Ependion AB

Thank you very much. Welcome, everybody, to this quarter three presentation. As usual, we have Joakim Laurén and myself, Jenny Sjödahl, sitting here in Malmö for this call today. The agenda is the usual one. I will start with the general business update. Then Joakim will dig deeper into our financial performance. And then I will give some concluding notes and outlook. And then after that, we open up for Q&A. So summarizing quarter three of 2024, we can see that the challenging demand situation that we have been seeing now for quite some time remains. We see a relatively weak demand still in the marketplace in basically all our key segments, which is affecting our order bookings and sales. So the trick now really that we have been focusing a lot on is really to balance the forward-looking activities that we are doing, such as our investment in the India market for Vestimo with short-term cost reductions to balance the lower sales volumes. When we look at the order intake, we see similar order levels as last quarter. No larger orders booked in the period as we sometimes have, but not this time. And we see a similar pattern actually for both Vestimo and Bay Electronics. The sales drop that we see is, of course, compared to an extremely strong quarter free of last year, where we were delivering on a very large late backlog in the Vestamo business entity. So a very strong quarter to compare with. But also sequentially, we see a drop, which is mainly due to that we went into the quarter with an unusually weak order book in the train segment in Vestimo. What is really positive and what I'm really, really happy about, given the situation that we are in, is that we are seeing a very strong development of the gross margin where especially Vestimo shows significant improvement. We have been struggling since the component crisis with very high costs of purchased goods. And despite the price increases, we have had a pressure on the gross margins during that time. And now we are slowly but surely seeing how that level is improving thanks to the cost level being more normalized, but also thanks to us adjusting our labor costs to the lower volumes. So overall on the whole group we see an improvement of 1.7 percentage points driven mainly by Vestamo but also by Bay Electronics. And as I mentioned I think the teams are doing a good job in generally controlling the cost level, everything that we can do to take out costs, we are actually doing to balance the lower deliveries. And we do see, we have the operational leverage that we have been talking about many times. So we do see an EBIT percentage drop versus a very strong quarter last year. But what I'm actually also happy to see is that compared to last quarter, sequentially, we are keeping a stable level on the EBIT percentage side. which is something that we have not historically seen in this group. So that's important to note. So looking a little bit more into the business entities. Bestimo, we do see that customers are being a little bit more cautious. It's the same pattern that we have seen for quite some time now. The high interest rates have led to projects being delayed, hesitation in customers making decision. It is our firm belief that we are not losing market share. We are not losing business, so to say, or customers for that matter. And the underlying long-term demand within the focus segments are assessed still to be very, very robust. So mid-term, we are very positive about that. The sales drop that I mentioned compared to record levels last year was due to a lower order book for this particular quarter. Positively, the India establishment is progressing according to plan and not only are we setting up the organization with all the paperwork related to that, but we are also seeing customers both in this quarter and also in last quarter, which is very positive and with good feedback from the customers in the Indian market. Our plan is to be fully operational in this entity by the end of the year. We are, as you know, also setting up assembly of, as a first step, our rail products in Bangalore in India. And on top of that, we are continuing with important strategic development work in our R&D teams, which are forward looking and which are related to important business opportunities going forward. In Bayer Electronics, orders again impacted by the weak business climates that we have seen for quite a while now. It's also important to remember that the phase out of the product group display solutions is impacting the volumes in this quarter, while the key product, our HMI range, the volumes of that one is remaining stable. And as part of the new strategy, there is a review going on regarding the portfolio in the electronics. We want to prune the portfolio to focus on even more on high margin offerings. So that's where that work is going on. If we look at the sales level last 12 months, they are actually quite stable, but on the lower level than we saw in the 22 and 23. There's a very strong focus in the organization on launching the next generation of HMIs. That is really a key project for Bayer Electronics going forward. And we are very pleased that the first part of this launch will actually happen very soon now in November when the X3 web product will be launched. which also is very well adapted to the software platform WebIQ. So there we will have a very strong offering with those two products combined. And then throughout the rest of 24 and throughout 2025, there will be a gradual release of the whole X3 family, which is something that will lift our competitiveness and the functionality level of this important family. If we look at those volumes in a more graphical way here, you can see what we just mentioned orders at 456 or minus 11% versus last year, sequentially minus five and the sales level minus 20 versus last year, sequentially at minus 16 for the reasons that I just mentioned. only smaller negative effects in the quarter. And even though we have been reducing our backlog now in 2024, we still have a healthy backlog level at around 1 billion Swedish kronor. So with that, I hand over to you Joakim.

Thank you very much. I will take you through more of the numbers and we will start with the opinion. We had the order intake of 456, sales of 493, and then an EBIT of 51 million or 10.3%. And as Jenny said, the drop in profit and profitability compared to last year, that is really due to the lower sales volumes. But then sequentially, the profitability maintained actually went up 0.1% compared to Q2 due to strengths and gross margins, as Jenny pointed out, and then the tight cost control. Looking at the numbers, the total FX impact on the EBIT level compared to last year, here we have somewhat of an uphill. minus 14, so quite significant numbers, 14 million. And the main part of that is then transactional variances. Looking at cash flow, we improved quite significantly compared to last year, and we came in at plus 56 million in cash flow for the quarter. Still, when it comes to working capital, there is more to do to reduce those levels. For those of you that focus on what's below the EBIT line, so to say, you can note that the tax cost rate is somewhat lower, and that's due to that we have some activations of losses carried forward in the quarter. Net income at 31 million and EPS of 1.08. Let's go to Westermilk. Order intake 278 million, sales 269 million and an EBIT of 37 and an EBIT percentage of 13.9. Obviously, orders and sales on similar levels in this quarter. We're actually with a somewhat positive or book to bill above 1, 1.03. Jendi pointed out that we do see a sequential drop of sales. And it was about minus 20%, so it's quite significant. And that's also then behind that is that we had an unusual low order book for the train side. We do want to point out that we increase profitability in Vestamil to this 13.9, despite that we have this drop of sales. And the reason or what's behind that is, gross margins and the tight cost control as said. High activity forward looking on R&D as said. We also want to note or tell you about that we are continuing to look on the efficiency side on the supply chains in Vestamo and one activity that is Decided now is that we will close down a small assembly facility in Switzerland and move that to the Swedish facility in Stua Sundby. The sales and product center will remain in the Swiss entity, so it's only the production side. Last point, last quarter we talked about the minority investment in Blue Wireless. The collaboration work with Blue Wireless is progressing. according to plan. Let's go to Bale Electronics. The order intake of almost 180 and the sales of 224 and an EBIT of 26 million or 11.5%. If you look at the order bookings over time, it is stable on HMIs as Jenny pointed out. And the variations is basically display solutions volumes. And that is also a product area that we have communicated that we are facing out. Sales relatively stable as well. But then you have, again, deliveries of the display solutions. And we communicated last quarter that we had quite a big chunk of display solutions at relatively low margins. We had less of that in this quarter. sequentially basically maintain profitability. And behind that is then the mix of what we are selling and delivering and the fact that we have a really tight cost control in the electronics as well. And as Jenny pointed out, high level of activity on the X3 family. Also, you can note that the fact that we are focusing on x3 we do have an unusual high level of capitalization of r d and that is behind the uh the reason for that is then the focus on x3 and we also want to point out that even though it's not released yet we are depreciating starting depreciation of some of the elements that's been capitalized the software elements already in 2024, impacting the results. That concludes the numbers. So back to you, Jenny, for conclusions.

Thank you for that. So summarizing this, we can see now with three quarters in the pocket that this year will be a transitional year for Appendion after the record strong 2023. And the reason being that the external market situation is weak and uncertain. The order booked for the fourth quarter is relatively weak, similar to what was stated last quarter. But more importantly, we are very confident about the medium and long term outlook. because we are well positioned in attractive markets. And as the demand starts to pick up, we are well positioned to start to grow again and also improve our profitability thanks to our operational leverage. And we are really focusing on what we can affect, i.e. our own activities, really looking at short-term cost savings, but also keeping our eyes on the very important strategic growth initiatives that we are working on, such as Vestamo India, such as the X3 family, and also, in general, a high product development pace in Vestamo tied to important customer opportunities. So we definitely see a potential for margin improvement in the group as demand increases. And just to be clear as well, we are keeping our eyes on our financial targets. The demand market situation is a bit tough right now, but nevertheless, we strongly believe that it is absolutely reachable for us to come back to a growth situation with 10% average annual growth organically. a 15% margin on the group level, and also, of course, a healthy dividend paying policy. So we are still focusing on reaching those targets, of course. Summarizing the outlook, we think that we operate in attractive markets, as I mentioned, with good underlying growth, thanks to digitalization, electrification, sustainability and so on. And therefore, we have good prospects for reaching the targets, as I just mentioned. But we still see a great deal of uncertainty in 2024, both in geopolitical economic terms and so that view remains and that is why our view is that we expect the situation to persist throughout the rest of this year. So with that we would like to open up for Q&A.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Marcus Almarud from Carnegie. Please go ahead.

Hi, Marcus from Carnegie here. I'd like to start question. My first question is on demand. If you can talk a little bit about, I mean, we do see orders, et cetera, but can you talk about underlying demand and what you're seeing in terms of sequential movements? And then also, if you see any tangible signs of improvement, I mean, you're talking a little bit about interest rates and that should increase demand, for instance, for trains and other, those kind of projects. That's my first question.

Yeah. Maybe I can answer that. Yeah, it's always very hard to tell what's going to happen. But my view is that the world has not come to a complete stop. There are still trains being built, there is infrastructure being built and so on. And I think we have come from a situation where customers have had perhaps a little bit higher inventory than usual and are a bit... cautious when it comes to investments, but eventually these investments are going to have to happen. So the longer we see this weak demand situation, the more probable I see that it will start turning in the other direction. And as you mentioned, the interest rate coming down will have an effect on the economic wheels in general. We know that it generally takes time, but Yeah, I think that soon we should have seen the end of this unusually weak demand situation. That is my view.

And when you talk to customers and when you, because I assume that they're quite big projects when you are talking about trains, etc. There's been no changes that you've seen in terms of decisions. It's just a question of hesitations.

Yeah, I think it's a question of hesitation. Our large customers still have very healthy order backlogs that they need to deliver on. The Indian market that we are now entering is opening up new possibilities with new projects, a lot of investments happening there. And looking at the unusually low level that we have seen for some time again, I think that there is a need being built up out there for for solutions and products. Very hard to tell exactly when, but it's not going to last forever, that's for sure.

And then I'm curious to hear about the outpacing of low margin products that you are undertaking in Bay Electronics. Is this a project which has just started or has it gone on for a while? Where are you in that phase?

We communicated this earlier this year that what has been decided with display solutions and then the phase outing of those, the volume is about 50 million that we have guided about and that we expect us to invoice around 30 million in this year. There will be some volumes of that product area also in Q4, but relatively limited. So we are getting close to the end for that. And then added on to this, it should be said that, and Jan stated that earlier, what's ongoing right now is that within Bayer Electronics, they are going through the whole portfolio and looking through on various offerings. And there might be more to come when it comes to phasing out, but that we will come to going forward and then guide on that, of course, with the ambition to make sure that we have a really strong portfolio that we are focusing on to deliver on good margins and by that good profitability going forward. But then it could be that we offer somewhat on the top line for that reason. But we will come back to that going forward.

Okay. Yeah, there was this comment that I was referring to rather than this solution. So it's something that has just started.

It's ongoing. The process is ongoing.

Yeah. Okay. I know it's difficult to say, but on the X3 launch for Q4 next year, is it your view or do you think that there is a lack of or pent-up demand because of this launch or should we expect that things will go on just as normal and they will just take over? What kind of pattern do you expect?

Yeah, good question. First of all, the launch is now this year in November. Just a few weeks or a month from now, we are starting to launch the product. I think that the of course when customers become aware that there is a new product range coming out and there might be such an effect that you are talking about that customers are kind of hesitating to to spec in the the previous generation and are waiting for the new generation for let's say a new product family or a new generation of their products in their turn so there could be partly such an effect. I don't think that it's huge, but definitely the X3 range as it is being launched now, starting now and throughout the next 12 months, is going to help us find and win new business, definitely.

Okay, perfect. Thank you very much.

Thank you, Marcus. The next question comes from Henrik Alveskog from Redye AB. Please go ahead.

Hello. Do you hear me? Yes, we do. Hello. Great, Ben. Just first on, well, obviously you've been able to manage your costs well, given the numbers that you're presenting here today. And I'm just wondering, have you sort of addressed the low hanging fruit up until now or do you still have similar flexibility going forward if this sluggish trend continues, so to speak?

First of all, we don't really expect to see a further drop in volumes compared to now. But if that would happen, then, of course, we would have to, again, look at our cost base. We have a pretty good view on that. But the major steps we have already taken and what we don't want to do is to touch too much on our R&D resources, because we do see that the product development that is happening in both units right now is extremely important and forward looking and close to customers, so to say. So we don't want to risk that. But obviously, we are keeping an eye on volumes and we are doing everything we can, as we did also in this quarter, to balance the cost level to protect a decent margin.

Yeah. Okay, great. Then I'm wondering about what you said here in the report for the train segment. You saw an unusually weak quarter within the trend segment. Was that a temporary dip or is it still weak like that?

Yeah. Yeah, the level that we saw now in quarter three, I see more as a temporary dip because a lot of our big customers are placing orders a long time in advance. And sometimes it happens that a certain quarter is stronger or weaker. So there's an element of that in this quarter. We also do see and have seen for some time a lower order intake from the train segment compared to the extremely high levels that we had back in 2023. As I mentioned before, we don't think that that is due to our customers' order backlog or success on the market is any worse. We think it's more related to customers having product on stock and perhaps some of their delivery projects of rolling stock being pushed into the future affecting their demand on us, so to say. So it's more market logic that is happening in that respect.

Right. Okay. And you also mentioned here that you will close down the manufacturing unit in Switzerland. I assume it's a very small unit, but should we expect some sort of the one-off costs in the fourth quarter?

No, not really. This is a small unit, as you say, and the project will go on until quarter two next year at the latest, and it will be finalized. We don't foresee any major restructuring costs because of the small team that we have there, and some of them we can reallocate to other positions and so on. So no, there is no... Nothing big there.

To be added, I mean, there is a small efficiency coming out of this. So that will actually, once this is all done, we will save some cost on it. But it's still, it's not the big numbers. But yeah.

And then just on Blue Wireless and your investment in that company. I'm not sure if you mentioned it here, but I think you did in the previous report. You said something like you will address the market jointly. Just so I understand, does that mean that you or Vestermool will market their products when they address customers or is it some sort of other setup?

Mm-hmm. Yeah, it's actually a partnership set up whereby Vestimo will be offering this product range as a Vestimo offering, so to say. However, right now we are still in the startup phase, getting to know each other, looking at business opportunities together. But the idea is that Vestimo will include this offering as part of the Vestimo rail portfolio.

And could you say something about their pipeline of projects? There are two projects I understand where you have already started delivering or will deliver soon. But beyond that?

Yeah, I think they have a healthy pipeline and we are starting to add now to that pipeline, even though, of course, we know in the rail industry that things... take time. What is very positive is that the project that Blue delivered to in 2022, 2023 in California for Caltrain is now operational. So people can actually go there and try out the gigabit connectivity in real life, so to say, on these trains. And this is something that we believe will be very important for customers actually looking at this technology and making the choice so that's a major milestone so we are working on the pipeline but we also know that in the rail industry business cycles are long so we need to be a little bit patient but we are excited about about the opportunities in this space okay great thanks that was all from me thank you

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for written questions or closing comments.

No written questions. So with that, we thank you all for attending this call and wish you all a great weekend when it's time for that. Thank you.

Thank you. Bye-bye.