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...

development and the progress for for that entity within their electronics is according to plan in a really good way that kind of concludes the financials so back to you Jenny thank you for that Joakim so just to summarize the message here overall a very strong quarter demand wise as we have mentioned the mixed picture with a very strong development in Vestimo, thanks to the good position that we have in industries that are growing despite economic uncertainties, while Bayer Electronics is actually affected by the overall economic downturn, the inflation rates and interest rates and so on that are affecting our customers at the end of the day. Very good to see that we have made progress in our supply chains. The situation is much, much better than it has been for a long time. And most of all, I'm happy because we can actually deliver the goods to our customers that are actually waiting for their products. So that's a good thing. I will come back to the financial targets in just a bit. So I think the whole organization is fully focused on executing on our strategies, talking to customers, finding new business opportunities. But at the same time, of course, we are keeping an eye on the market developments and take actions according to that as well. But if you look at the group overall, I think that several steps in the longer term plan are now in place. Several pieces of the puzzle are now in place with Christine joining, Lena joining. And I feel confident about our journey going forward. And just to remind ourselves of our financial targets that we launched, that we decided on, the board decided on end of last year. If we look at the revenue side right now, after six months, we can see that we are above our revenue target of an organic growth of 10%. We are at 25% currency adjusted at this time. However, there is, of course, an element of catching up and delivering on our big backlog included in that number. But anyway, on that side, we are actually showing a strong performance. In terms of profitability, we said we want to reach 15% on the EBIT level. We are not yet there, as you have noted. But I think the last quarter's performance kind of shows that that target is actually within reach going forward. So I think that's quite good. And on the dividend side, Joachim mentioned earnings per share is looking a lot more positive. So that's of course something that we will stick to being a dividend paying company also going forward. And then finally looking at the outlook, it's a little bit difficult right now of course to give an outlook. On the positive side, we know that we are operating in very attractive markets and the underlying growth drivers such as digitalization, electrification, sustainability and so on are of course driving our markets overall. So over time, we think that we have very good prospects for reaching our targets. However, the world is looking as it is right now, as I mentioned already, the high inflation rate, interest rates, etc. affect the global economy. We know that Bayer Electronics is more exposed to that than Vestimo because it is affecting above all the manufacturing industry. So therefore, we are saying that the mixed picture we have seen so far for some time now is expected to remain for some time. Let's see how things develop. So with that, I'd like to open up for any questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number two. And if you are using a speakerphone, please lift the handset before pressing any keys. As a reminder, if you are joining us via the web, please dial into the audio numbers provided in this morning's press release if you would like to ask a question. Please stand by while we compile the roster. Ladies and gentlemen, once again, if you would like to ask a question, please press star one now. Your first question will come from Mark at Red Eye. Please go ahead.

Thank you very much, and good day. I have a couple of questions. So, could you expand a bit on the weakness you see in Asia? It was down quite a bit even compared to the first quarter of 2023.

Yes, exactly.

We have seen this trend in Asia for Bayer Electronics for a few quarters now. We had exceptionally high order intake in Asia in the first quarters of 2022, and that was to a large extent driven by extended order horizons from our customers, but also by a very strong demand from their customers in turn when it comes to electric vehicles and different end customer segments. And what we are seeing now is a combination of shortened order horizons with our customers. Some customers seem to have built up inventory during this period that they want to deplete before placing new orders. And I think the inflation situation has also caused the end customer demand in some segments to weaken, for example, when it comes to electric vehicles, which is causing some of our customers to slow down their investment pace, basically. So it remains to be seen how fast Asia will rebound. We do believe that it will pick up, but it's, of course, hard to tell exactly when that is going to happen.

Okay and I think you said like in the Q4 that you were cautiously optimistic about the order intake going up again in China specifically and I think you mentioned a car manufacturer BYD I think so if that trend it's more cautious now less optimistic or how do you see that could that like be enough to flatten the order intake trending in the second half of 2023?

Well, it's of course not only depending on one customer. It's of course the pattern of several customers, but I think that we have seen Compared to fourth quarter in last year, we have seen the trend that the consumers are being more cautious when it comes to investing in new cars, for example. And that trend has kind of shown more clearly now in the last six months, I would say. And I think that is a bit of a change. And I think a lot of people thought that China would, you know, the Chinese economy would pick up quite significant to the second half of this year previously. But now, I think we are seeing signals that it might take a little bit longer than than was expected previously. So yeah, hard to tell again, but at some point, it will pick up.

Yeah, okay. Meanwhile, the rest of Europe and America seem to be very strong. Is this broad-based or do you see any specific area that is standing out?

Well, I think a little bit the difference between Asia for Bayer Electronics and Europe and America is that our customer base, especially in Europe but also in America, is broader. We have a stronger base business in both Europe and America. And so we are not dependent on a few key customers. And that is one reason, I think, why we are seeing those regions keeping up better. And those customers are spread out in a lot of different applications and segments and so on, which makes it more resilient to this kind of situation.

Okay, I understand. And a bit more specific. So some time ago, and you have mentioned like you signed American Electric Power, for example, have this order or similar larger ones given any ripple effect in the American market for like, for what I know, parts of the American infrastructure are in need of a major facelift. Do you see some ripple effects here?

yeah when it comes to to vestimo on the on the north american market we see the same picture as elsewhere so to say that there is the the segments that we are active in the energy sector as you are mentioning there is a huge demand for modernization and upgrading of the infrastructure and and the money that the the government has has promised so to say in this that is called inflation reduction act now that money is starting to ripple down now into the different states and are being used finally to actually invest in different projects. So there's of course a time delay until the projects are started and until they need products from us and so on. But overall, we are looking very positively at that development.

All right, interesting. Could you also just mention a little bit what kind of supply chain projects are you conducting at Vestimo?

It's on the Vestimo side really that we are using an external consultant that is very experienced in the supply chain area to really look at how can we ensure that both our capacity and our resilience in our supply chain is supporting our growth plan going forward. We don't want to be in a situation again, so to say, even if it has been due to some very special circumstances, we don't want to be in a situation again where our supply chain is kind of limiting our growth. That's not how it should be. So therefore, We want to proactively now look at how to redesign our industrial system so that it can actually support our growth plans going forward. So that has to do with where should we be producing things, how many factories do we need and where, what should we do ourselves and not, and so on. So all the usual aspects of the supply chain area, you can say.

I just comment on that one. I sensed maybe in your question, Mark, it does not mean that we will build a new factory somewhere. That will not mean a lot of heavy investments and cash flow. That is not happening. We do have, as you know, quite a few entities now as part of the acquisitions that we have done the last years. So there is something to work with, if I may put it like that. So it will not lead to any excess investments or costs related to that going forward.

All right. Thank you very much. And thank you for answering all the questions.

Thank you, Mark.

Your next question comes from Marcus Olmert at Pencer Bank. Please go ahead.

Yeah, hi, hi, good afternoon. A couple of questions left. Maybe it's just me being thick, but the 100 million krona in orders or in extended order in Vestamo, how does that work? Is it simply an additional order or what do you mean by extended order?

Well, it actually means that our larger customers have typically a certain order pattern towards us. In this case, the customer has been placing order a little bit depending on their locations, but either on a three-month horizon or on a 12-month horizon. And what they have done now is that they have extended that horizon up towards us. more than that so to say up to almost two years horizon and that of course gives then a one-off effect when they are placing their orders for that extended period of time and then what will happen in the coming quarters is that they will of course you know month by month place new orders for the end of that period and also adjust of course their needs in terms of their demand so I think it's quite a positive thing, actually, because it means that there's a stability and it gives us better chances to plan ahead as well when it comes to component needs and so on.

But it could have been so that these orders, I mean, theoretically could have come on just, you know, rolling bases going forward instead of you getting the 100 million at once. That could have happened. Just so I understand how it works. Yeah. yeah okay okay okay okay and then on the electricity side you're talking about a good pipeline and then you talk about the the ripple down effects from from the from the inflation act money in the US for instance can you talk a little bit about that pipeline I mean how firm is it what kind of conversations you're having is it Is it more that you're having conversations or do you expect for some of these to actually, I mean, how far gone is this pipeline is one trying to understand?

Yeah, that's a tricky question to answer, but I think it's a mix here. First of all, of course, we are talking to a lot of distribution companies in Europe and elsewhere that have actual projects ongoing where they are digitalizing, especially the edge of their distribution networks where they need to modernize and connect all their equipment close to the consumer, so to say, in the electricity landscape. So there's quite a few projects going on that have to do with that. And we are also talking to some pretty large players, I would say, that are also looking at modernizing their whole transmission and distribution infrastructure over the coming years. And then there's also a lot of smaller customers like municipalities. utilities that have smaller projects, but where we are also in dialogue with the customers locally in the markets where we are present. So it's really a mix between different customer types. But what I find interesting is that even though we are not a big player yet in the energy market, we see a clear interest from customers because they know us from other segments. They know what we stand for in terms of robustness and quality and and resilience and so on and and those are our values that resonate really really well with customers in the energy sector also so so i think even though we are not seeing any huge a huge increase in order intake as of yet i am confident that that the work that we are doing is going to result in in increased business in the future

And it's fair to say that there are a fair amount of projects out there that are ongoing and will need some of this type of equipment that you're providing from you or somebody else. So it's not just something that is in the future. They may or may not, but there are projects that do need these equipment that have started, but you're further down the line.

Yeah, lots of projects. Yeah, definitely.

Uh-huh. and on the profitability side uh so we talked about the electronics holds up quite well despite and and and you talked about quite a lot of quarters in a row where there are 14 to 15 margin despite the falling sales is this a level where they should be or should we see that they are protecting it um and that there is there is further upside or how should you look at the margin potential in in electronics in particular

Absolutely. What we have seen in Bayer Electronics and what I tried to point out also when I did the presentation earlier is that we have had an ability to maintain profitability on this kind of level. And I do point it out because there are historical development if you go back quite some years back for Bayer Electronics where we've been on very much lower levels. So, of course, when it comes to compensating for volume changes, we are on to that all the time. And we can conclude that we managed well in Bayer Electronics to compensate for the somewhat lower, it's not been huge downturns, but somewhat lower volumes in this quarter compared to earlier, but still maintain the profitability. And it is related to price management, efficiency in the supply chain, and also then being cautious on the cost side. We do, of course, watch closely what's happening. We will also take the necessary steps that we need to take if things change going forward. You won't get any predictions of what kind of level. We have stated the financial targets and that is something that we're aiming for we have proven that we can in in bayer electronics and yeah those are the considerations that we have right now but it's still fair to say i assume that i mean given that you you're still protecting the margin as you're saying so when

where volumes come back, we should assume a leverage effect there as well.

Oh, yeah, Marcus. There is a leverage effect, definitely. Adding volume, adding growth, that will contribute to the bottom line, absolutely. That has not changed. But the thing is, it goes in two directions and you have to compensate and compensate if you have lost in volumes as well. So that's how it normally works.

Yeah. And in terms of the strategic overview that you're starting this fall, I guess, when should we expect an outcome of that?

For you, Jenny.

Yeah, I don't want to give any predictions regarding that. I mean, if you want to really dive deep into your customer segments and really look into where you want to play and then how you're going to win in your selected playing fields, it does take a little bit of time. So I want to let Christine and the team carry out that process. The important thing about it is that it's being done in a thorough, and that it results in a crisp strategy. So I don't want to give a timeline for that at this point.

Okay, fair enough. And then finally, if I can just ask, the facility that you're building for HMIs in Malmö, what's the status of that?

The status is that the project is running according to plan and we will be able to start the manufacturing in that site in the second half of this year. So by the end of Q3 or beginning of Q4, we will start manufacturing HMIs in that location.

Okay, excellent. Thank you very much. That was all for me.

Thank you, Markus.

Thank you. At this time, we have no further questions, so I will turn the conference back to Jenny Soudal for any closing remarks.

Okay, thank you very much. Thank you all for listening, and I wish you all a great summer. Thank you.

Thank you all.

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating. and ask you to please disconnect your lines.