit on your gross margin, given the price and volume increases, and perhaps also on your efficiency level status with ongoing supply chain issues? How is this melting pot impacting the final result.

Yeah, you want to take that one?

Yeah, I mean, obviously, as we have stated in the report, we have had some high costs for sourcing components in Vestamo that is then obviously impacting short-term. And those extreme, you could say, purchases that we have needed to take It's nothing that you can compensate with the price increases during a quarter. Over time, though, and as we pointed out, we are also now increasing prices further in Vestamo. We believe over time that we will be able to compensate. And of course, and we have also stated that in the report, when we have this you could say, challenging situation for the supply chains where they need to reprioritize, replan on a very frequent basis, sometimes many times during a week. Of course, that is not an efficient way to operate. Going forward, when we have more stable, more and more stable sourcing of components, of course, there will be efficiency gains to be realized.

Right. And a follow up on this, like how sticky are these price increases? Let's say we have a scenario where the sourcing is becoming more normal and the prices go down. Could these price increases permanently boost your gross margin a bit?

Yeah, I think they could. I mean, there's nothing... All the price increases that we have implemented are until further notice, so to say. There is no time limit on them. So I do believe that once the situation stabilizes, we should be able to see better gross margins. Then, of course, depending on what the world will look like then, the pressure from customers to take down costs will, of course, also... come back, but overall I see that we should at least come back to the gross margin level where we used to be, so to say, before this whole thing started.

When it comes to the efficiency gains, I think that we cannot emphasize that enough. I think that's a lot of things there.

Yeah, all right. And also, on the gross margin. How does it look on the new products compared to older products that have been out in the market for three to five years? Are there any differences between the gross margins? And are you increasingly able to charge for the expanding software share of your offering?

That's two questions there. But if we take new products, of course, when we are releasing new products to the market, we aim to have an improved gross margin with solutions, with designs that are making us realizing better gross margins for the products. That is normal part of new development of new products.

When it comes to the software side, we are moving towards a business model where we will be able to to charge in a better way for software. That's what we are aiming for, but up until now, it's quite a limited impact, actually, overall. We are not there yet, so that's still something to work with and to help improve our markets going forward.

Okay. And another, given the energy prices in Europe, have you noticed any changes in the willingness to invest and Does this impact different end customers? I mean, for example, manufacturers should bear some burn from this, I guess. But your power distribution products could gain from this. Correct me if I'm wrong, but it would be interesting to hear your thoughts about this.

Yeah, I think medium to long term, definitely, it will further increase the urgency that I think most countries in Europe and in the US and everywhere face. already feel regarding the need to upgrade and strengthen the power grids. I think there is already a big sense of urgency everywhere and there are big investments going on, but of course this situation further emphasizes that and strengthens the incentive even more to invest, to modernize and extend the grid. And, of course, the operators will have more funds available to do that with higher energy prices in a way. So, yes, I don't think that short-term it's influencing anything, but mid- to long-term, yes, it strengthens the case, so to say.

All right. I've taken up a lot of time, but thank you very much for answering my questions.

No worries. Thank you, Mark. Thank you.

And we have one more question from the line of Marcus Almarol from Eric Pencer Bank. Please go ahead.

Yeah, hi, Marcus here from Pencer Bank. A couple of follow-ups to Marcus' questions. Firstly, maybe talking about the uncertainties. Are there, just to confirm that there are no impact on numbers, I mean, as of yet, of the uncertainty. So the uncertainty is still... sort of spoken about, but not materialized. Is that correct?

Yeah, that is correct, Marcus. We are not seeing, as of now, any impact.

Yeah. And then in terms of component shortages, have you seen any signs of easing of these at all? Yeah, I'll start, and then I'll follow up on the same topic.

Yeah. I would say that we have seen a little bit of an improvement in that there are less new issues coming up now compared to maybe six months ago. But the issues that we still have are of a very serious nature and difficult to solve, so to say. So fewer issues, which is of course good, because then we can focus on the complicated ones, but the ones that we have are of serious nature. I think you can put it like that. We don't see any improvement overall in the component markets in lead times and so on. It's still 12 to 18 months lead time on almost all active components. But of course, with the PC demand now starting to go down, maybe there will be some improvement in the coming 6 to 12 months, but we haven't seen any yet.

Okay, okay. So the ability is increasing to deliver in the second half is more of a catch-up kind of, I mean, you have all these components sort of on the way and you saw delays and then you will kind of get them during the second half. You will be able to catch up, catch up some of what you weren't able to deliver in second quarter. Is that how you see it?

That we are clearly indicating when it comes to Vestamo because Vestamo has really Q2. You should not see that everything is hanky-dory in their electronics. They have challenges also, but obviously in this quarter we managed to deliver much better than we did in the first quarter. But it's not over in Bayer Electronics either. They have challenges also. But we are, as we are stating in the outlook also, we see an improved or increased optimism when it comes to our ability going forward as a group. But it's not over. Absolutely not. It's still a challenge. But our organizations are doing a really, really good job, I must say.

Mm-hmm. Mm-hmm. Okay, and then when it comes to Vestimo, because they've had these problems for some time now, even though the problems seem to have escalated in the second half, or at least the impact of them seems to have escalated. There's no impact on orders or discussions or anything like that on the back of this, so that people are more hesitant to place orders or anything like that.

No, not really. And you can almost be surprised at the patience that our customers are showing, so to say. But I think that's due to the fact that, and we know that, that our competitors are having exactly the same issues as we do. So there's nobody out there who actually has normal lead times. Everybody is struggling in a similar way as us. So I guess that's That's why our customers are, you know, they understand the situation. They are dependent on other electronic components or products containing electronic components as well and are seeing the same pattern from other suppliers. So I think there's a general understanding of the situation right now.

Okay, and then my next question is on electronics. You highlight the broad... broad kind of upturn, but you also highlight the electronic segment. Can you, energy segment, sorry. Could you be a little bit more specific? What part of the energy segments were you seeing this strength? Would be interesting to hear.

Yeah, we have seen, especially now in the second quarter, and that is, of course, we are very happy about that, large orders for electric vehicles charging infrastructure customers. Several of those have placed large orders in the quarter. And also energy storage applications, which are, of course, all in line with the energy conversion and electrification and so on, where we can help and support that. So that's the areas where Bayer Electronics have seen strong water intake in the quarter.

Okay, okay. Brilliant. And finally, maybe just a question of working capital. So just what we should expect going forward. I think you were talking a little bit about it evening in the second half of the year, but just tell us a little bit on what we should expect towards the end of the year in terms of working capital.

What we can say is that when it comes to inventories, basically, or mainly, I think we are peaking now. We don't foresee that we will need to increase. So in terms of cash flow, we expect a positive development in the coming quarters.

Okay, excellent. Thank you very much for that.

Thank you, Marcus.

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

Okay. Well, thank you all very much for joining, and have a good summer. Thank you.

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