Ependion AB

Good morning ladies and gentlemen and welcome to the Appendion Q2 2023 report conference call. At this time all lines are in listen only mode. Following the presentation we will conduct a question and answer session. To ask a question you will need to press star followed by the number one on your telephone keypad. Please note, if you are joining the conference via the web only and would like to ask a question, you will need to dial into the audio numbers provided in this morning's press release. If at any time during this call you do require immediate assistance, please press star zero for the operator. This call is being recorded today, Friday, July 14, 2023. I would now like to turn the conference over to your host, Jenny Sudahl, President and CEO. Please go ahead.

Thank you very much for that. Welcome everyone to this quarter two presentation. As usual, let me see if I can change the slide. As usual it is myself Jenny Sködahl and Pendion CFO Joakim Laurén who are going to walk you through this report. Today we are sitting in two different locations. I'm sitting in at the Västermo office in Västerås while Joakim is down in Malmö. So the agenda for today is the usual one. I am going to start with the overall business update for the quarter. And then Joakim will walk you through a little bit more details regarding our financial performance. And then I will finally present some concluding notes and outlook. And then after that, we will open up for questions. So let's get started. The headline for this report, as you have seen, is New Record for Order Intake Revenue and Profit in a Mixed Market. And I am, of course, very happy to see that we are posting another record quarter for the group, both in terms of order intake, revenue and profits. But the fragmented picture in the two business entities remain, and I will come back to that in just a bit. But we have a record high order intake, almost at 700 million Swedish kronor for the group, or 5% up compared to the same period of last year. We did have a very strong order quarter in quarter two of 2022, and if we look sequentially on our order intake, we are up 13% compared to the first quarter of this year. And the demand is very strong, as you have seen in Vestimo, while we have a weakening in the Bayer Electronics order intake. And I will come back to explain a little bit more about that as well in just a bit. I'm very pleased considering the huge issues that we have had for quite a while now with the component situation hampering our sales numbers. I'm very pleased to see that we now have a good pace in our factories and especially the Vestamo production facilities have really taken up speed now in quarter two and we are starting to ship out quite a bit of late customer backlog, which I'm very, very pleased about. So that's a 20% increase compared to last year. And 3% up compared to the first quarter of this year. Also in terms of results and earnings, we are seeing another strong level in the quarter at 13.4%, which is in par with quarter one of this year and a huge improvement actually compared to the rather weak quarter two back in 2022, where if you remember, especially Vestimo had huge issues with getting products out of our factory due to the component situation. Both business entities are contributing to the profit level, which I think is very good. Vestimo came out at a strong level of 16.5%. while Bayer Electronics achieved 14.8% EBIT in the quarter. I'm also very happy that we have, during the quarter, strengthened the team quite significantly. Christine Lindbergh took office as the new CEO for Bayer Electronics in the beginning of the quarter, beginning of April, and has started off very, very well in her new role. And then we also have Lena Westerholm as head of sustainability who started mid-May. And also there, I see that we can really up our sustainability work thanks to the experience and knowledge that Lena has in this area. So very pleased about these two additions to the group. Looking at the macroeconomic situation, as we mentioned here, we do see a mixed picture. There is, of course, a lot of uncertainty in the market driven by the inflation rates and the high interest rates, which is kind of dampening the overall industrial activity. However, when it comes to especially the vestibular side of things, we see that investments in critical societal infrastructure such as rail and energy, electricity to transmission and distribution and so on. It's really keeping up and we don't really see any change in that. We see that there is a need to continue to invest in these areas, driven both by legislation and of course by the need to move towards a more sustainable society. Okay, let's look into a little bit more details about each business entity. As I mentioned, Vestimo had a very strong quarter in almost all regards. Order intake was at record high levels, driven by, in this particular quarter, particularly the train and trackside industry verticals. We did receive, as you may have read, a very nice and strategic order again from a big Swiss train manufacturer and that really strengthens our position with that customer and also shows what a strong position we actually have in the train networks area. The order intake in Vestimo is boosted in the quarter by about 100 million Swedish kronor. That's a one-time effect, and it is due to one of our large customers having decided to extend their order horizon quite significantly in the wake of all the issues that we have seen in the world over the last 24 months. So this is a one-time effect. However, we do see that the overall demand on the vestibule side is still strong. And if we look at the energy sector, we didn't receive any larger orders in the quarter in that area, but I can see very, very high activity level in the whole organization related to energy, and we have a very strong water opportunity pipeline in that area as well and customers want to talk to us and that is very very encouraging um and i can also mention when we talk about vestimo that we have started now to run a very strategic and important supply chain project and the reason why we want to do that now as we come out of this difficult component situation. It's not because we have a capacity issue right now, but it's really about making sure that we have production capacity to actually grow in the coming years. So that is the main reason why we want to really invest in our supply chain now and make sure that we have the capacity and the resilience in the supply chain that we need to support our growth plans going forward. I mentioned the high earnings level in Vestimo, 16.5%, and that is despite the fact that we still had some higher costs in the quarter related to spot purchases that we did earlier in the year. And if we then move over to Bayer Electronics, we see that there is a weakening in the demand. There are a couple of reasons for that. First of all, we do see, as some of our colleagues in the industry have also noted, a changed order pattern with our customers. Now that delivery times are back to a normal situation, so to say, customers place orders with shorter notice and some of them also have inventories that they need to deplete before they place new orders. It's still mainly in Asia that we see a clear slowdown. Europe and America are keeping up in a better way. However, thanks to the strong order backlog that we have in Bayer Electronics, the sales level is stable. And I think that we have managed well with both the pricing side of things, but also being cautious on the cost side as we see the volumes coming down a little bit. And that has resulted in a very good and stable profitability level of 14.8% in the quarter. Christine and her team have also decided to initiate a strategy review for the whole business entity. That is not related to the short term situation but rather to make sure that we have a very clear and crisp plan for profitable growth going forward. That work is going to start here now in the autumn just after summer. Looking at the volumes more in a graphical format, I already mentioned the numbers, but you can see here that a very strong order intake quarter after having seen three quarters in a row with a little bit weaker levels. But this is the sixth consecutive quarter we see with an order intake above 600 million Swedish kronor. And on the sales side, as I mentioned, we are very pleased to see that we are starting to convert our order backlog into sales. And in particular, Investimo, that has been an issue, as most of you know. And now we are starting to really ship out the late backlog so we can shorten our lead times as well. Translation VFX effect because of the weakening Swedish krona is between 4 and 5 percentage points in the quarters compared to last year. And despite the fact that we are shipping now at quite high levels, we still have an all-time high backlog of 1.6 billion Swedish kronor on the group level. And as I mentioned before, we are pleased to see that the component situation has improved significantly, I would say. There are still some issues, some suppliers pushing out deliveries on short notice, but it's much more stable than we have seen in the last 18 months. Also, some EMS suppliers that we are using are having a very big backlog, so we are struggling somewhat to get deliveries from some of them. But I would say that overall the delivery situation is much improved compared to before. So with that, I'd like to hand over to you, Joakim.

Thank you very much. This is Joakim here. Hi to all of you. I will take you through some of the financial details. We start with Appendion, the group. Order intake of 698 million, a sales of 638 million, and an EBIT of almost 86 or corresponding 13.4%, as Jenny pointed out. And as stated before, there are some boosting of the one-time effect, the 100 million related to this larger customer extended order horizon in the month, sorry, in the quarter, and the sales as pointed out it is an all-time high level that we are happy to note. EBIT, more than double compared to Q2. And as Jenny said, Q2 wasn't the best quarter last year. So the improvement is relatively high, more than double that. Should point out that the weak Swedish krona have a positive FX effect on our profitability. It impacts our EBIT with about 12 million in the quarter. Mostly of those are then transactional variances. If we look at the cash flow that we had last quarter concluded was negative, we have turned that around. to a positive free cash flow of about 30 million in the quarter. Still not where we want to be in terms of working capital. We still are on a high level on the working capital, very much due to the component situations in our supply chains. The net income, positive record level of 58 million, and also the earnings per share then ended at a nice level of two kroners per share. Looking at the graph in the lower left corner, I think the trend of the EBIT percentage is trending strongly and positively, and the direction is nice to see, I think. Let's move into Vestamil. Order intake of 496, sales of 368 million, and an EBIT of 60.5. or 16.5 percent. Very strong order development, as Jenny pointed out, and the supply chain then pacing up the deliveries even further and lowering the delays that we are in where we expect in the next quarter to catch up and be back to normal delivery times. The component shortages, as Jenny pointed out, has led to that we have some expensive spot purchases impacting them, the gross margin and the quarter, but still these kind of levels. And the supply chain project is also, of course, affecting as we are having quite a lot of activities on that one, but that is also included in the quarter. We do want to point out that our R&D activities It's full focus according to the plan and where we are then working towards even a better and more attractive offer for continued growth going forward. And the bottom line, 16.5 is a strong level. Bayer Electronics. Order intake of 203 million, sales of 272, and an EBIT of 40, corresponding 14.8% EBIT percentage. The lower level of orders, as Jenny pointed out, it is market and it's changed customer behavior. And we should also note that last year we had a very strong level where the customers also change behavior and prolong their hoarder horizons and now we have the opposite direction in this quarter when it comes to sales we we want to label it as stable most of the products are being delivered at normal delivery times we do have some some product ranges that we're still struggling with, but overall it's a good situation when it comes to availability in our products. Price management and cautiousness on the cost side and spending is helping and also providing for a decent profitability level. And also in Bayer Electronics, we are continuing on the R&D activities according to plan, where we focus on the future and future growth. When it comes to the profitability of the 14.8%, I do want to point out that it is the fifth consecutive quarter where we in Bayer Electronics landed in the range of 14-15%. So stability in terms of profitability, we do want to point out that. Last point, we did an acquisition. We acquired the German software company, Smart HMI, early in the quarter. And the...