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.