Ependion AB

Thank you very much and welcome everyone to Appendion's quarter four and full year report. So with me today as usual I have Joakim Larene, we are both here in Malmö today. And the agenda is same as usual, I will start by giving a general update, then Joakim will dig a little bit deeper into the financial performance and then I will conclude with the concluding notes and outlook and after that we will open up for Q&A. So let's get started. If we look at the fourth quarter, it came in above our expectations with an order intake that was 20% higher than the same period last year and the increase was actually seen across both business entities and actually also across all our focus segments. And also the sales number came in at the stable level but sequentially a step up compared to the rather weak quarter three which was driven then mainly by Vestimo. It's good to see that the strong gross margin development that we have seen in Vestimo for some time actually remains and I do see that this gross margin level is sustainable over time and it's due to the changes that we have done in the supply chain in terms of improving efficiency, streamlining operations, working on material costs and so on, all that has, and also the pricing factor of course, all that has led to this increase in gross margin in Vestimo. In Veer Electronics, the quarter was affected by an unfavorable mix with a larger portion of display solution sales and we have been talking about that throughout 2024. It is a conscious decision to actually phase out these low margin products but of course as we ship them out in the quarter it does have an unfavorable effect on Veer Electronics margins. We continue to keep a very tight control over our costs but at the same time we are moving ahead with forward-looking investments in line with our strategies so that's good. We did see an improved profitability in the quarter where Vestimo actually posed an all-time high level in terms of EBIT percentage while Veer Electronics came in at a similar level as last year, actually quite low level, explained by what I just mentioned. But, and the full year EBIT for 2024 ended up at 11.3, concluding a rather challenging year actually for the group. Positive was that we see a continued good free cash flow in the quarter, 80 million Swedish kronor and if we look at the whole year we ended up at the record high level of 187 million Swedish kronor. Looking a little bit deeper into the two business entities, I mentioned the order step up in particular in Vestimo. It's good to see that after five quarters of rather sluggish order intake we did see a pretty big step up actually in the fourth quarter and it was driven by all focus segments but in particular the train segment actually doubled in terms of order intake compared to the low level that we saw in the third quarter of 2024. And we did receive sizable orders from several of our key train customers. Sales also increased sequentially, quite significantly with 29% and ended quite close actually to last year. The most important activity that we are doing right now in terms of forward looking investments, as you are well aware, is the establishment of Vestimo India. That is progressing absolutely on plan. I'm very pleased to see that. The organization is set up, the production equipment is in place and installed and we have a strong team in place there that are already starting to interact with customers locally in India. So that's a very positive development. I mentioned the strong profitability in Vestimo at an all time high EBIT, which was driven by the good gross margin level that I mentioned before in combination with, of course, a tight cost control. And I think that this actually shows the inherent earnings capacity that we see in Vestimo with those gross margin levels and a decent volume. We do get really nice EBIT levels. In Bayer Electronics, we also see the orders pick up in Q4 compared to the last two quarters and they also grew 8% compared to the same quarter last year. We're pleased to see that the marine segment continues to develop well. That is really mainly the actually the key focus, I would say, of Bayer Electronics, even though we are also focusing on the manufacturing and the rugged environment segments as well. But also the manufacturing side picked up in the quarter compared to the rather flat development that we had seen earlier in the year. Sales for Bayer Electronics at quite stable levels, but I mentioned the unfavorable mix in the quarter. This is actually the last, almost the last portion of display solutions volumes. Joakim will come back to that a little bit later, but that had an effect in the quarter, which actually weighed down then on the EBIT level, which was at a similar level as last year. But again, we know why and it's the result also of conscious decisions that we have taken in the business entity. All right, so if we look at this then in a graphical view, we can see that there is a bounce back, so to say, both in terms of order intake and sales on the order intake side. You can see there how this quarter actually was stronger than the last five quarters, not quite as strong as the high levels that we had back in 2023, where we had very, very high order intake from our main train customer. So overall, a very strong quarter, 20% up versus last year. Sales at a similar level compared to last year, as you can see here, but a big step up from quarter three of 2024. There were no translation effects, currency effects on the volumes and the backlog is still at a healthy one billion Swedish kronor. So with that, I will hand over to you Joakim.

Thank you very much Jenny. I will take you through more of the detailed financials. I will start with the opinion level where we then see an increase in the order intake and profitability. Order intake came in in the quarter at 572 million, sales at 578 million and EBIT at 65, giving an EBIT margin of 11.3. And as Jenny pointed out, the increases in the profitability is very much driven by the gross margin effects, especially then in Westermil. And we want to point out also that there are sequential improvements compared to the last quarters in 2024 as well. Including in the numbers, we do have a negative effects impact compared to last year, and it amounts to minus four million in the quarter, mainly then transactional variances. Jenny pointed out the good cash flow. We had plus 80 million in the quarter. And the main driver, except of course, compared to the profit generation, is the quite significant reductions of the working capital, predominantly the inventory levels, which is something that we have talked about. We have been on a too high level, I would say. But but now we came down in a decent way in the quarter. That's good to see. Net income at 35, slight improvement to last year. And the same goes with earnings per share at 122. I also want to point out that we did a small divestment in the quarter. We sold out the partially owned production unit in Taiwan, a small one related to the previous Karenix range that has then been sold off with a minimal impact on the financials. Let's go to Westermil, where we then see a strong order intake and an all time high profitability. We had an order intake of 354 million in the quarter, sales at 347 and an EBIT of almost 62 or an EBIT margin of 17.7. So it's good to see the step up in order and take as Jenny pointed out. And we can also conclude now that we have a quarter with a book to bill ratio above one at 1.00. We talked about the bounce back and and compared to when we went into the quarter, we talked about the relatively low order backlog going in. But we have had really significant book and turn volumes in the quarter giving this effect. And that, of course, is something that we are happy about. And the 17.7 percent profitability in the quarter, the all time high level, as Jenny pointed out, it is the gross margin improvements driven by the operational excellence or efficiency in the organization, the way we do things in the supply chain combined with a very tight cost control. Nice to see. Jenny has already talked about India. And we also want to point out that the minority investment that we did early in the year with Blue in Blue Wireless, that is then progressing according to our plans. Then we have Bayer Electronics. Here we note improved order bookings, but an unfavorable mix in the quarter in the sales. So order intake to 19 million, the sales of 232 and an ebit of 19 or an ebit percentage of 8.3. So if we look at the order bookings and we compare that to last year, it is an improvement and also sequentially. Still, we are reducing our backlog and that relates to a big portion to the phase out of the products. And I will guide you with the coming slide here on how the phase out products will impact. So we all get the numbers right. Sales levels in the quarter are quite stable. Similar levels as we've seen now for quite some time and profitability, as Jenny pointed out, This is due to the high portion of low margin deliveries in the quarter. Some combination or some impact also of the fact that we have somewhat higher depreciation levels. We do want to point out that we have also that we have said for quite some time now, there is a high level of R&D activities ongoing in Bayer Electronics. It is the new generation of HMI's. We call them the X3 families that there's a lot of activities ongoing. And if you look at the R&D spend, we are on a high level in Bayer Electronics. And that is the reason behind it and also the reason why we see also relatively high R&D capitalization level. Yes, my final slide is related to to bring clarity to all of you when it comes to the phase out in Bayer Electronics. We did inform in the Q1 report in 2024 about the display solutions volumes in Asia. We had 50 million in 2023. We said then that we expect it to be around 30 million in 2024 and onwards it will be zero. And those are the numbers also in the actuals. What we now add on is that that we have another part of low margin products that in 2024 were about 70 million. That will be phased out now. We expect that to be around 20 million spilling over, you could say, into this year 2025. So if you summarize then 2024, it's about 100 million that will go to 20 million in 2025 and onwards it will be zero. And again, we do this because this is relatively low margin. We believe that we will focus according to our strategies. And this is in the line of the strategies that Christine or her team has presented earlier. And of course, as we are phasing out volumes in the beginning of 2025 or the first half of 2025, we will, of course, adjust and align our cost base accordingly. So this one is to bring clarity and hopefully this is help helping you to understand what's going to happen in better economics. With that, I conclude the financials and over to you, Jenny, to conclude.

Thank you Joakim. So as we have seen, the fourth quarter actually marked a shift from the somewhat hesitant pattern that we have seen throughout all of 2024. And actually starting already end of 2023 in terms of customer demand. So that is very positive. We feel that it's still too early to say if it is really a trend shift that we are seeing because external factors, as we all know, remain uncertain. So therefore, our cautious approach to costs remain and we shall see what happens now in the beginning of 2025. But medium and long term, I am very, very confident about our ability to continue to grow profitably. And we have also done a lot of improvements in the two business entities under the hood throughout 2024 and also earlier in 2023. So I feel that we have a very strong platform now in the group to actually grow from, so to say. And of course, in 2024, we didn't really move towards our financial targets. Actually, not at all, you can say. And we are, of course, not pleased with that. But we definitely have those targets in front of us and we are relentlessly working towards achieving those financial targets. And just as a reminder, I think most of you are aware already, but our financial targets are that we should grow 10 percent on average organically and then acquired growth will be added to that. Our profitability level in the group should be at least 15 percent on EBIT level. And we should also be a dividend paying company. So concluding that and talking a little bit about the outlook, I believe that we as a company are well positioned in attractive markets that are bound to grow in the coming years due to the big megatrends that we are seeing in terms of digitalization, electrification and so on. So there's no doubt about that. I feel very confident with that. As I mentioned before, in the near term, there is significant uncertainty still both in a geopolitical and economic sense. But we are actually carefully optimistic about the outlook for the full year 2025. So that concludes our presentation. So now we would like to open up for Q&A.

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

Yeah. Hi, Jenny. Hi Joakim. Marcus from Carnegie. Maybe starting out with the demand and you say that, I mean, you saw very strong order intake and you saw kind of improvements of demand increasing after hesitation. Can you just talk a little bit more about what kind of conversations you're having with your customers? I understand that you don't want to give an outlook and there's still uncertainty. But what is your feeling when you talk to them in terms of in terms of demand?

Yeah, I can answer that one. Yeah, that is actually the reason why we are saying that we are cautiously optimistic, because of course there has been a long period now where, you know, customers have hesitated. Projects have been delayed and postponed, not necessarily cancelled. But, you know, there's been a delay in the whole chain, so to say. And some customers, to be fair, have also had inventory levels that they have been using, so to say, throughout 2024. I do feel now that, you know, the world has not come to a stop. There is still stuff being manufactured. Trains are being ordered and so on and so forth. So I do feel that it is improving, improving a little bit, you know, in terms of some projects that have been delayed now restarting again. So slowly we are seeing a slight improvement. But again, it's too early to say whether it's really across the line and whether it's going to continue that way. But cautiously optimistic in that respect.

And if I continue on the same track and talk about Western moves, so you talked a little about trains sticking out and we know that train has been weak, especially in Q3. Do you think there is an element of pent up demand here or is it the same thing there is very uncertain still? Or do you feel the hesitation is kind of fading a bit in the train segment in particular? Yeah,

it's as we have said many times when it comes to our train customers, the order intake or the orders that they place on us can actually vary quite a lot between quarters. There can be larger orders in some quarters and not in others and so on. So actually you should not draw too much conclusion depending on just one quarter, because that can happen. But in general, our train customers have very strong order backlogs from their customers in turn. And of course, in order to invoice and get their deliveries out, they need to build trains basically. So therefore there is definitely an underlying demand. And I think that there has been a certain element of inventory depletion at some of our customers also that they have been sitting on larger inventories. That actually stemmed from the component crisis. So, yes, I am expecting the demand to slowly but steadily pick up a little bit there at least compared to the low levels that we saw earlier in 2024.

And if I continue on the margin side and starting with Bestimo, which I mean the best margin ever in the segment, you talked a little bit about the drivers and better gross margin, but can you maybe elaborate a little bit more? We've been talking historically a lot about the operating leverage in the business. And there's nothing on that here because your negative growth still year on year. So can you can just talk a little bit more? Is there any mix, anything else that kind of sticks out that can explain this? In

Bestimo, it's not so much about mix, actually, as it is about all the work that has been done in the supply chain to actually increase efficiency and operational excellence. We talked about it quite a lot during the component crisis that our production was running in an extremely inefficient way. The production planning was a mess really because component shortage forced us to actually replan basically every day and then just try to get out as much as we could to our customers. So that was not an efficient way of running our operations. Since then, we have put a very solid plan in place in terms of how our production system should look like going forward. And we have started to implement that plan. And there are several things there. It's about consolidating our our footprint, which we are doing now. We are moving the small production set up in Switzerland to Sweden. We have negotiated component prices with our suppliers and we have done some redesigns in order to take costs down. But we have also streamlined our personnel, so to say, in the production sites to really run because we are running in a much smoother way thanks to improved processes, improved system support and so on. So a lot of things have been going on in parallel there in order to to reach this higher level. And that is also true. It's true for Westermor here in Sweden. And it's also true for our subsidiaries in Ireland and Germany and Switzerland, where we have also been working very diligently with with pricing management towards our customers, which has brought up the gross margin also in in those units. So it's a number of things that have led to this improvement.

But if so, if I read you right, there's nothing to do with any particular order, which was more profitable. Anything like that is really under the hood work that has been done and should hence be more sustainable also going forward. These kind of levels.

Yes, definitely.

OK, perfect. And then maybe moving on to electronics. Just the we've talked about the spatial solutions before the other low margin products have been phased out to 70 million. How have those been being distributed throughout the year? Has it been most of this at the end of the year and been quite fast or has it been quite even throughout the year?

The display solutions, volume and the other low margins products, which the other low margin products includes the non Asian display solutions volumes, to be clear, and also some IDC kind of products, et cetera. I would say that that has been relatively well spread over the year. Quite a big chunk in Q4. In Q3, however, if you remember what we stated then, there we had a favorable mix, not unfavorable mix. So it was less of that in Q3. So and then as we then stated in the specific slide, mainly volumes for 2025, that will be in the first and mainly in the first. And that could be a very small portion in the second quarter as well. But it's definitely the first half.

And if you would take out these 100 million of one payroll products that you have been facing out with low lower margins, has the underlying margins, including that, been kind of stable?

I would say in the gross margin on all the other products, I would say has been quite stable. Yes. OK, perfect. So the next one is on X3. Say again. Sorry. Now, the the the the we have seen in Bayer Electronics over the year between the various quarters is due to different mix of low margin. And and you could say the HMI volumes. And so it's not so much that we have taken huge steps in terms of efficiency and and all that that we have been very much taking steps forward when it comes to price management, etc. We are, of course, doing that on a regular basis. Of course, we are working with supplying components, etc. The procurement side to to improve. But but the big steps or the big swings has been because of the the mix of favorable and unfavorable profitability, you could say, in the in the deliveries.

OK,

OK.

And then finally, maybe a couple of words on how the actually launches is progressing.

Yeah, I think it's progressing according to plan. The launch is happening in several stages. And the first product that we actually launched in quarter four is the Web version of X3, meaning that it's a it's a panel that is made for for the web based HMI. And that is something that has been really lacking in our portfolio. So it was a pretty good thing to actually start with that. And but the whole family has been shown that I think it's 25 exhibitions throughout 2024, even though we we hadn't officially launched the product. So a lot of customers have already seen X3. And now in 2025, we are continuing with the stepwise launch of the different versions of X3. And then we are, of course, talking to a lot of customers right now about this new new generation. So so that's a very positive milestone that this this product range is actually now starting to come out.

OK, perfect. Thank you very much.

Thank you, Marcus.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Henrik Alviskog from Read.iAB. Please go ahead.

OK, hello, this is Henrik. And well, congrats on strong numbers.

Thank you.

You hear me? Yes, we

do. Hey, Henrik. Thank you. OK. OK.

Hello. Hey. So I have a few odd questions, but let me start with one on the gross margin side. And on a few occasions, you have been generous enough to give us the actual numbers for the two business units. Would you care to do that for the fourth quarter?

We are we are not on a general basis giving exact numbers, but the reference points that we have given before. And for you who don't remember, we have talked about 50 plus for both business entities. As we have said now, we have seen good step ups in the gross margins in Westmoor. So obviously it's higher numbers, but you won't get more details than that at the moment. OK.

All right. And then, yes, I'm interested to hear. Well, regarding the overall market situation, when it comes to the US market, I saw in the report that you both sales increased in the Americas. But for the US market in particular, I'm interested to hear if well, with the election last fall, I understand that the market was kind of hesitant. And now we have the discussions around tariffs, et cetera. What do you hear from our customers in the US in terms of, well, potentially holding back business decisions?

I think it's a little bit too early to say, actually. But of course, whether you like it or not, there will probably be more investment in North America in the oil and gas industry, which is an industry whereby electronics has several good customers, which probably have been a little bit hesitant to see who was elected president of the United States. So that that could, of course, be a positive development. In general, we feel that North America is a growth market for us. I mean, electronics have been pretty strong there for a long time, but best of most business has not developed as good as I would have wanted it to. So North America is definitely a growth area for us. And it's a big market that we are relatively small. So we see growth potential both in the rail industry there, where we have very good customer relationships, but also, of course, on the energy side, where there's a huge investment need in the power grids, for example, in the United States, as it is almost everywhere else. And we have started to gain some traction in that market. So we look at North America in a positive way, I would say, going forward.

OK. And then I was curious about the contract that you received or the order you received from German company Festo. That was also mentioned on Bayer Electronics website. And they, well, you wrote that it was a significant contract. So I understand Festo is a new customer and well, and well, if you could just give some color on why you think this is a significant contract.

Well, first of all, it is definitely a new customer. And it's an example of the new strategy that Bayer has to really go after medium sized OEM customers in the manufacturing industry. And the other significance of this order is that we actually won it thanks to the Web IQ smart HMI acquisitions that we have done. And because that was a decisive factor for Festo to actually choose Bayer Electronics. So in that respect, it's very much the kind of customers that we want to see more of going forward.

All right. And then just regarding the pruning of the product portfolio in Bayer Electronics. Is this going to be a smooth transition, so to speak, or will there potentially be any temporary costs that will be incurred because of this?

In general, you could say that there would be a smooth transition. I mean, this is something that we have planned for over quite some time. And it's, as Jenny said earlier, I want to emphasize it's something that we've decided to do because we think it's the right thing to do to focus and have a more solid base to grow profitable going forward. So that's the idea. Of course, when we are aligning our cost base, there could always be some cost elements related to that. But it's not significant enough to be material.

OK, excellent. Thanks. That was all for me. Thank you,

Henrik.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Yes, we actually do have a written question here from one of the participants in the call. So the question is, product development expenditure as percentage of sales continue to increase. Can you give us some more insight in what opportunities you are investing in and the top priorities in the R&D pipeline? So, yeah, that is true. We have even though we have been focusing a lot on costs during 2024, we have actually more or less protected our R&D organizations because we feel that strategically, there is so much important stuff going on there that customers are waiting for, so to say. So we have so that is why the percentage has gone up slightly compared to previous year because our volume has dropped a little bit. It's two things in Bayer Electronics, the X3 family, as we have been talking about, absolutely crucial for the entity to get that new family out. So that is leading to a higher than normal R&D spend in Bayer Electronics compared to a more sustainable long term level. In Vestimo, we see a continued high level. However, the R&D activity in Vestimo is very much very tightly connected to customer opportunities and market opportunities. So we feel very confident that every dollar that we are spending in our R&D investment there actually is going to pay off, so to say, in terms of increased growth. So, yes, it is a high level. We are expecting it to come down over time in especially in Bayer Electronics, but we feel that this is investment for the future and it's crucial for us to do that. So I think with that, that's no more questions written here neither. So with that, we will conclude the call. Thank you very much and have a great weekend.

Thank you.