Ependion AB

Welcome to the Bayer Electronics Group Q1 Report 2023 conference call. For the first part of this call, all participants will be in the listen-only mode. And afterwards, there will be a question and answer session. Today, I am pleased to present Ms. Yenny Siudal, President and CEO, and Mr. Joachim Loren, Executive Vice President and CFO. Speakers, please begin.

Thank you very much. Hi, everyone, and welcome to this quarter one 2023 report for Bayer Group. So next slide, please. So the ones present in this call from our side is myself, Jenny Sjödahl, and Joakim Laurén, as mentioned previously. So next slide. Agenda for today is, as usual, I will start with the general business update, and then Joakim will dig deeper into the financial performance. And after that, we will have the concluding notes and also outlook. And after that, you will have the chance to ask questions. So let's get started. Next slide. So to summarize the first quarter of this year, we are happy to conclude that this was the new record quarter for the group. managed to get the delivery situation significantly improved, meaning that we had a record in sales. And thanks to that and the volume leverage that we get from that, we also had a very strong earnings in the quarter. When it comes to the demand side, we do see that the customer demand in general continues to be stable. We see continuously strong demand on the Vestimo side, whereas the Bayer Electronics business entity, especially compared to the very strong quarter one of last year, is a little bit weaker in terms of order intakes. But nevertheless, another quarter with an order intake level above 600 million Swedish kronor. I mentioned the sales number at the new record level. We have never been above 600 million before, so we are happy to see that we reached 623 million Swedish kronor. The main reason behind that is that we do see an improved component availability finally, which is, of course, very, very nice. And that has especially helped the Vestimo business entity to ship out a lot of products in the quarter, whereas Bayer Electronics has also performed on a stable level in terms of sales. And as mentioned, when we do get good volumes out, we see the volume leverage working actually quite well. And we reached an all-time high earnings level of 13.7% for the quarter, which is a significant step towards our financial goal of reaching 15%. And what is also very good to see for us is that both business entities are performing on a high and stable level here. Record high EBIT level for Vestamo at 16.4% and Bayer Electronics another very stable quarter with an EBIT of 15.1%. During the quarter, we have also made a small acquisition. It was the Bayer Electronics business entity that acquired a German company called Smart HMI, a software company specialized in web-based HMIs. So that's really a very nice complement technology and product offering-wise to our portfolio. As we all know, the geopolitical situation and the economic development are still uncertain. And as usual, we follow the development and we are prepared for different scenarios. Next slide, please. So if we talk a little bit more about the two business entities, as I mentioned, we see a continued strong demand in Vestimo with a new all-time high order intake. And in this quarter, that was driven mainly by the trade segment. And as we mentioned in our report as well, there is an effect in the quarter where our order intake in Vestimo is boosted somewhat by a larger customer actually extending its order horizon. Most other customers are now kind of shortening their order horizons again after this very turbulent period. But this particular customer is extending the order horizon and that gives an effect on the order intake for Vestimo in the quarter. Very good progress when it comes to increasing the delivery capacity and new record level of sales. And what I'm pleased with about that of course is that we are starting to serve our customers in a better way. We are starting to take down the late deliveries to our customers and that is of course a very, very good thing. I mentioned that the component situation has improved in general. There are less components and less suppliers causing issues. The problem is not completely gone yet. There are a few components still remaining challenging. And that has impacted our cost side in the quarter this time as well at approximately the same level as it did in quarter four. And it also continues, unfortunately, to drive up our inventory levels. But we have prioritized to be able to ship products to our customers. And then, of course, we need to work really hard on managing the inventory side of things. But despite these increased costs that are very clearly there as well in this quarter, we see a record level for the operating margin thanks to the nice volume development. When it comes to Bayer Electronics, another very stable quarter in terms of revenue and profit, as I mentioned, and actually a new record there as well for the operating margin. The order side, lower than last year. We had a very, very strong beginning of the year in 2022, thanks to customers extending their order horizons and also some last time buy effects from older product ranges. And compared to that, we are seeing a weaker demand side. We see that customers are going back to more normal order horizons, so that has an effect in combination with some uncertainty in the market. And we know that Bayer Electronics is somewhat following the general economic industrial development. So this is kind of expected in today's economic environment. And we also see that this effect is mostly present in Asia. I'm also very pleased that Christine Lindbergh has started now, taken office as the new CEO for the electronic business entity. She came in the 3rd of April and has already started in a very, very good way. Next slide, please. So if we look at this in a more graphical format, starting with the order side, you can see that, again, compared to the very strong quarters in 2022, we are down by 7% compared to the same quarter last year. But sequentially, we are actually slightly up in order intake. So a stable development there, I would say. What I really like is the right hand graph here. If you look at the sales side, as I mentioned, where we have the wheels are turning faster now and we managed to get deliveries out on a very good level from both business entities. So plus 42% in sales. That's a pretty strong number actually. We have some FX effects in the quarter on the order side, adding on 3% and on the sales side, 6% percentage points in the quarter compared with last year. And it's also worth mentioning that our backlog is still at the very high level of 1.5 billion Swedish kronor. This quarter, ordering, taking, sales were, you can say, almost imbalanced. So the backlog remains at the same level. So with that, I hand over to you, Joakim. Thank you.

Next slide, please. I will then take you through some of the details in the financials. As you can see, we have ordering take of 617, sales of 623 and an EBIT of 85 million representing the 13.7% EBIT margin. As Jenny stated, I mean, stable order bookings. And as also said, the fifth quarter in a row with orders above the 600 million with this underlying mixed picture where we have prolonged order horizons in Vestamo and shortened order horizons in Bayer Electronics. And as also stated, more time high on the sales level than very much driven by the improved component availability, but also the fact that our organizations have been able to ramp up in a very good way and also handle the situation because we still have challenges when it comes to the component availability. And it's nice to see that we can deliver a good result with the increased volume and the 85 million tripled compared to the same quarter last year. Worth looking at the LTM graph, we're going in the right direction. We are above the 11% mark on the last 12 months rolling trend. If we look at FX impact with the weaker corona, that is helping us as we have quite a lot of revenue in dollars and in euros. The EBIT effect is 7.6 million positive in the quarter. Unfortunately, the situation with the component availability that we are still having challenges with, that means that we have been forced to actually increase our inventory levels. We need to increase our safety inventories on some critical components and that has affected the cash flow that was negative in the quarter of minus 39. The bottom line 56 million significant step up compared to the 16 that we delivered last year and the EPS improved nicely to 1.95 for the quarter. Next slide please. If we dig somewhat deep into Vestamo, you can see that the order intake was 356 million, the sales 335, so still higher in order intake than the sales. giving an EBIT of almost 55 million or 16.4. It is a very high level, good growth on the sales, sorry, on the orders. And it has been then boosted, as Jenny said, by one customer, one larger customer extending their order horizon impacted them, the quarter number. We have talked about the sales step up. very nice to see and the fact that it's then giving the nice 16.4 EBIT margin in the quarter despite the fact that we have had spot purchases of some components as you have seen in the previous quarters. So despite this, Nice to see the good profitability in Vestamil. And we just wanted to remind you that we are continuing our activities when it comes to developing our products according to the strategies that we are working so that we can continue to see growth going forward with an attractive offer for us. Let's go to Bayer Electronics. Next slide, please. Bayer Electronics came in with orders at 265 million, sales of 291, and an EBIT of 44 or 15.1%. It is a lower level of orders, as stated. The last year was really high or record levels, so the comparison is very hard. It is expected that we will come in somewhat lower than this. And we do see order horizon being more normal in Bayer Electronics combined with what Jenny laid out earlier, that we see some market uncertainty, especially then in Asia, that we also highlighted earlier. last quarter. Asia is basically moving sideways, similar level as we saw last quarter. Deliveries on a good, stable level. We do see challenges in the component situation also in their electronics, but it has been handled well and no major effect on the deliveries. It's a stability. And it's also very nice to see that we have been able to deliver another quarter with good profitability now on 15.1 level, which is actually a record. And it's due to that we work well with price management and also with a mix that's favorable for us. But stability is the key word here. Also here, we continue to develop our products and our offering going forward. We have informed about we are setting up a new supply unit in Sweden. That is fully according to plan, and it will be operational in the last quarter of this year. And Jenny talked earlier about the acquisition that was done. Early April we acquired the company Smart HMI. That kind of concludes the financials. So over to you, Jenny. Next slide, please.

Yes, thank you. So to summarize all that, we can say that we see a stable demand in the quarter, although the picture is a little bit fragmented. Vestimo on a strong level still, while Bay Electronics are actually seeing some uncertainty in the market, which we will be following closely going forward. We are very pleased with the work that the teams have been doing. We are reaching a good profitability level in the quarter, taking a big step towards our financial targets, but we are not yet there. So there is still more to do to get to the 15% level. Extremely pleased to really start to see now that the component shortage situation that has been plaguing us for so long actually has improved significantly. As I mentioned, it's not over. There are still some challenges for certain components, but it's a lot better than it has been and it's handled well by the organization. And we should also mention, we didn't mention it before, but you have maybe seen the press release of There is a proposal on the table for the General Assembly to change the name of the group from Bayer Group to Appendion. The reason for that being that there are so many listed and not listed companies that shares the name Bayer with us. And it gets confusing for everybody. And also the fact that we have a business entity called Bayer Electronics also causes some confusion. So with the changes that we are doing in the group, we feel that it's a good time to actually solve this problem once and for all. And we are happy with our new name, Appendion, which actually comes from the Greek word for investment, which is what we want to do. We want to invest in people, in technologies, in products and so on going forward. Okay, so then we have the outlook. Next slide, please. So, of course, we are striving to reach the financial goals that were decided last year and were communicated in November. As we all know, the world situation and the global economic development are a bit uncertain. But with the stable demand that we are seeing now in the first quarter, in combination with the very strong order book gives us confidence about the development in the near term. So with that, I think it's time for Q&A.

Yes.

Thank you, presenters. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. Again, that's star followed by the number one on your touchstone phone. If you would like to withdraw your request, please press star followed by the number two. One moment, please, for your first question. Your first question comes from the line of Mr. Mark from Red Eye. Please go ahead. Your line is now live.

Thank you very much. And thank you for taking my question. So first, could you start to talk a little bit about the acquisition of smart HMI and how this company sectors strength and their electronics offering and not least compared to competitors and also what makes their web IQ software good.

So I can start and maybe you fill in Joakim. So the acquisition of Smart HMI is a technology add-on you can say to the Bayer Electronics business entity and what they have done and is that they have developed a web-based HTML based HMI platform and And that means that you can actually build HMIs that can be displayed and used on any device. It doesn't have to be an operator panel. You can use it on an iPad or a phone or any device, actually, which gives great flexibility and is a complement to HMIs. to the more traditional operator panels, you can say. So that is the idea. This complements the Bayer Group, the Bayer Electronics offering in a very nice way, and it widens the scope, so to say, and the offering that we can sell to both existing but also to new customers.

All right. And did you acquire the company, like, due to initial user feedback or because of, like, positive feedback from your engineer sales reps or something else?

I think it was a combination. This is a company that we have been working together with for a few years already. So the organizations knew each other. We were very familiar with the company and the offering. And we had already seen evidence, so to say, that this offering would complement our existing offering. So that was a good starting point for a closer collaboration and for the acquisition.

Yeah, and I mean, we believe to be, you know, to provide both the fact to have embedded IX software solutions in the more traditional HMI scope in combination with offering the web-based. Some customers would like to have that and it's a trend towards that kind of solution and we believe that we would like to have that offering in-house and and we know this company well and and we believe that this fits very well into our organization and and our offering yeah and does it put you like in the forefront of this trend or how are like your competitors doing

It's hard to tell whether we are really at the forefront, but it definitely takes us a big step forward into offering this technology to our customers. And from what we have seen, we believe that smart HMI has a very, very good solution when it comes to this web technology. And with the acquisition, we are also gaining access, of course, to a number of very good software developers, so to say, that can also help us developing the offering going forward. All right.

And so you mentioned like stable order intake, but a mixed picture. How does the market amount look like in some of your larger markets like China, US or larger? Economists in Europe is it like any market in particular that shows signs of strength or weakness or any like market segments?

The mixed picture is it's really because it looks different in the two business entities in investimo We have a very strong position in Europe and There I would say that we are seeing a strong demand situation from all our markets. A little bit weaker in China, but overall a stable and strong demand in Vestimo. And driven, as we mentioned, in this quarter a lot by the train segment. But we also know that that can vary quite a lot in Vestimo between quarters. Sometimes you get a large order in one of the segments and sometimes you don't, so to say. But overall, strong and good Investimo. In Bayer Electronics, we are seeing a little bit weakening overall in the order intake, as we mentioned, compared to the strong quarters last year. And there, it's mainly the Asian market. So China... Taiwan, Southeast Asia that is continuing to show a weaker demand than previously. Whereas Europe is going quite well and also America. So let's see how that develops going forward.

And on the topic of the normalized order horizons and the one extended horizon for a large Vestimo customer. How much does this impact the two business units? And are most customers going back to like pre-COVID levels or are they having some buffer inventories?

Well, it is in Bayer Electronics we see that we go back. I would say if we look at the effects in Bayer versus Vestamo, I would say it's similar levels. We have not guided with an exact figure, but if we look at the effect in Vestamo, it's somewhat more than 10% at least of the orders that is boosted, you could say, by the longer order horizons.

All right. I understand. Lastly, you have a strong focus on R&D, and you mentioned a business unit. What are your

main focus areas and do you see opportunities to increase r d spending on an absolute level from today's like 50 million quarter we we our target is to to keep the r d spending relatively stable of course as we grow we also can put more resources into r d which is of course good The focus in Vestamo, I would say, is very much on our key segments, so continuing to develop our offering for our trained customers, but also a strong focus on the energy-related portfolio, where we are kind of building up a stronger offering now to be able to reach a larger portion of that market. In Bayer Electronics, more about, you know, keeping our products at the forefront, so to say, keeping them up to date, looking at new generations, looking at new technologies, and then making sure that we all the time have a competitive product portfolio that corresponds to customer demands.

All right. Yeah. Thank you very much. Thank you, Mark. Thank you.

Just a reminder, should you have a question, please press star followed by the number one on your touchstone phone. Your next question comes from the line of Marcus Allerud from Eric Pencer Bank. Your line is now live. Please go ahead.

Yeah, hi. Marcus Allerud here from Pencer Bank. Let me start by just following up on Mark's question about the demand situation. And I'm particularly curious about Asia. So there's been some talk during this quarter on some easing in Asia in the demand pressure towards the end of the quarter. And I'm just curious to hear if you have seen the same thing.

I'm not sure that you can talk about the early part or the later part of the quarter. I would say in general it's been similar market situation or order booking levels that we saw in last quarter. And now I'm talking particularly Bayer Electronics. What we did mention in the report though is that We got an order when we closed the Q1, so it was after the Q1. We got a nice order. We have earlier talked about us providing equipment to a very large semiconductor manufacturer that is Taiwanese-based. And we got, you could say, breakthrough order of a new factory that they are setting up in Japan. And that one came in the early part of this month. So it's not completely dead or anything like that. There are still, of course, activities ongoing, but it's still not on the high level that we saw in the early part of 2022. Okay, okay.

My second question is on Västermolen. You said the train was driving, but I also understand it's kind of broad. If you could talk a little bit about the electricity segment. I know it's something you focus on. Where you stand and maybe an update.

We are continuing to execute on our strategy there. We have a very strong focus on the energy segment. And I think we are proceeding well. We have some sizable opportunities in our pipeline that we are looking at. But on top of that, we also have a lot of smaller opportunities because all our markets, there are energy-related opportunities in all markets where we are present. So that's a big difference compared to the train segment, for example, where you have a few train builders spread out around the world. The energy segment is broad and we are working very broadly in all markets to find new customers and do proof of concepts and help customers with technical solutions and so on. So overall, I think it's going well. In addition, as I mentioned, we are continuously developing and broadening our product portfolio. In the quarter in particular, released some more family members in in the Merlin product family out of our Irish company virtual access which also strengthens our portfolio so there's a lot of activities going on in this area and we are present at a lot of exhibitions and and other events so to say related to energy so so the momentum is good I would say okay okay good to hear

then I'm curious to hear you gained some share during the pandemic and especially if I remember right in Bayer Electronics you gained share has that sustained when things are opening up now are you able to defend those shares or do you lose some of that business back what's your impression

I think time will tell, so to say, because it's only now that our competitors, so to say, are starting to come back to more normal or shorter delivery times. And we hear that from several regions. So I guess time will tell whether customers will stay with us, which is of course our intention. We try to serve them really well so that they don't want to move back to their previous suppliers. So we are not seeing anything like that yet, that they would be going back and we will do everything we can to keep them, of course.

Okay, okay. And then my final question is on this supply chain hub that you're setting up. Is this something that you've planned for a long time? What's your view on supply chains changing? Are you changing with them? Are you doing more second sourcing? Are you moving any of the supplies back closer to home? Is this a part of that or is it separate?

I think this initiative that we have taken now to start up an assembly of operator panels here in Malmö It's very much a result of the global trend of actually regionalizing our supply chain. It's not viable anymore to only have one site located in Asia, for example. There's too much risk to that. So that's why we are taking this step. And it feels really good because we can also serve our customers in Europe in a better way once we have this production facility up and running. And also I can mention Investimo, we are reviewing our supply chain. I mean, it's been a tough time now, and we have realized that we need to focus more on making our supply chains more resilient to disturbances so that we can support our growth plans going forward. So I would say that we have increased our focus on the supply chain side as learning from the situation.

It's very interesting. May you say when did you make this decision about the supply hub in Malmö and starting to assemble panels there?

It's a few quarters back. informed about it already in the last quarterly report. So it was during that quarter that the decision was taken. Of course, there has been work or pre-work done before looking at how would the setup look like. As Jenny said, we have been looking at regionalizing and not having everything in Taiwan where there's also, of course, a geopolitical somewhat risk related to that. And there were some proper evaluation work being done on where we would put such an entity. Would it be where in Europe, you could say, would be the best place to have it? After some proper work being done, we concluded that it is best for us to actually set it up here in Malmö. And that was the decision taken. Okay. Excellent.

Thank you very much for that. Thank you. Thank you, Markus.

Thank you. There are no further questions at the phone line at this time. I'd now like to turn the call back over to the speakers for closing remarks.

Yes, we would just like to thank you all for listening in and we are looking forward to continue to develop the group. Thank you very much.

Thank you.

Thank you so much, presenters. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.