Ependion AB

Good afternoon, ladies and gentlemen, and welcome to the Appendian Q1 2024 report conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Should you have a question, please press star, followed by the number one on your touchstone phone. For participants that have joined the web portion of the call, you may type your questions in the Q&A box you see on your screen. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, April 24, 2024. Today we have Yenny Siodal, President and CEO, and Joachim Loren, EVP and CFO. I would now like to turn the conference over to Yenny. Please go ahead.

Thank you very much and welcome everyone to this quarter one 2024 conference call for Appendion. So with me today here in Malmö, I have as usual Joakim Laurén, CFO for Appendion. And if we move over to the agenda, it looks similar to previous calls. I will start by giving a business update for the quarter. Joakim will guide us into some more details about our financial performance. Finally, I will give some concluding notes and outlook, and then we open up for Q&A. So business update for the quarter. So the quarter one shows a sequential improvement, both for order intake, sales, and earnings compared to the fourth quarter of last year. And in my view, looking at the quarter sequentially right now makes quite a lot of sense since we had a 2023, that was a fantastic year for us, but which also contained some unusual effects, so to say, and especially on the order intake side. And if we talk a little bit about that, you can see that our order intake is down 15% compared to the same quarter last year. And there are several reasons for that. One being that the comparison year, actually the first half year of 2023 for the Vestamo business entity contained a very, very high order booking level from the group's largest customer who were at the time extending their order horizon throughout the first half of 2023. This led to extremely high order bookings in Vestimo that did not reflect the underlying demand. So that is what we are seeing now comparing to the first quarter of last year. However, we also do see a little bit of a softer market situation right now where we don't see the full customer activity that we saw back in 2023. So that also, of course, plays into this. But I just want for clarity to also say that if you look at Vestimo and the train network segment, if you adjust for the effects from this phenomenon, we can see a stable underlying demand situation from our train customers in Vestimo. If we look at sales, we are somewhat lower than the same quarter last year, approximately at the same level as quarter four. And the EBIT is lower than last year as well. As you can see, we came out at a level of 12.4%, which is, however, a significant step up versus the fourth quarter of last year. So the trick for the group right now is really about keeping the foot on the accelerator and on the brake at the same time. On the one hand, we have a lot of future-oriented activities that we are carrying out. The most important ones being the establishment of a business entity for Vestimo in India, which is a booming market that we want to take part in in the coming years. And the other one being the electronics new strategy, which is now being implemented in combination with a continued high activity in our product development teams in both business entities. But at the same time, of course, we are being very careful on the cost side. We are looking at the efficiency improvements and we are looking at adjusting costs to the volume development. So if we then look into a little bit more details into the business entities, I mentioned the order bookings side for Vestimo. We had sales growth with 9% compared to the same quarter last year. However, the product mix in this quarter was a little bit unfavorable for Vestimo, which actually had an effect on the profitability, which still amounts to a little bit more than 15%. And we're also communicating in the report that due to the somewhat lower order intake pace in Vestimo in the last three quarters, we do see a weaker backlog now for the second quarter of this year. And of course, we are doing everything to fill up that backlog. And so that's, of course, a big focus for us. But that's the situation right now. And at the same time, lots of forward-looking activities and looking at also reducing ongoing costs. And just for clarity there, Investimo, what we are doing is that we are reducing the number of external resources that we have, especially on the operations side, since the volumes out of our factories are temporarily lower. That is where we are focusing our cost savings. I'm also very pleased to see in the quarter for Vestimo that we are launching a whole bunch of new and updated products, which are the result of the last year, year and a half R&D work in Vestimo. So among other things, we are strengthening our Wi-Fi portfolio with the Wi-Fi 6 standard, which is the new Wi-Fi standard that provides much higher bandwidth and a more secure connectivity. That's one example. So that's positive. If we look at Bayer Electronics, we see a sequential improvement, both in order intake, sales and profitability. In particular profitability, I would say, because we did have a challenging Q4, but we are now back at a more decent profitability level in this business entity, thanks to the cost measures that the unit has taken. The same pattern as we have seen before remains. So we see a weak demand in Asia, continued weak demand in Asia, while EMEA is actually showing a slightly stronger demand side. and America is quite stable. We also do have an effect of a decision that was taken in 2023 that we would phase out a product area that we call the display solutions that is mainly sold on the Asian market with lower than average margins. So that's a good decision for us, but it affects also the order bookings a little bit since the quarter four of last year. When it comes to the product development in Bayer Electronics, the team is fully focused on the next generation HMIs and we are planning to launch that product line towards the end of this year. Also notable in the quarter is that the new production site that we have mentioned before that we are setting up here in Malmö has now been inaugurated and we have started deliveries from this production unit as of this quarter. So that's great. So if we look at this in a more graphical way, I mentioned already that the order intake has picked up compared to fourth quarter of last year and the sales is on the stable level compared to same quarter last year. Worth mentioning as well is that we still have a strong backlog. In 2023 our backlog was abnormally high, I would say, because of the delivery issues that we had. Now we have an order book of some 900 million Swedish kronor, and the majority of that is with Vestimo. Sorry, the total order stock is 1.2 billion, where 900 million is with Vestimo. And the majority of that order backlog in Vestimo is due to be shipped now in 2024. Yeah, I think that's basically all from my side for now, Joakim. So I will pass over to you to give some more details.

Thank you very much, Jenny. And I will start with giving some more on the numbers for Appendion. And let's look at the order intake. It was 528 million for the quarter, and the sales was 599, and the EBIT was 74 million, corresponding to an EBIT margin of 12.4. It's worth noting, as Jenny has been saying, if you look at the graph down to the left, sequentially we do see a step up compared to where we were by the end of last year also in terms of a bit. In the numbers, we have a tailwind when it comes to, FX, weaker Swedish Krona, helps us, and in total that has contributed about 8 million, of which mainly it's transactional variances. Looking at cash flow, we do see an improvement, but still it is slightly negative, the free cash flow at minus 8 compared to minus 39 last year. Worth noting as well is that we do have still quite high working capital levels. There is still potential to improve. Net income at 51 million compared to 56 last year. And for those of you that read the details, you can conclude that the tax cost is somewhat lower in the quarter. That is due to that we have a more, you could say, favorable geographical mix of the profit generation for the group. That was a pendulum. Let's slide into Vestimo. So Vestimo had an order intake of 310 million, sales of 364, and an EBIT of 55, corresponding to an EBIT margin of 15.2. Jenny pointed out that the comparison on the order side to last year is challenging for what Jenny described earlier. So we were down minus 13%, but if we compare to then end of last year, it's a step up sequentially. And looking at the good backlog that we had, that provided for a good sales growth in the quarter with 9%. And the fact that we do see somewhat lower, profitability now in Q1 compared to last year Q1 is that it is somewhat unfavorable mix of products that were shipped in the quarter. As mentioned we are continue to work with the India project that is working according to plan and we also launched a new sales entity for Vestamo in Denmark. And it should be mentioned that if you look at the pipeline and the customer activity, we do see a relatively high level of that. So that gives us some comfort going forward. If we then jump into Bayer Electronics, here we had an order intake of 219 million, sales of 236, and an EBIT of 31 million corresponding to an EBIT margin of 13.3. If we look at the order bookings, basically we are moving sideways. now for the fourth quarter in a row in Bayer Electronics, even though there is a small step up compared to where we came in Q4 last year. And as Jenny pointed out earlier, it's Asia that is weak, while EMEA is actually showing a somewhat uptick, and then America's running stable. Jenny also mentioned this on display solutions, and I do want to give the numbers here so you get a good feeling for what we are talking about. We are facing out this display solution Asia business and the decision was taken in 2023. As from Q4 in 2023, we did not book any orders on this area. And the total value of this business in 2023 was 50 million. And if we look at what we expect for this year, 2024, it's about 30 million. that will give you the numbers so you understand what happens in the electronics with that respect. Sales, it was somewhat better than last quarter, but still on relatively low level. The cost reduction program that we talked about last quarter report, that was finalized in Q4, and we see a full effect of that. Of course, what was said earlier on the estimate when it comes to cost caution is that it's still applicable for Bayer Electronics, given where we are in terms of volumes. It's good to note that we came in at the more decent profitability level on this 13% that we came in this quarter compared to the eight that we had in Q4 last year. And it should also be mentioned that in the numbers, we do still have quite high activity when it comes to R&D and the new HMI generation, as said earlier, with the launch by end of 2024. That kind of concludes the numbers, so I hand over to you now, Jenny, concluding notes.

Yeah, so to try and summarize this then, the start of this year is a step up compared to the fourth quarter of last year. We are focusing a lot now on balancing future focused strategic activities with adjusting our running costs in both business entities to the current volumes. And the general market situation is still uncertain. It's hard for us to predict, you know, what is going to happen the second half of the year. So we actually refrain from doing that, but we keep close attention on the development and are of course prepared to act further if need be. And I also want to point out that the strategic directions of both business entities, the WeGrow strategy in Vestamo that has been in place since 2018, and the newly crafted strategy in Bayer Electronics, which is now being implemented, those remain unchanged. And if we look at our financial targets, you remember that we have said that we should grow 10% organically in revenues, profitability level for the group about 15%, and we should be a dividend-paying company. Obviously, looking at the start of 2024, it seems that we are far away, so to say, from the first two targets here. However, we need to look at this for a little bit longer period of time, and we are absolutely focused on reaching those financial targets now over the coming years. So I just want to highlight that. And when it comes to the outlook, I mentioned before that we are in a situation macroeconomically that it's a little bit hard to predict. However, I am as convinced as I've ever been that we are well positioned in attractive markets that are driven by very strong mega trends. And therefore, I believe that in the midterm, we have very good prospects for reaching our growth and profitability targets. But with the uncertainty that we see right now, we actually predict that the mixed picture that we have been seeing now for quite some time, we expect that to remain in 2024. So with that, I think we'll open up to Q&A. Yes.

Thank you. 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. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star, followed by the number two. For participants that have joined the web portion of the call, you may type your questions in the Q&A box you see on your screen. If you're using a speakerphone, please lift your handset before pressing any keys. One moment, please, for your first question from the phone. We have our first question coming from the line of Marcus Almagrid from Carnegie. Please go ahead.

Yeah, hi, Marcus from Carnegie here. Maybe to start with the big train order that you got last year, Can you tell us a little bit about how the customer has acted after they put in these large orders, that is in Q3, Q4, and now in Q1? Have they gone back to kind of normalized levels or have they been lower than normalized and normal?

Yeah, I understand the question. Well, as mentioned, the reason why we did receive those very high numbers in Q1 and Q2 last year was the extension of the order horizon for the customer. So basically they went from between three and 12 months order booking ahead of time to actually 24 months. So there was a one-off effect coming from that. And what we have seen in Q3 and Q4 is that we did see a weaker than normal order booking from this particular customer in Q3 and Q4. And especially in Q4, we had a big effect from that. While as in Q1, I would say that we are back on a more normal level if we look historically from that customer. So hopefully this effect will kind of fade out going forward because it becomes complicated to try and explain this kind of artificial things that we have seen.

Mm-hmm. And also, if you look at the other segments and you strip up, because this is a big ordinance distorting everything else. You're talking about the train segment, except for this one being kind of stable. What does the other segments look like if you look like energy and track side, for instance?

Yeah. Westermost energy segment has actually started off the year quite well. We see an increase in both order intake and in sales. compared to the same quarter last year. So that's positive. And also the track side segment is looking decent, not as big as an increase there as in energy, but it's still looking very stable. And then we have all the rest of the segments as well that are also kind of in a stable situation, I would say.

But energy is increasing. So momentum is quite good in energy. Then on the margins in electronics, which kind of bounces back from where they were in Q4 and also a little bit in Q3, but particularly in Q4, is it mainly savings or is there anything else which kind of brings it up? You have this segment which are discontinuing, and I guess that helps, but is it anything else which kind of brings it up?

And obviously, it's the main difference is the effects of the cost savings. But we can also note that the development in electronics has taken steps forward. And that also contributes to the better profitability. And we also pointed out last quarter that we had a high volume of more of the low margin products in Q4. So at last quarter, actually, it was quite unfavorable with quite large volumes of display solutions that went out in Q4. We saw much less of that now. There's still an element of invoicing of display solutions. And we will see that the quarters of this year, as I mentioned earlier, it will be around 30 million that will be invoiced for the whole year in 2024. But the main thing, to answer your question, the main thing is cost. But we also have a positive effect on the gross margin compared to what we saw in the last quarter last year.

But that also means that if I read it right, the 13% that we're seeing right now is a lot more representative than what we saw in Q4. I agree. For the level of returns. Yeah. And on the unfavorable mix, you mentioned unfavorable mix in Bestimo as part of the reason for the margin contractions. Can you talk a bit more about that unfavorable mix?

Yeah, we can try and elaborate a little bit on that. We obviously have different product lines in Vestimo. We have the traditional products that Vestimo had previous to making the acquisitions that we have made, and then we have the wireless portfolio from our acquisitions. Of course, the gross margin varies slightly between different product lines. And in this particular quarter, we had a little bit less portion of the Ethernet products in the mix than usual. And that has a certain effect on the gross margins.

But the operative word here is as usual. So it's a more unusual mix that you have now than you normally have so to speak so it's not representative for the business as it should be

No. Not really. I mean, we should be clear that you can have variances in between the quarters. But it's not like it's huge differences either, Marcus. I mean, we were at 16, a bit north of 16, and now we were a bit north of 15. So it's not huge differences. This quarter was unfavorable. That we want to convey and laid out the main reasons for it.

Okay, perfect. Thank you very much.

Thank you very much, Marcus.

Thank you. Our next question comes from the line of Mark Sjost from Red Eye. Please go ahead.

Thank you very much and hello Janne and Joakim. How good visibility do you have for example of potentially larger deals in the energy segment and how quick can you be once you get an order to fill it and ship it now when the component situation has improved?

Yeah, it is, of course, nowadays possible to actually book and bill business in a completely different way that we have seen over the last couple of years, actually, where book and bill has probably in the same month or even the same quarter has been almost impossible, especially in Vestimo. I would say that we have a strong pipeline in the energy segment as in the rest of the segments as well. I'm not sure if we should expect some really big orders. I would rather see that we are going to receive many smaller orders because we are working with customers in the energy segment in all markets basically and our sales people are out there. talking to customers and so on. But when we do get orders, small or big ones, we are able to ship them quickly should the customer wish to receive the material in a short period of time.

In general, we could say, Mark, in the supply chain, we are back to, say, more normal lead times in the factories now. So the situation that we've had now for quite some years with really long lead times, that is basically over. As a general statement. All right.

Okay. And you also write that to offset the temporarily weaker demand, the business entity is working to reduce ongoing costs and adjust them to volumes. How big are these processes and what are you actually doing right now?

Well in Bay Electronics we have the cost program that was carried out end of last year so that is kind of already done then in combination with the general cost cautiousness overall in that business entity. In Vecimo we had a situation in 2023 where we did quite a lot of additional projects to actually improve our supply chain and so on and we spent spent, of course, some money on doing that. But now that we see the market weakening a little bit and the order backlog being a little bit weaker than we have seen before, we are taking steps to reduce costs. And as I mentioned, primarily related to our production site where we have quite a lot of external consultants which is actually the reason why we have that is so that we can adjust our workforce according to the volume. And that's in combination with the general cautiousness on costs, of course, to compensate for a somewhat lower volume. All right.

And a more general question regarding Vestamo's market position in the track side segment. While you state that you are a market leader within Crain and a challenger in the energy segment, you write in your annual report that you have a moderately strong position in the fragmented trackside market, but with significant domain expertise and an increasingly robust product portfolio. So could you comment on how you try to position yourselves here and how you can strengthen your position? And is the fragmentation making it harder to become a clear market leader in this segment?

Yeah, that's a good question. We have chosen to keep trackside as a separate segment since the products are not sitting on the board, the trains actually, it's sitting on the trackside and there are loads of different applications related to trackside. It can be signaling system, it can be train to ground communication, it can be level crossing automation and a lot of different applications. And we can see that the fact that we are a very well-known name in the rail industry as such, thanks to our number one position in train networks, means that we are always invited to the table also when it comes to trackside projects. And I think that we have taken big steps over the last years in finding and talking to customers in trackside, which are mainly... train operators in different countries. Those are the ones carrying out those types of projects as well as transport authorities. The likes of Trafikverket for example here in Sweden are also potential customers in this segment. So I think that we are step by step building our position in Trackside and we have a lot of domain knowledge and we know the players in this market. I'm quite optimistic about the future development in that segment.

I know that this has been a recurring theme in many conf calls and questions from my side, but it is still interesting. Asia continues to be weak. Could you expand a bit on what you see there?

It's again very hard to predict. We don't want to speculate about what the development in Asia is going to look like. If you take China, for example, they are saying themselves that the economy should pick up the second half of the year and so on, but it remains to be seen. We want to be careful about making predictions as to when that is going to change. However, in Bayer Electronics, which is the most affected by the lower volumes in Asia because we have bigger volumes in Asia there, we have also done some organizational changes there to actually improve our sales methodology and our sales activities there. Even in a difficult market, there's, of course, more we can do as well to grow our business.

All right. And how are you working with pricing on the Bayer Electronics side and how good pricing power do you have?

I think that we have been working in a good way with pricing in Bayer Electronics. Of course, the big window for major price increases has closed now, I think, in most businesses. because the inflation is coming down and so on. But I think that we have learned how to work with pricing in a much more professional way. And all our sales teams are much more conscious about this and they are working continuously with pricing in a different way than before. So in that respect, we are continuing and using this tool, so to say, to try and keep up the prices and increase prices wherever and whenever we can.

And I said earlier, I mean, one component of the improvement in Bayer Electronics is actually cross margins. And that is, and one part of that is price management. So we are taking steps forward and performing quite well, I would say, in Bayer Electronics in that respect. All right. Thank you very much.

Thank you.

Thank you, Mark. Thank you.

Ladies and gentlemen, just a reminder, should you have a question, please press star followed by the number one on your touchtone phone. Annie and Joaquin, please proceed with the web questions if there are any.

Thank you. We don't have any questions from the polling at this time. We can proceed to the web questions. There don't seem to be any web questions as far as we can see here.

All right. Thank you so much. There are no further questions at this time. I'd now like to turn the call back over to Benny for final closing comments.

Thank you for that. Well, I just want to thank everybody for listening and have a great rest of the day. Thank you.

Thank you.

Thank you, ladies and gentlemen. This concludes your conference call for today. We thank you for participating and ask would you please disconnect your lines. Have a lovely day.