Ependion AB

Ladies and gentlemen, welcome to the Appendian Financial Statement 2023 conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. If at any time during the call you require immediate assistance, please press star and then zero for the operator. This call is being recorded on Thursday, January the 25th, 2024. I would now like to hand over the call to Jenny Shortell, President and CEO. Please begin.

Thank you very much for that. Good afternoon everyone and welcome to this quarter four and full year report for the Appendion Group. With me here in Malmö I have Joakim Laurén as usual. We are the ones that will be conducting this call and as usual our agenda looks like this. I will start by giving you a general business update then Joakim will dig a little bit deeper into our numbers, followed by me giving some concluding notes and outlook. And after that, we will move on to the Q&A session. So, starting with the overall summary of the quarter, we can see that we have a fourth quarter pretty much in line with last year. when it comes to sales and earnings. And we are still seeing the more mixed pattern in our business that we have seen now for also in quarter three. And the order bookings, as you have noted, came in on the lower level compared to same period last year. There are two parts to this. First of all, we could see that Vestimo's order intake came in a little bit weaker than maybe we had expected. And the main reason behind that is that we had some adjustments. on our train networks backlog. You remember we had very high bookings both in quarter one and quarter two related to a very big customer of ours in the rail industry. And there has been some adjustments in the backlog from that customer in this fourth quarter, which has meant that the order intake in the train network segment has been unusually low in the quarter. combined with a little bit of hesitation as well in the other segments that Vestimo is targeting. And that's in combination then with the same pattern that we have seen now for a couple of quarters in Bayer Electronics, where there is an effect from the generally slower economic activity, especially in Asia, but also a little bit of hesitation in Europe and America, although those regions are being quite stable. we came out at a lower order booking level compared to the same period in 2022. When it comes to sales, we had a good sales growth in Vestimo. We continued to deliver on a high pace to all our key segments, whereas in Bayer Electronics, we saw a decrease in sales due to basically the lower order booking level that we have seen in the last quarters. And the EBIT level overall for the group came in at a similar level as last year at 10.4%. That is, of course, below what we are happy with, so to say. We are not pleased with that EBIT level. But on the other hand, if you look at the whole year, we can see that we have taken significant steps forward compared to where we are coming from. What was also good in the quarter was that we managed to get a real nice cash flow out of our operations, free cash flow of 109 million in the quarter. And overall, we sum up a record year for Appendion in 2023 in terms of sales, earnings, and also revenue. cash flow and and for those of you that have followed us for some time i would like to say that we have established ourselves on on a new level basically that we of course want to work further with but given where we're coming from we are actually very happy with with the full year of 2023 and the board also proposes a doubling of the dividend to one krona per share Looking a little bit more into the two business entities, I already mentioned some of these things. And again, Investimo, we are very sure about our strategy. We are in the midterm, very, very optimistic about the demand side. We have a very strong order backlog still, we have a very high activity level in different sales organizations, and we have a super strong pipeline as well. So I am not at all worried about Vestimo in the midterm, although we see that we are a little bit affected by the overall weaker demand, which is very much related to projects being delayed due to higher costs of financing and so on. But overall, I'm still extremely optimistic about the demand side in Vestimo. Happy to see that the good sales level remains and also the profit level concludes a record year for Vestimo. We have done a lot of improvements in the Vestamo business entity, both in quarter four and throughout the whole of 2023, mostly related to making our supply chain even stronger and more resilient so that we are prepared for the future growth journey. And we also decided in the quarter to establish ourselves in India. And that is a key market for us. going forward especially we see that there are huge investments happening in India when it comes to the rail infrastructure and that's why we see that that's a very good market for us to be present in together with also opportunities on the on the energy side when it comes to their electronics again I mentioned it a pretty slow order intake We can see that Europe remains quite stable, while we are seeing the same pattern as before in Asia-Pacific, and also China, which remains weak, and America somewhat slower, but still quite stable. We see the lower sales volume due to the order intake and that is also why we launched already in quarter three the cost restructuring program of around 20 million Swedish kronor which is now finalized and is taking full effect as of now basically. I'm very happy to see that the strategy work that Christine and the team have been doing now for four months in Bayer Electronics is now ready. And we will actually present that new strategy in our capital markets day that we will hold on the 5th of March in Stockholm. But we can really see that the unit has come up with a more focused strategy, which is exactly what they need, so to say. So I'm very pleased about that. Also very high activity within R&D. Some of you may know that we are working on the next generation of HMIs, which is strategically extremely important for us. And that generation will be launched by end of 2024. So the work is really very much ongoing now on finalizing that product range. Also the new production unit in Sweden here in Malmö is completed. We are just waiting for one certificate but the series production is due to start now in the first quarter of this year. So if we just look at this in a more graphical format, I think we already mentioned it, orders are down 21% versus last year, sales still on a stable level. We didn't have any big effects in the quarter, and we still have a very healthy backlog situation of 1.2 billion, most of which relates to the Vestimo business entity, which traditionally has longer order horizons. So with that, I will hand over to you Joakim.

Thank you very much. And I will go through the numbers more in detail and I'll start then with the pendulum. The order intake in the quarter ended up at 478 million. The sales came in at 590 and the EBIT at 61.5 million or an EBIT percentage of 10.4%. The effect of FX, we have had quite a few quarters now in a row with positive contribution on the EBIT line on FX. This quarter, we don't see that. We see a small negative number. So the tailwind from the FX is not longer there. As Jenny pointed out, we have talked about the cash flow situation and the fact that we have not been able to generate cash flow as we have tied a lot of capital, especially in the inventory side. But now in Q4, we were quite happy to see that we start to see effect and 109 million generated in the quarter. For you that also follow the P&L below the EBIT line, you can notice that the financial net costs has increased quite significantly compared to last year. I think we all understand with the general higher market interest levels that is also affecting us and that is the reason behind this. Net income came in at 34 million, earnings per share in the quarter at 1.18 million. So if we then summarize the full year, I mean, we can conclude we have a sales of 2.5 billion or a growth of 16% and an EBIT of 322 million or 13%. And as a year, this, as Jenny pointed out, is a record, of course, for us as a group. Let's go to Vestamu. Here we see an order intake in the quarter of 277 million, a sales of 362 and an EBIT of almost 56 million or 15.4%. Jenny laid out the reason for the orders that we have and we want to emphasize that it is very much an adjustment of the big order backlog that we received in the first half of this year. It's also worth pointing out that looking at the full year, there is a growth of the order side of 13%. We also want to highlight now that we have had a long period investment due to the component shortage with delays in the supply chain. Now we have ended that period. We are back to more normal lead times in our supply chain. When it comes to R&D activities, we continue to have that on a high level in Vestano also in the fourth quarter with the focus on future growth and including our service offering that we have as a focus segment within Vestano in the WeGrowth strategy. As Jenny also mentioned, we have taken a decision to establish ourselves in India. The initial investment means around 10 million and it involves about 10 employees to start up with in the India investment. We also continue to expand, and we have opened up a sales entity in Denmark for Vestamo. And worth mentioning again, looking at the full year, it is a record year for Vestamo, and the full year ended with an EBIT level of 16.5%. Then we go to Bayer Electronics. Here we see an order intake in the quarter of 201 million, a sales of 228, and an EBIT of about 19 or 8.3%. As Jenny pointed out, the order bookings basically what same picture as we've seen now for a few quarters, where MAI is stable and APAC is slow. um and then what we have seen also previously in 2023 with a pattern of shorter order horizons by the customers and that is also seen now in the q4 sales came in if you look sequentially somewhat lower than we saw in q3 basically affected by the lower order pace that we have seen in the last quarter the profitability came in not on the levels that we would like to see but we did launch a cost reduction program as Jenny pointed out at the last that was informed in the last quarterly report and we see full effect of that or we expect full effect of that now from 2024 and onwards with an annual effect of 20 million Also worth pointing out is that we continue on the longer horizon with R&D activities in Bayer Electronics in the quarter, where we focus on the next generation of HMIs, where we have planned release of this new product generation by the end of this year. So if we summarize the year for Bayer Electronics, we have sales of about 1 billion and a profitability level of just below 13%. That concludes the numbers. So back to you Jenny.

Thank you Joakim. So just summarizing what we have just presented. 2023, a new record year for Appendion in terms of sales, earnings and cash flow. There is more to do in order to reach our profitability target. There is a very high activity level in both business entities when it comes to future oriented activities. So I really feel that going into 2024 now, we have built a much stronger organization. So really our journey continues moving forward. And of course, we are looking very closely at the market development now, and we are prepared to act if needed in both the business entities. Coming to the financial targets, just to remind everyone about those, we have said that we want to grow our revenues by 10% on average organically. And if we look at 2023, we came in at 16%. So for now, we are above that target. Profitability-wise, we want to reach 15% operating margin. We came out at 13%, so we are not quite where we want to be, but we are really focusing on continuing the improvement journey here when it comes to that target. And then the dividend side of things, we have said we want to be a dividend paying company. We are doubling our dividend right now, even though it's from lower levels. And we are starting to generate a cash flow now that we can use to invest in further growth, as well as, of course, giving dividend to our shareholders. So just to conclude our outlook, the situation remains quite difficult to predict. We are very confident if we look in the mid-term perspective that we are well positioned in attractive markets and therefore we feel that we have very good prospects for reaching both the growth and profitability targets going forward. But there is a lot of uncertainty in the world right now, and it's very hard to predict which direction things will go. So what we are basically saying is that the mixed picture that we have seen now for some time is expected to persist in 2024. And yeah, we will monitor the situation and let's see how things develop. Well, with that, we will move on to the Q&A session.

Thank you. If you wish to ask a question, you can do so two ways. If you'd like to ask your question verbally over the phones, you can dial star 1 on your telephone keypad now to enter the queue. And once your name has announced your question, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial star 2 to cancel. Alternatively, if you're logged into the webcast and you can submit your questions via the Q&A section at the bottom part of your screen. So once again, that's star one if you wish to ask your questions on the phone or the bottom part of the webcast to ask them by type in. And we'll take questions from the phones first. And our first question comes from the line of Marcus Almorod of

Hello, I think we lost. Yeah, hello, can you hear me?

Yes, barely, I would say. Try again.

Okay, better now?

Not really.

Go ahead.

You have to speak slowly, Markus. We hear that it's you at least.

Okay, I will try. You hear me better now?

Yes, very much better.

Okay, okay. so i wanted to start with maybe maybe a question on western move first uh when you talk about projects being delayed is it can talk a little bit about which end markets are being effective it's all end markets or if it's primarily the trains and also the the impact that we saw on q2 on the trains is that done or is it more to come in the next couple of quarters

Yeah, I think that when it comes to delayed projects, I think it's affecting a little bit all the segments in one way or the other. The projects can be larger or smaller, of course, depending on the segment. But of course, the interest level rates that we are seeing now is in some cases affecting the financing situation of end customers and so on. So I think it leads to a little bit of a slowdown in decision making when it comes to projects going forward or not. So we can see that the projects are not canceled, but they are in some cases delayed. So that is affecting us a little bit. And then your second question. question, which was related to the adjustments of the train backlog, as I understand it. Yeah, it's really, of course, hard to say. We have a very close relationship with this particular customer. We have close discussions regarding this. So we are trying to understand the situation. I think the business situation of our customer is very strong still. They have an extremely strong backlog. So I think it's a temporary effect that we are seeing that they are kind of looking at their order bookings with us and seeing how that fits with their project execution. So I think it's a time-limited effect that we are seeing, but overall their business is quite healthy, I would say.

Okay, okay. And then on the energy side, clearly in Vestamo, can you give us an update of where you stand there and what the momentum in that business is, that part of the business?

Yeah, the activity level is still very, very high in Vestamo. We are meeting a lot of customers. We are participating in a lot of conferences and exhibitions and so on, generating leads. and we are working to find new projects, new customers in all markets. So I think it's moving forward, but we also know that the time to actually win a customer is often quite long. So I think that we have really good momentum in terms of activities, but we have yet to see the breakthrough, so to say, when it comes to the order intake.

Mm-hmm. And then finally, if I may, on electronics, first of all, do you see any signs of a trough? So how did it develop throughout the quarter? It's been weak for a couple of quarters now. And then also the savings program, did that impact you at all or should we expect that to come from 2024 onwards?

If we take the last question first, I mean, we have seen elements of the cost-restruction program affecting this quarter. Obviously, not enough, because if you look at the profitability level, it's not where we want it to be. The full effect of the program, we will see from Q1 and onwards. What was the first question, Jan?

Yeah, if you see any signs of the market troughing out for you in particular, I guess, in Asia and electronics.

We would say that if you summarize the Q4, it's very much similar pattern that we saw in Q2 and Q3 in Bayer Electronics. It is stable. It's not going down further, but it's stable on on this kind of level. And I wouldn't say that we see any light in the tunnel as of yet.

Okay, but at least it hasn't deteriorated further. It's kind of, as you say, stable.

No, it has not. It's basically the same of the same, basically.

Okay, perfect. Thank you very much.

Thank you, Markus.

Thank you. Our next question comes from the line of Mark Syrstedt of Redeye. Please go ahead. Your line is open.

Thank you very much. And hello, Jenny and Joachim. I have some questions as well. I'm going to try to not overlap too much. But first, could you comment on, you stated that Bayer Electronics developed stably in Europe, while North America was a bit weaker in the period.

Anything specifically happened here?

Not really, I would say. The customer structure is a little bit different. In Europe, we have a very broad customer base. Lots of customers, some are up and some are down, and that kind of helps with the stability, whereas in the U.S., we are more dependent on

a few customers and there we also see a little bit of seasonality in the demand when it comes to North America so yeah it's relatively stable in the US also we don't expect it to go more down that is not what we want to convey so it's both on the MA and the US side it's quite stable. In Asia, it's still on a low. We'll see when we see things picking up in Asia. That's very hard to say when.

I understand. So it's more project-based than I guess. I have a question regarding cybersecurity and EU regulation. Do you see a tightening happening? And if yes, is that something that could impact your sales?

I think that we have seen a development of the EU regulations, not only EU, by the way, also the other parts of the world. And it's been going on for some time and there are new regulations coming all the time, of course, tightening the requirements and so on. I feel that we are really following closely what is happening. We are working closely together with our customers to understand what the requirements are. And we are taking steps all the time, you know, to make sure that we live up to the customer's expectations, which in turn are driven by the regulations. So I feel that we are, you know, at a good place when it comes to cybersecurity, even though it's, of course, always a challenge to keep up and try to stay ahead of those increased regulations.

All right. And could you also talk a little bit about India and the investments there? Maybe it's just a coincidence, but I noticed that Alstom highlighted India and its ramp up yesterday in the presentation, and they are established in Bangalore too. So 10 million and 10 employees, it seems like a rather small investment, a first stepping stone. Is this likely to expand in size and scope in the next few years?

Yeah, that is definitely our plan. It is a relatively small investment to start with. But now the background is really that we do see a booming rail market in India in the coming 10, 15 years. You know, 10 years ago, it was the Chinese market that was really booming. And now we can see that the infrastructure investments are very significant in the India market. So it feels like a good timing for us to really move into this market and we want to support our customers and the regulations in India when it comes to local production are extremely challenging and they are becoming more and more tough every year so in order to support our customers winning business there we need to to do our part, so to say, and by putting, establishing assembly of our train-related products in India, we are supporting our customers to win more business. So, yeah, this is a very strategic move for Vestamo, and I feel it's a good timing as well of this investment.

And I noticed also that Alstom India had some export references to countries like Australia. Could your Indian entity become a way to improve sales and delivery in Asia Pacific in the medium term as well?

That is not our intention, so to say, in this first step. It's really an India for India approach right now. We have a presence in Australia and other countries in Asia Pacific, not with production, but with own sales resources, and that is actually working quite well. But of course, going forward, when we have established this production site, who knows? It could very well be that we can use that for other countries as well. But as a first step, it will be for the Indian market.

All right. And you're right in the report for Bayer Electronics that the result was negatively affected by unfavorable mix in the deliveries of this older product line that is the end of life. So if one adjusts for the temporary increase in this product, was the sales number substantially lower than the reported sales or was the impact more moderate?

The impact of the... display solutions or the products that we are phasing out is, I would say, moderate. But it's affecting. It's affecting.

Yeah. But it's not a jump-scarring Q1, then, I assume. No. Okay. And you also state that X3 will be using Windows-based software. Has the old software been an obstacle for the sales team?

Well, the current solution is also a Windows-based solution. It's just that we are moving to a more modern version, so to say. And we are starting to see that... I mean, the X2 product line has been around now for a few years, and we are starting to see... that there are some gaps compared to what customers are expecting. So I think it's really good timing for us now that we can come out with a modernized and much improved HMI range now by the end of next year. I think that's going to be a very good step forward for Bayer Electronics. All right.

That's all from me. Thank you.

Thank you, Mark. end of this year it should be of course, sorry, the end of this year we will be launching X3.

Thank you and currently there are no further questions on the phone line so I'll hand back to our speakers for the web question.

Yes, we do have a couple of web questions here. How do you aim to raise your margins as your backlog is clearly down? Well, there are many things that we are working on in order to raise our margin and looking at the backlog, In one way, we are coming back to a more normal situation when it comes to the backlog. The backlog that we had in 2022-2023 was actually too high because it was due to the fact that we were not able to ship products to our customers in a high enough pace. But when it comes to the margin improvement activities, it's really about increasing our efficiency, it's about pricing management, And a lot of different levers that we need to look at in order to take the further steps. Lower cost base and the new offerings.

And it's not only a volume game, but we still believe in our growth journey. So in the more mid-long term, of course, we will see a volume impact or volume leverage that will take us closer to the financial targets when it comes to profitability.

Is it possible to quantify the impact that the train or adjustment had been on the order intake for the quarter?

Yeah. We have not, we have decided not to give a certain number. What we have said is that the train part of the order intake in the fourth quarter, was significantly impacted by this adjustment. And we also basically implicitly saying that part of what was booked in Q1 and Q2 were adjusted. So we need to see the order intake for this particular customer basically more on a full year scope. More than that, we won't go into a detailed number.

When it comes to the 1.3 billion backlog, how big part of that would we expect to deliver in 2024? I would say most of it is related to 2024. There is some backlog in Vestamo that relates to 2025 as well, but most of it will be delivered this year. Yes. So I think there are no more questions on the web here. So with that, thank you very much for listening, and we'll talk to you soon.

Thank you. Thank you. This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.