Ependion AB

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

Okay, thank you very much for that. Hi, everyone, and welcome to this quarter four call for Bayer Electronics Group. With me today I have as usual Joakim Laurén. We are currently in Malmö and we will walk you through our Q4 and 2022 results. As usual, I will start with a business update. Then Joakim will move into more details around our financial performance. And then finally some concluding notes and outlooks and then of course we open up for Q&A. So let's move right into the summary of the quarter then. We are happy to see that we have achieved another strong and stable quarter. It's a strong ending to a record year for Bayer Electronics Group. And if we start with the customer demand side, which is, of course, where it all starts, so to say, we can see that the customer demand continues in general on a good level. And we posted our fourth consecutive quarter above 600 million Swedish kronor in order intake. Driven mainly by Vestema, I would say, in the quarter, who had a fantastic, strong order intake. But also Bayer Electronics came in on a stable level where for Bayer Electronics, Americas and Europe were strong and the China market actually showed some weakness. In terms of sales, we posted a new record quarter of 589 million Swedish kronor. That's 26% up on the same quarter of last year. And both business entities contributed to that. Bestimo came in finally at 300 million, which was a significant step up in delivery. So that was good. However, we do still see constraints due to the component situation. I wish I could say that those problems are gone. They are mainly gone, I would say, in the Bayer Electronics business entity with the components that they are using. But on the Vestimo side, with the very high spec components that we need, there are still fewer, but the number of suppliers that are still letting us down, so to say, in terms of capacity and are pushing out confirmed deliveries, which are still causing issues for the Vestimo delivery situation. Earnings came in at 10.7% for the quarter, somewhat lower than quarter three of last year. There are some explanations to that, which Joaquin will come back to in just a bit. In terms of Vestamo business entity, as I mentioned, good increase in sales and an EBIT level of 12.3%. And as I mentioned, the component situation continues to affect us quite a lot. We are prioritizing deliveries to our customers. And in the quarter itself, we were forced to buy components on the spot market to an extra cost, so to say, of 12 million in quarter four. And we have seen that issue throughout the year. But just to point out that this is still having a major impact on the earnings in Vestimo. Bayer Electronics came in with another very stable quarter and posted an EBIT of 13.9%. So they are staying on that higher level, so to say, that we have seen over the past two quarters in that business entity, also with a nice sales volume. When it comes to the global situation, so to say, there are, of course, as we all know, a lot of uncertainties still out there. And we of course follow that development and we are preparing for different scenarios. However, for the time being, we are not seeing any major effects on our demand side related to that. And today the board has decided to propose a dividend of 0.50 Swedish krona, same dividend as last year, basically based on the fact that there is a lot of investments and good things that we would like to do during 2023, and that is the reason why the board proposes to stay on that dividend level. Okay, I think I mentioned already quite a few things about the business entities. In Vestimo, we see that the high demand that I mentioned is driven by mainly our focus segments with the train and energy segments really sticking out with very, very nice order intake from our key customers there. And of course, despite the component issues, the organization is fully focused now on continuing to step up the sales volumes. We have a very, very strong backlog, as most of you are aware, and we need to deliver that backlog to our customers. Bayer Electronics, again, stable demand. America's very strong growth. EMEA, Europe, Middle East, Africa also on a good level. We are seeing a weakened demand in China at the moment due to the issues that they have over there right now. But we believe that that situation will somewhat improve throughout the year. The delivery situation in Bayer Electronics is on a good level now. There are a few issues related to capacity of suppliers, so to say, and components. But in general, we are in balance now with the water intake. And as I mentioned, a very stable profitability level now for this business entity. Okay, here in a graphical format, orders and sales. Order level again, it came down a little bit as you can see there because of the Bayer Electronics, a little bit weaker demand in Bayer Electronics. Vestimo is still very strong, but you can see fourth consecutive quarter above 600 million Swedish kronor, which of course historically is a very, very high demand. Sales 26% up compared to last year, almost 590 million Swedish kronor. That's an all time high for the group. We have an FX effect that you can see here in the quarter compared to last year. And our backlog, as we have been talking about before, is at an all time high of 1.5 billion Swedish kronor now going into 2023. So with that, I hand over to you Joachim to give some more meat to the bone. Thank you very much.

We start with Bay Group and up in the left corner, you see that the order intake came in at 603 million. The sales was 589 and EBIT almost 63 million representing an EBIT percentage of As Jenny pointed out, it is the fourth consecutive quarter above the 600 million mark, despite the fact that China market has developed quite low when it comes to order bookings in the fourth quarter, where they've had a very good or very strong early 2022, but the last quarter was weaker. Sales, as Jenny pointed out, all-time high. And the EBIT level, well, it's almost three times better than last year. And in the second quarter now that we are well above the 10% mark. If you look at the graph, you see the orange line, the solid orange line, that is the last 12 months development and the trend there is of course in the direction that you would like to see going upwards. FX impacts and with the weaker corona in total for the group we have a positive impact of about 4 million corona in the quarter. We have been struggling for quite some quarters during 2022 with cash flow. Now, by the end of the year, we post a quarter with, I would say, positive free cash flow of 57 million. Still, our working capital, it's a bit challenging with the component situation. So we state it's still on two high levels compared to where we want to be. But still, we show a positive cash flow in Q4, which is, of course, good for us. Net income, bottom line, 51 million compared to 11 last year. And EPS increased nicely from 0.37 last year to 177 this year. So let's go to Vestamil. Estimate order intake, 326 million, sales of 300, and an EBIT of 37, representing 12.3%. The order intake, all-time high as well, fifth quarter above 300 mark, very strong development in Western, as Jenny pointed out. And we're also happy to see that we have been able to step up the deliveries, giving us the 300 million in invoicing in the quarter. But still, I mean, you should look at the pace that we are booking orders compared to what we are delivering, so we still have a way to go when it comes to increasing our ability of deliverance. EBIT margin, 12.3. Decent is what we describe it as. But we should be aware, as also stated before, that we needed to do expensive spot market purchases of some components to be able to deliver. And as Jenny said, we are prioritizing deliveries to our customers. And then we have to do these kind of activities that will or have affected the result with the 12 million, as we pointed out before, in the quarter. and it's what to expect when it comes to the component situation. Well, it is still challenging for us, and it will impact us in the short perspective. Of course, with the inflation and the cost increases that we are facing, we are active on price management, and also our strategies when it comes to working with development to make sure that we have the latest technology that's needed with those focus segments that we have. So we continue that on full force, making sure that we will be competitive and open up for the growth going forward. Bayer Electronics. we have an order intake of 279 million, sales of 290, and an EBIT of 40, representing the 13.9% EBIT. If we are comparing to Q4, we state it's a stable bookings, where China, as said, has had a weaker development, but Americas and also EMEA, they are developing in a good way, so it's The slowdown in order bookings is not general. It is limited to the Asian or specifically the Chinese market. Deliveries, stable development without too many hiccups in balance with what we have booking orders. Profitability, well, we can conclude another quarter around the 14% level. It's actually the third quarter in a row where we've been on this level. Also in Bayer Electronics, of course, we need to be active on price management, and that we are doing. We have for quite some time talked about the integration of CoreNX into Bayer Electronics. Now, when we close this quarter, we can conclude we're done. It's fully in place, and we will now basically globally operate under the name Bayer Electronics only. And also in Bayer Electronics, it's full focus on R&D activities to maintain the position that we have and to make sure that the offerings that we have, both hardware and software, are competitive and the best to offer to our customers. That concludes the numbers so over to you Jenny.

Thank you for that and this is really just a summary of what has already been said. The takeaways are that we are seeing a stable overall demand where Vestamo continues to show a very strong development and the electronics is stable. Good profitability development compared to where we come from. We are not happy. We are not content with that. There's still much more to do to reach the financial targets that we communicated in November of last year. And that will be the key focus, of course, for us going forward. The component shortage, as much as I would want it to be over, we still see issues with a handful of components causing us challenges regarding the delivery capacity, specifically in Vestimo. And again, global outlook is somewhat uncertain still. As we have mentioned before, we are not directly impacted by the Russia war on Ukraine. But of course, the inflation and the risk of recession and so on is something that we monitor very closely and we prepare ourselves for different scenarios. And then outlook. Yes, this is early days, so to say, looking at 2023. But as I mentioned, our target now is to strive to reach the financial goals that we communicated in November and the fact that we operate in attractive markets. with good underlying growth driven by digitalization, sustainability, electrification, and so on, gives us a certain optimism for reaching both the growth and profitability goals in the medium to long term. And it also gives us some optimism for 2023. But again, difficult to tell how the market will develop. So that That's how we look at it right now. So with that, we would like to open up for Q&A.

Thank you. If you wish to ask a question, please dial 01 on your telephone keypads now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is 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. And currently we have two questions in the queue. The first is from the line of Marek Rostov of Redeye. Please go ahead. Your line is open.

Thank you very much, operator. And hello, Janne and Joachim. So I have a handful of questions. First, could you expand a bit on the slowdown in China and perhaps also on what signs that make you cautiously believe that it could potentially rebound a bit in the second half of 2023?

Maybe we take them one by one, otherwise we will forget. Well, if I start with the China situation and then maybe Joachim would like to fill in. And we are seeing a slower demand basically related to the lack of liquidity in China and the overall economy slowing down there due to the COVID situation and so on. So that is something that we see. But what is making us cautiously optimistic still about the China market is that quite a few of the customers that we have in China are global exporting companies. like the big car manufacturer BYD, Build Your Dreams, that are exporting their products globally. And they have become an important customer to us. We are delivering our X2 panels to... They are actually making electrical batteries for electric cars. And we are delivering equipment or panels to the production equipment of those batteries. And that's a global business. And those kind of customers, there we see a continued strong demand going forward. So that's the reason why we are cautiously optimistic about China coming back and picking up again.

There are quite a few Chinese customers that we have design wins that we believe will lead to order intake later in the year. So that is the reason why we are cautiously optimistic still despite the weak Q4.

All right. Interesting. And so during the capital markets day, you discussed the growth opportunities in new infrastructure such as EV chargers and in the grid network. Are you looking to recruit perhaps more sellers or other support personnel in the US specifically and increase the local presence in 2023. Would you have the organization in place for this growth opportunity?

I think overall we have a strong organization in place in North America. We have strengthened the Vestimo team during last year actually specifically to focus on the energy market in North America. So we have already recruited a couple of people and we will probably continue to strengthen our presence there during 2023. And also in Bayer Electronics, we have increased our capabilities, so to say, to support these new segments in North America, but also in other geographies. So selectively, we recruit and add resources where we see there is a growth opportunity that we want to capture.

All right. And are there any other like high margin pockets or interesting growth areas that you see? So, I mean, you have talked about like mining ports, water facilities, et cetera. Is there anything that is like standing out?

I think that you can say that the energy segment overall, which is the focus area both for Vestimo and for Bayer Electronics, represents a higher margin segment. It, of course, depends on the different applications, but it is the segment overall that is growing and where we see that we can get good prices, so to say, for our products. So as we grow that segment further, I believe that will have a positive impact on our gross margin. All right.

And so before Querenix and Bayer Electronics merged, you wrote in the Q4 in 2021, I believe, that Querenix, you wrote about Querenix's extensive product development and the new Querenix Switch OS platform. And in this report, you also mentioned JetNet and JetWave, et cetera. So I'm just curious to know, especially since you have talked about a few larger deals, about how Carenix is doing in the new business segment and whether the investments have gone through.

Yeah, part of the fact that we are integrating the Carenix business into Bayer Electronics, we have, of course, looked at the portfolio and the focus areas and you could say that we have limited the scope of the former Coenics from, you know, more wide and to focus more on supporting the Bayer Electronics development. I think about a year ago, we talked about the TSMC order. That is still a very good business where we still see good progress going forward, and there's a lot of opportunities in that area, which is then the digitalization of production or manufacturing 4.0 applications. There, the offer that we have where we combine the Bayer Electronics and the Koenig side, we see good opportunities, and we believe that we are very competitive. All right.

And one last question. So it's on the component shortage. What are your suppliers telling you on the outlook of getting into balance once again?

Yeah, they were telling us early quarter four that there would be improvements in capacity and so on with the consumer electronics demand going down. So that made us feel a little bit... optimistic actually about about the situation and I can say that the situation has improved in terms of you know that there are less components now that are on on the critical list so to say so less components less suppliers to deal with but the ones that are still critical those suppliers which which is basically two three suppliers are still having major issues with with the particular components that we are using and are pushing out deliveries with very short notice that had already been confirmed. We are, of course, having a very close dialogue with these suppliers, trying to get attention and priority, but the hard allocation situation that has been around for more than 18 months now is still there for those components. You can end up having no allocation one quarter, for example, and getting to know that very late. there seems to be still supply chain imbalances for some specific electronic components, and it's very hard to understand exactly why that is, but that's what we are seeing.

Sorry, so one last question then. Do your customers understand this, your end customer?

Yeah, I think they understand it and we are also asking for their help, so to say. In some cases they can help us push and help us get priority and so on. So I think that there is a good collaboration with our major customers. And again, the reason why we are doing these spot purchases to a very high cost is that we want to serve our customers. That's the priority number one after all. so that we can have a life also after this situation is gone. So that has been our focus area, and I think most customers appreciate that. But we have too long lead time still, and we are working hard on getting the lead times down and improving our delivery, our on-time delivery, basically.

Yeah, all right. Thank you for answering. Thank you, Mark.

Thank you. And we currently have one further question in the queue. So just as a reminder to participants, if you do wish to ask a question, please dial 01 now. And the next question is from Marcus Almorad of Penza Bank. Please go ahead. Your line is open.

Hi. Thank you very much. Marcus Almorad here at Penza Bank. My first question is on China. So China deteriorated in the fourth quarter. And My first question or sub-question on China is, have you seen any, I mean, they have now opened up. Have you seen any signs of any relief from that? And second, if you were to, maybe you can't answer straight away, but if you were to kind of strip China out of the order intake, what would the trend look like if you compare with China?

Well, in the short term, I think it's too early to say what will happen. Right now, we are in the middle of Chinese New Year, and quite a lot of the China countries is basically, when it comes to businesses, is closed down. Many people are on vacation. So let's see what happens when we open up and we come out of the Chinese New Year's. When it comes to your question on how does it look, well, what we state is that if you look at the order development in Bayer Electronics, the Americas is doing really well, or we've used the word even strong, and we have talked about EMEA is doing really well. That means that it is the Chinese market that is making the numbers look like going flat or sideways. So if you take away the Chinese, it's positive, definitely positive in both, especially America, I would say, but also the EMEA market region is doing well in their electronics. I hope that answers your question, Marcus.

Yeah, it did. Thank you. And then on the components, I know that there was a very positive tone in Q3, and I'm just curious to know what happened in Q3, Q4. Was it one of the situations where you got more of these critical components you were referring to in Q3 than you did in Q4, or what was the difference?

I would say that in Q4, we have had higher cost of spot purchases. We have had that the full year, every quarter, but there has been more in Q4 than before. And we felt that there was a need for you analysts or the market to understand what kind of money we are talking about. And that's the reason why we explicitly give you the number of 12 million that is extra in the quarter. So that's the reason. We do focus deliveries, and it is a deliberate decision for us to make sure that we can deliver and increase our capacity to serve our customers. And therefore, that's the reason for the actions. Mm-hmm.

If I remember correctly, it's the same kind of magnitude of funds that have been mentioned before, that is in Q1 and Q2, and I also think in Q4 last year. It was a kind of 10, 12 million krona in extra cost that has been mentioned already then, and then we didn't have that in Q3, or at least there was nothing written at the same kind of magnitude, if I remember right. So that's why I was just wondering what the difference was, what's happened during this period. this time in the second half of the year and the response markers is that it's higher in q4 compared to q3 okay and then then uh just just also how do you work with these issues and and i mean how are they are there alternatives to this and how do you work with this long term maybe this is not the question with this call but but when is it time to start looking at alternatives to to this I mean, if we have COVID outbreaks again, et cetera, et cetera, bottom line, I mean, all the alternatives and can you do, can one do anything or is one stuck?

You're absolutely right. And we have been looking and working on finding alternatives to those critical components now for, for, for 18 months. So to say that is one of the activities that we can do to move away from the most critical components. However, What we are seeing now is that some of the design changes that we did during early 2022 to get away from components that were put last time by the likes of Intel and so on. And then we moved to another supplier to get away from that. And then we bought quite a lot of components to be able to ship those new components. But then that other supplier got so many orders from other customers as well that had done the same redesign as we did. So their capacity wasn't enough at the end of the day to supply all the customers. So there are movements like that and effects like that that are very hard to predict, but that we are now seeing the effects of. So in some cases, we need to, again, start looking for other alternatives or buy on the spot market. And those are, of course, decisions that we are making every week. What is the best solution to a particular problem? So it's about juggling that situation still, I would say.

And coming back to, I think, Mark's question, but maybe asking in a different way, I mean, is there any light in the tunnel? I mean, or is it just, we don't know, we'll have to see. And is it possible to predict at all?

Yeah, I'm getting a little bit more cautious now on predicting because I felt that we did see an improvement at the end of last year and now still we are seeing issues, so I think it's very hard to tell because it depends so much on different types of components being available or not available. So now I think I refrain from making any predictions at this time as to how the development will look like.

Okay, fair enough, fair enough. And then my final question is just on the composition of the two. I mean, you raised your EBIT margin target ahead of your capital markets day to go from 15 percent in business units to 15 for the group meaning that that the business units will also have to carry the overhead costs so my question is just just i mean this is very new but but what are your thoughts about the overhead costs and to to to decrease those and have that work started um

Or is it simply so that... I'm not sure what you mean with the decrease of overhead costs. I think that is something that we have stated, Marcus. So, please.

Okay, let me rephrase it. Should I look at it that you will, that the margins, you look for the margins in the business units to be, let's say that we would sit with the overhead cost or the other cost similar to what we have today and that will kind of continue for the years. Let's say hypothetically you will reach a margin of up to three years for the sake of discussion. Should I look at it that the overhead cost should be stable in that time and that the margin in the business units would raise to high enough levels to compensate for that to get to 15% for the group?

That is the way we view it. I mean, what we have stated is the 15% mark for the group. And to be able to get there, it's about continuing to grow, making sure that we are improving our profitability in our business entities, where there are still, for sure, lots of things to do when it comes to internal efficiency. I mean, in the Capital Markets Day, we talked about running productions in the critical component situations that we're facing. No way we are efficient. And there's so many things that can be approved in that matter. So over time, there's absolutely within reach to release the 15% of for the group. And we are quite confident with that. We will not grow the overall group OPEX. That is not something that will continue to grow on the level of the growth or the sales growth or anything like that. That you can view as more stable. But the growth in the business entities, that will create that we are moving towards the 15% over time.

Okay, perfect. Thank you very much.

Thank you.

Thank you.

Thank you. If there are no further questions at this time, I'll hand back to our speakers for the closing comments.

Okay. Thank you very much. Thank you very much, all of you, for attending this call. And, yeah, I wish you all a good day.

Thank you.

Thank you. Bye.

Bye-bye.