Ependion AB

Good afternoon, ladies and gentlemen, and welcome to Ependion Q2 Report 2024 Conference Call. At this time, all lines are in lesson-only mode. Following the presentation, we'll conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator. This call is being recorded on Monday, July 15, 2024. I would now like to turn the call over to our CEO. Yanni, please go ahead.

thank you very much so welcome everyone to this quarter 2 presentation and as usual it is myself Jenny Skjødal here in Västerås together with Joakim Laurén our CFO who is today in Malmö so the agenda is the same as usual I will start with the general business update after that Joakim will dig deeper into the numbers and And then finally, I will give some concluding notes and outlook, and then we will open up for Q&A. So let's dive straight into the quarter. Well, as you probably have seen, we have a quarter now that is just like we expected, affected by the weaker market demand that we have seen now for the last 12 months period. And my view is that we are keeping our market shares. We are not losing any business in either of the business entities. But the customers are being more cautious and it takes longer to actually close orders. And that is what we have been seeing for some time. And that situation remains also in this quarter. So what we are doing now is that we are balancing, of course, cost savings in our running costs in both business entities. offset these lower volumes but we also have a clear strategy in place we believe in a lot in in the future and therefore we are also continuing with selective forward-looking investments which I will come back to later on so in terms of order intake if you remember we had a perfect storm in quarter two of 2023 where Not only we had an extension of the group's largest customers order horizon, which led to a one-off effect of more than 100 million Swedish kronor in that quarter. On top of that, which was somewhat hidden by this big effect of this customer, we also had a handful of other customers. significant orders, both from rail customers, but also from some other segments. So it was really a very, very strong quarter last year. This year, we came in at the 500 million SEK level that we have seen for some time now. And both businesses, business entities actually face lower order bookings compared to the same quarter of last year. When it comes to the sales, we see a more stable situation. Vestimo came in lower than last quarter, as we had already indicated, because of a lower order stock coming into the quarter. Bayer Electronics shipped a little bit higher volumes this quarter compared to the first quarter of this year, because there are some final deliveries of... this product line display solutions or part of that product line which are now being shipped in this quarter and when it comes to the profitability Joachim will dig deeper into it later on but of course we know that we have a strong operational leverage on our operating margin And of course, this works both ways. So when we do see lower volumes like we did in this quarter, it also has an effect on our EBIT. And Vestimo came in lower due to the lower volume, and Bayer Electronics, which actually had a stable volume, came in a little bit lower because of the unfavorable mix related to the display solutions products that I just mentioned. for the group at 10.2% for the quarter. Not quite where we would like to be, of course, but that's the situation that we are in. The good thing is that our free cash flow actually doubled compared to last year, and not only related to lower account receivables, but also because we have been working really hard in reducing our inventories, which we have also succeeded to do in the quarter. Last but not least, we did a minority investment in the quarter and also put together a strategic partnership agreement with a company called Blue Wireless. And I would like to take a few minutes now to actually explain what that deal actually means and why we did it. So bear with me for maybe being a little technical here, but I think it's important to understand why we want to move into this area. So as you all know, Vestimo is really, really strong in the rail industry. It is our largest segment. We are the market leaders when it comes to products for onboard data communication networks. And we have very good connections in the rail industry, basically all over the world. And the previous acquisitions that we have done, Neratec in 2019 combined with Eltec in 2021, those acquisitions gave us access to wireless technology for what we call train-to-track communication, meaning the communication between the train and the trackside. and those technologies were are built on on Wi-Fi technology and also mobile ie 4g 5g technology But as we all know it's not always Fantastic when it comes to internet connections on board trains not in Sweden nor in other countries and the fundamental problem that that maybe not everyone is aware of is that neither Wi-Fi nor the standard mobile 5G can actually provide enough bandwidth to meet the demands that both we as passengers have, but also that the operators have in order to improve their efficiency and their operations. Wi-Fi is fine for metro applications where the trains are moving kind of quite slowly. But when it comes to high-speed trains, it becomes really, really challenging to achieve this kind of ultra-high bandwidth connectivity that would be needed for those trains. And 5G can provide high bandwidth, for sure, but requires a very costly infrastructure. And you can imagine building that infrastructure along the full length of all major train tracks. That's pretty much cost prohibitive. So what this company in the UK, Blue Wireless, has done is that they have taken a new spectrum that is unlicensed and it's called the millimeter wave because the wavelength is very short, 1 to 10 millimeters. That means that those waves can transmit very, very big amounts of data. And Blue Wireless has worked over the last 10 plus years to actually productize this technology and actually build products that can provide a cost efficient and ultra high bandwidth connectivity using this unlicensed spectrum. And the first projects using this technology are right now being deployed. One in California by Caltrain and the other one in the UK. And it's looking quite promising so far to actually be able to contribute to better connectivity for trains. And as you probably also are aware, we aim to be the key player in this space, in the connected train space. And we believe that millimeter wave technology can potentially be a game changer in this area. However, the technology is quite new. It's still in a scale-up phase, and that is also why we decided to go for a minority investment at this point, to really be able to follow this technology, influence it, and also by this strategic partnership with Blue, we will be going to market jointly, develop the market further, and also together work on the future product roadmap. So I'm quite excited about this opportunity this opportunity and what it's going to bring moving forward. All right. Looking at the two business entities then, as I mentioned, Vestimo, we are seeing lower order bookings in the quarter, especially compared to the extremely strong quarter two of last year. However, I feel that the customer activity is still high. Our pipeline remains on good levels. And we are, of course, taking cost measures now to adopt to the lower volumes that we are seeing in this quarter. But at the same time, we see that the possibilities that we have going forward with a clear strategy and the segments that we are active in means that it would make no sense to slash costs too much. We need to invest for future growth which is why we are going ahead with the establishment of Estimo India which is ongoing and also the blue wireless deal that I just mentioned and on top of that the high activity that we have on the product development side I also want to protect that because there's a lot of interesting things cooking connected to real business opportunities that are ongoing and we are continuing to launch new products also in this quarter and that will continue also going forward. When it comes to Bayer Electronics, we see that the challenging business climate continues and we have seen that for five quarters in a row now. The manufacturing segment is the one that is mostly affected and we can see that from our other players in the market as well. The effect has been mostly visible in Asia. while we see the marine segments and also the rugged segment that Bayer Electronics is now focusing on are more stable. We are seeing some slight signals that may indicate that we have reached the bottom, so to say, in Asia. We do hope that those signals are correct let's see what's what's happening going forward but at some point in time you know things will start to improve again as I mentioned we have shipped significant display solutions volumes in the quarter we are putting that product line end-of-life as you know because of the low margins in that in that product but it affects the gross margin in the quarter Also in Bayer Electronics, very high activity in the product development side now in order to release the new generation of HMIs, the X3 family, a very strategically important launch for Bayer Electronics. And the first products in that family will be launched by the end of this year. And also with a lot of focus, of course, on the software platform WebIQ, which was acquired with Smart HMI last year. All right. So summarizing this in a more graphical format, here are the graphs showing the order intake and the sales. As you can see, another relatively weak order intake quarter, as I mentioned, 31% down compared to the boosted quarter of last year. sales is more stable as you can see sequentially at minus two and minus eight compared to last year so still keeping up on a on a pretty stable level and and our backlog overall still quite strong at 1.1 billion Swedish kronor so with that i will hand over to to you Joachim

Thank you, Jenny. This is Joakim and I will take you through more of the numbers. We start with Appendion and order intake of 483 million, the sales of 588 and an EBIT of 60 million corresponding to the 10.2% profitability. As Jenny said, the profitability compared to the first quarter of this year, we see a drop. And the reason for that is then the lower sales investor mode that we talked about, and then the unfavorable mix or the fact that we are delivering significant volumes in display solution. I will touch base on that when we go through each of the business entities. In terms of this forward-looking investment that Jenny pointed out, that we are continuing with that. We talked about the blue wireless transaction, but also the India investment that we all established that we are doing that we have talked about before. I just want to give you a flavor on what kind of money we are talking about impacting the cost side for those particular ones in the quarter. I mean, we are talking about 1% on the EBIT percentage level. Then you understand the impact that we are talking about. When it comes to the FX impact of the numbers, we have had a positive total impact of about 6 million compared to last year. which then mainly consists of transactional variance. Free cash flow, as Jenny said, has developed positively, plus 60 million, which is then a doubling. The main driving behind this is the reduction of working capital. The focus on reducing our inventories remains. There are still a way to go on that area. For you that look further down the P&L, the tax cost was somewhat lower. The percentage was somewhat lower in the quarter. That is due to some one-off activations of losses carried forward happening in the quarter. Net income at 40 million and the earnings per share ended at 137 for the quarter. Some words on Vestamo order intake 294 million sales 336 and an EBIT of 44.5 corresponding to 13.2%. Jenny talked about that the comparison is kind of disturbed by the boost in last quarter. So that is first point. We have had no larger orders in the quarter in Vesterno. And as stated before, the saving activities, they have been in high focus, looking at the running costs, making sure that we balance what we are doing compared to the top line. But then we do have the investment going forward, as I mentioned before. We have improved our gross margins. We are at the level of 52% for Vestimo. And it's price management, efficiency, and also some lower component costs that we see in the market right now. And summarizing the drop on the profitability down to the 13.2%, the main driver is then the volume effects. As Jenny pointed out, we are continuing to have high activity level in product development with several product launches within the quarter. That is very exciting. And they blew wireless minority investment. We just want to highlight the number. It was 3.4 million pounds that was invested. Then we come to Bayer Electronics. We had an order intake of 190 million or a sales of 253 and an EBIT of 30 million or corresponding to 11.7%. As we saw earlier, I mean, the orders, they are moving sideways on a relatively low level. It's the fifth quarter now in a row. The sales picked up as stated. It is a sequential uptick of about 7%. And it's mainly then display solution volumes that we will phase out during this year. That displays solution volumes. They have low margins. And if you look sequentially comparing to first quarter this year, we are dropping the gross margin about three percentage points. And in Q2 in Bay Electronics, we ended up at 50%. Full focus on tight cost control in Bay Electronics as we have tight on the volumes. And then the drop in profitability from last quarter from the 13 level to the almost 12. Well, that is then driven by this unfavorable mix of display solutions, nothing else. And continued high focus, as Jenny pointed out, on X3, the new HMI family and WebIQ. And when it comes to X3, the first releases, they will start being released then by the end of this year. That concludes the numbers. So over to you, Jenny.

Okay. Thank you very much for that, Joachim. So to conclude this message then, the challenging market conditions remain in the short term. And I want to point out that we also see a weaker order book also for the coming quarter however it is my assessment that the weakening demand situation is temporary we have clear strategies in place in both business entities and we aim to advance our position significantly in our focus areas in the coming years so therefore we are of course taking out significant costs to counter the lower volumes but we are not slashing our cost base at this point because We really see that we need to be ready for the future when the market picks up again We have a very strong foundation to actually continue our growth journey So our financial targets we are keeping those targets clearly in sight and Looking at where we are coming from, I think we have established a new baseline in Ependium now compared to where we were a couple of years ago. But we are still not, of course, where we want to be, which is the 10% average annual organic growth and the 15% operating margin on the group level. However, we do see that a more favorable market situation needs to come back, so to say, for us to be able to reach those targets. But we are definitely still keeping them in sight, as I mentioned. So finally, the outlook remains unchanged. We know that we are operating in attractive markets. There is a good underlying growth in our key segments driven by some of the big megatrends in the world, such as sustainability, electrification and so on. And we believe that we have good prospects in the longer term to reach the growth and profitability targets. But at the same time, we can see that there is still a great deal of uncertainty around us. The market is not very strong at the moment, but And therefore, we see that the mixed picture that we have seen now for quite some time is expected to persist throughout 2024. So with that, we conclude the presentation and should be opening up for questions then.

Thank you. Ladies and gentlemen, should you have a question, please press star 1 on your telephone keypad. If you'd like to retry a question, press star 2. Again, to ask a question, press star 1. One moment, please, for your first question. Your first question comes from Marcus. Please go ahead.

Hi, Jenny. Hi, Joachim. Maybe I'll start with a demand. I'm just curious to see your thoughts about the comments in Q1 and how they tie into Q2, because you're also talking about low order bookings in Q1. Just curious to see if demand has actually gotten worse since that point or if it's kind of been stable at the lower level.

Yeah, I can answer that one. I think that it's being stable. It's not worsening, but it's continuing on a relatively low level.

And then if I look into end markets a little bit, maybe looking at six months compared to last year, I'm seeing train is actually up where energy manufacturing is the main driver of the fall. If you look at energy in particular, which parts are falling there?

Sorry, which parts are falling?

In energy, if you talk about end markets particularly, look at the big ones, train is actually up a little bit and then you have infrastructure being stable and then The fall in sales is in energy and manufacturing. And manufacturing you talked about, and then energy, what is coming down there, and is that temporary?

Yeah, if you look at the energy segment on the group level, it's a combination of Vestimo and Bayer Electronics in those numbers. And for Vestimo, we see that the energy segment is relatively stable, actually, in terms of water intake. It's kind of moving forward. moving a little bit sideways at this point because of the general weaker market, and we did not receive any bigger energy orders in the quarter. And for the electronics, the energy segment is not huge, of course, but also there we do see a bit of a weakening trend.

Okay, thanks for that. And then next question, just general about your comments in your opening statements as well. You're talking about the week order book also for Q3. And just to be clear that you're talking about demand, because when you talk about demand will persist throughout 2024, we're talking about demand to the order intake, basically, if you could just clarify.

Yes, there we are talking about the order intake. Yes, the demand from our customers. Correct. Correct.

And then on Bay Electronics, the mix impact that you're seeing in the quarter, will that remain in the second part of the year as well, or is that done?

I can respond to that one. We had somewhat higher volumes of this display solution volumes that would be phased out. There will still be some deliveries also in the second half of the year, not to the extent that we saw in the second quarter. But it's not finalized everything yet, if that's to be more explicit on that one, Marcus. It's not finalized, but it will be less of the total going forward.

Okay, that's it for me now. Thank you. Thank you, Marcus.

Ladies and gentlemen, as a reminder, should you have a question, please press star one. And there are no further questions at this time. I will turn the call back over to this CEO, Jenny.

Yeah, I can just see here that Mark from Red Eye has posted in the chat here that he seems to have trouble dialing in. So he's placing his questions in the chat. So maybe we should attend to those, right? So the first question for Mark is, can you see those Joakim?

I can see them, yes, I see them now.

I can read the questions.

Mark's first question, will you invest more in blue wireless technology as they continue developing the technology in the future? What are competitors doing in the same field? Would you like to answer that one, Jenny?

Yeah, that is, of course, an interesting question. As I mentioned, this technology is still in a scale-up phase, which is why we chose to do a minority investment so that we can follow this technology, learn about it, and also, of course, help to develop it further. So I think that time will tell what the next step will be. We are very curious about that and very excited about this technology. And there are other players as well looking at this technology. But for the time being, there aren't a lot of companies that have actually managed to productize this millimeter wave technology. So blue seems to be in a somewhat unique position at this point. But yeah, we will follow it and we will see what the next step will be.

The second question by Mark is, you mentioned a slight rebound in Asia, while Germany is a bit weaker for Bayer Electronics. Could you expand on this? What do you see?

Yeah, it's still early days, but we have gotten some signals from Asia and particularly China that the market activity seems to be picking up there from very low levels, we should say, because we have seen a big reduction in demand from the Chinese markets in their electronics for over a year now. But slightly positive signals from China. Let's see what happens there. And then the German market, I think that's just due to the general industrial climate in Germany right now when it comes to manufacturing industries basically where there is a bit of a lower investment cycle which varies because in Vestimo in the segments that we are focusing on Germany is doing really really good so it really depends on what type of business you are focusing on in that market So the third question from Mark

is related to the business activity. He states like this, you had no larger order for Vestame in the quarter, but is the activity still on a normal level across the product portfolio? That's one question. And more specifically, how is the progress in the energy segment?

Yeah. So that's true. We didn't have any larger orders, but I forgot to mention specifically that we did have a very strategically important order in the Indian market for Siemens mobility. They are going to build electric locomotives for Indian railways, and they have picked Vestimo to take care of the wireless communication for those locals. So that's very positive. But anyway, I think that the activity level is still normal. Our salespeople are as active as before. I think the effect that we are seeing is that customers are taking longer to make decisions. Some projects are being postponed and it's just overall taking longer to close deals. And when it comes to the progress in the energy segment, I think we are progressing well there. There's a lot of activity going on. We are participating in a lot of events, exhibitions to really make it known to the market that we are there to stay, so to say, in the energy segment. Activity level is high. We are still waiting for the, so to say, real breakthrough, so to say, when it comes to business development. But I think we are doing the right things there.

Mark's last question is like this. What kind of cost measures have you conducted in Bioelectronics and Vestimo in the quarter? Do you see the margin stabilizing on these levels? Maybe I should answer that one, Jenny. I mean, when it comes to cost measures, I think we have a general cost cautiousness all across, really challenging everything we do. We have been looking at some structural changes as well in some places, and we are actively looking at the use of external resources slash consultants When it comes to margins stabilizing on these levels, it's hard. I'm not sure if he means operating margins or gross margins. I would say gross margins-wise, I think we can expect us to stabilize on the level in Vestamu that we have seen. In Bayer Electronics, I think we had a lower gross margin in in q2 than you can expect going forward as stated before we will have less of the total impact of display solutions going forward that was the questions by mark maybe then we should go to the closing remark yeah i think we have yes i think i've probably

pretty much done the closing remarks already and so if there are no further questions I think the call is finished right ladies and gentlemen this concludes this conference call you may now disconnect thank you