Ependion AB

Thank you. Hi everyone and welcome to the Q1 update for Ependion. As usual it is myself and Joakim Laurén hosting the call. Myself being in Västerås today and Joakim is in Malmö. So the agenda is almost as usual with one exception. We are going to share a few say a few words on the recent acquisition of Velotech. Apart from that, the agenda looks like it usually does. So, let's move into business update for the quarter then, in general. Well, it was an eventful first quarter for Ependion. Lots of activities and progressive investments in combination with a cost-saving program, as you have probably seen. The highlight for the quarter was that order intake increased by 5% and both business entities contributed to this. Vestimo with 2% and Bayer Electronics with 8%. Sales, however, came in lower than last year, driven by both business entities. It could be important to remember that Vestamo in particular had a very strong comparison quarter in 2024 due to some catching up effects from the components crisis in 2023. We have implemented the cost saving program in the Bayer Electronics business entity. We are of course not satisfied with the profitability level of the group of 9% driven by the weak result in Bayer Electronics. This is a step in order to safeguard profitability going forward. Earnings then came in at 49 million kronor or 9%. This result was impacted by a few things. Negative currency effects being one and quite a big chunk of non-recurring cost items of in total 10 million Swedish kronor. Joakim will come back and elaborate a little bit more on that. What I'm extremely pleased about, however, is the agreement that we did beginning of April to acquire the German company Velotech. I will come back to that in a moment, but the strategic rationale behind this is actually twofold. One is that it significantly strengthens our position in the energy segment, which is one of our key segments, as I think you are all aware. and in addition to that it gives us access to a complementary new technology which we call edge computing and again i will share a few words on that in just a bit looking a little bit deeper into the two business entities vestimo as i mentioned a relatively stable quarter orders at almost the same level as last year as you all know by now the order intake in vestimo can vary quite a lot between quarters due to how larger orders from our trained customers for example fall in the different quarters but now we can see that we have had a little bit less of train bookings in this quarter while our energy bookings were at stable levels. One highlight in the quarter and we have been talking a lot about the Vestamo India establishment we actually inaugurated and this entity officially together with customers now in march and and it was very very very well received by our customers um and we also received our first local order of 11 million kroner in in march and that was from a one of the big local rolling stock manufacturers in India. So I think we're off to a really good start there and I'm excited about the future of Vestamo India. Sales, as I mentioned, came in lower than the strong Q1 last year. But on the other hand, we do see a continued strong gross margin in Vestamo and in combination with a solid cost control, we managed to maintain a stable and relatively high profitability level at 15.7% for the period. This actually also includes acquisition related costs of 2.5 million. So taking that into account, we would be at 16 and a half actually. Bayer Electronics, the highlight there, if we start with the positive, and I think this is a good sign, is that orders are actually up 8%. And that is despite the fact that there's no order volume related to the phased out products included in this quarter at all. And that means that order intake of our key product range, the HMIs, increased at 18% in the quarter. So that's really positive to see. We do see a pickup actually in Bayer Electronics from the Asian region, which has been extremely weak now for quite some time. And we see that picking up, albeit from low levels, but still moving in the right direction. Sales declined slightly and there were still some final deliveries of these low margin products that we have been talking about for quite some time now. But those are the last deliveries that actually came out now in the quarter. We had a pretty strong negative FX impact in the quarter, which had a big hit on the result. And this combined with an unfavorable product mix and also the restructuring cost, we came in at the very weak 6.7% in the period. On a positive note, deliveries of the new X3 family has started now, early April after the quarter. And we are very excited about the second quarter now where the main part of the new X3 series will actually be launched. We are also very proud that this new product range has received the Red Dot Award, which is a design award really for 2025, which is a really positive thing as well. So looking at the volumes in a more graphical format, as I mentioned, order intake came up and you can see that we didn't quite reach the level of Q4, which was a relatively strong quarter. But if you compare to the order intake end of 2023 and the first three quarters of 2024, you can still see that it is a step up compared to that period. Sales, however, has not picked up significantly. We are down 8%, 9% compared to last year. But our book to bill is at least around one now for the first quarter. We do hope, of course, to see that becoming bigger, so to say, going forward. But at least it's... it's stable at one and the backlog is still at a decent one billion Swedish kronor for the group. So a few words about Velotech. I know some of you joined the call that we had right after the acquisition, but I just want to remind everybody why we are doing this. This is a significant acquisition for Vestamo and for Appendion. And as I said, two main reasons for doing this. First of all, Velotech is a very strong player in the fast growing market of substation automation. These industrial servers that you see on the picture here are actually playing a key role in digitalizing the substations and also eventually virtualizing a lot of the functionality that you have inside a substation so that you can actually remove more and more hardware and replace it with software functions running on such a computer. So VLOTech is really focusing on large system integrators in the energy sector. They also play in the manufacturing segment with strong relationships to some very interesting machine builders. They have been around for a long time and their experience in the substation automation market also goes back a long time. So very skilled team actually and I'm very excited about joining forces with them. Around 70 employees in Lär in Germany and the sales last year of 24 million euros. And they have shown a very stable growth actually over the last years, which is also positive. EBIT margins slightly below Vestimo at this point, but as we have seen with our other acquisitions, this is of course something that we will work with going forward. But strong and mature business, I would say. um so looking a little bit on on the energy market it's uh it's interesting to see what's actually going on when it comes to the power grids i mean you can just see that what happened in spain yesterday with this big power outage it is clear that the power grids need modernization they are very old in europe but also in other parts of the world and there is massive investment happening into the power grids both in Europe but all around the world actually in order to cater for the increased need of electricity in the next decades. And a lot of this investment is actually going into digitalization of the substations because that's the only way that the grid owners can actually manage and control and protect the grid stability. So we see a lot of opportunity in this area going forward. And with the Velotech acquisition, we strengthen our position significantly. They are very knowledgeable in the area of substation automation and they have excellent relationships with many of the key players in this industry. So with that, I hand over to you Joakim to give you a little bit more detail on the financing of this acquisition.

Thank you Jenny. Some facts on the acquisition and some words about the financing also. The initial payment at closing will be 35 million on a cash and debt free basis. And the agreement also includes performance-based earn-out opportunity up to 14.8 million euros. And that will then be depending on result achievements in 2025 and 2026. And this acquisition is expected to be contributing to our EPS going forward. When it comes to closing, the completion of this acquisition is expected to occur now within this quarter, the second quarter this year. When it comes to financing, we will ask the General Meeting on the 13th of May to give a mandate of doing a directed share issue of 300 million. And that will then part finance the acquisition. The rest will come from existing facilities and existing cash that we have within the group. If for some reason that we don't expect the share issue not to take place before closing, then there is a bridge facility in place. We also want to point out that Stenadaktum and Svaldo, the two largest shareholders of the group, they have expressed that they have the intention to invest in the directed share issue up to their corresponding ownership. And in total, Stena and Soldo together, they own about 45% of the shares in Ependion. That completes the words on Velotech. So then let's move forward into the financials, more details. We start with Ependion. The headline, order growth and challenging profitability. Order intake of 551 million in the quarter, sales of 545 and then an EBIT of 49 million or 9%. As Jenny pointed out, the earnings have been impacted by the negative effects and the unfavorable mix within Bayer Electronics and then these non-recurring cost items of about 10 million. In the report, we have been defining these 10 million, but I can remind you, there is these restructuring costs within Bayer Electronics of 3.4 million. We have transactional costs related to the Velotech acquisition in Vestamil of 2.5. And then we have the balance is some one-off items within the parent company. FX, as stated, that was against us in the quarter, about 4 million, mainly transactional variances, and that is basically all within Bayer Electronics in the quarter. Then some words on tariffs that everyone almost is talking about right now. No financial impact for Appendion regarding the tariffs in the quarter. We have ongoing activities to prepare for mitigation of the potential impact. both in Vestamo and in Bayer Electronics. And to give you a rough understanding of the exposure, in total we have about 300 million of an annual sales volumes in the US. Free cash flow in the quarter at minus 12. Normally we do have a weak cash flow in the first quarter and so also this year. Net income 32 million and an EPS of 1.10. Let's move on to Vestamu. We can conclude a solid profitability development for Vestamu in the quarter with an order intake of 317 million, sales of 321 million and an EBIT of just north of 50 million or 15.7%. Book-to-bill Investimo at 0.99, so basically at one. And we have also heard from Jenny that the reason why we see the drop in sales, well, we have a very tough comparison quarter where we have some spillovers on 2023 into the first quarter last year. But as Jenny also said, solid profitability in the quarter. Good gross margin development, really, depending on the fact that we have lower material costs and keeping prices, and then a solid cost control within the business entity. And we have also taken acquisition related cost of 2.5 in the quarter for Vestino. So the stability and good profitability in Vestino in this quarter. then Bayer Electronics here we do see the order growth and then we have as Jenny said also taking the cost reduction program order intake 235 million for the quarter sales 226 and an EBIT of 15 or 6.7 orders then plus eight as stated and As Jenny also stated before, HMIs were up at 18%. So that is a really nice development that we are happy to see. Booked a bill for Bayer Electronics at 1.04 for the quarter. Looking at the sales levels, you can see that in the graph in the bottom left corner, basically moving sideways, quite stable. But in this quarter also, we do have some final deliveries of the phased out products, the ones that we have talked about for quite some time. And we also gave guidance on the volumes last quarter presentation. And as stated before, the FX is impacting quite heavily for Bayer Electronics in the quarter, minus 4 million. We have the restructuring cost of 3.4, and this unfavorable mix, that is the reason why we came in as low as these 6.7%. Some words on the cost reduction program that we have implemented in the quarter. it affects 33 people positions mainly in the us and in taiwan and that will reduce our cost base with 22 million on an annual basis about 18 million of these will then impact this current year 2025 that concludes the financials so over to you jenny

Thank you very much, Joakim. So with that, concluding notes on this quarter. Well, two things. There are a lot of positive activities going on that will build our capability for growth going forward. For example, the establishment in India, the X3 range in Bayer Electronics that is about to be launched now in the near future, and also the acquisition of Velotech. However, we are of course not satisfied with the financial performance in the quarter and that is also why we have taken this step to reduce costs significantly in Bayer Electronics. It is also still positive to see that we see a high activity level among our customers despite the turbulent times. really hard to say how the trade barriers and the trade war is going to affect our customers. The uncertainty is high, the unpredictability, the situation is of course also worrying and that's why we are monitoring the situation really closely and we maintain our cautious approach to costs in this environment. However, as before, medium and long term, we are very confident about our ability to continue our profitable growth journey because we are well positioned in segments that are bound to grow due to the big mega trends that we are always talking about, the electrification, sustainability, digitalization and so on. So we continue to balance cost discipline with these future investments as I mentioned and of course we are focusing on what we can influence and are committed to creating value regardless of the market conditions. So, the financial targets. Well, you can argue that we are not exactly moving in the right direction in this quarter when it comes to our financial targets. However, I remain confident that these financial targets are within reach for Appendion, of course. a bit of tailwind will be needed in terms of market conditions in order, because as you all know, we have a very high operational leverage in our business. So volumes matter a lot when it comes to profitability. So again, focusing on what we can influence step-by-step building a stronger and better company is what we are focusing on. And our goal is still to reach these financial targets over time. Outlook, harder than ever, of course, to say much about the future. We are merely just concluding that the uncertainty remains high. It's even higher than it was before the new administration took office. And that's why the short-term outlook for us is really difficult to assess at this point.

so with that that concludes our presentation and we now open up for q a 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 Henrik Alveskog from Red Eye AB. Please go ahead.

Okay, hello, do you hear me?

Yes. Hi, Henrik.

Great, thanks. Hi. So first, on gross margins, 54% is quite impressive. Is this then all related to improvements in Vestamu, considering you said that Bayer Electronics had a unfavorable sales mix.

Yes. Do you want to answer that Joachim?

Don't you hear me? Yeah. Very good. Yes. Right. So, Henrik, the 54 is driven by Vesternil. Correct. Bayer is moving sideways. You could say complete if we compare to what we saw last quarter.

And Bayer Electronics unfavorable sales mix, is that related to these phased out products that you are, I don't know, accelerating now?

not accelerating, but final deliveries. And that we have guided that we will have that also in the first part of this year. And that is also what we see. So correctly, though, so that is the unfavorable mix.

Yeah, yeah. And then just very briefly on US tariffs. If I understand correctly, it's a 10% tariff from imports from Taiwan also to the US now and the European Union. And are you basically adding this 10% to your quotes for new contracts in the US or how does it work?

When it comes to tariffs, there are also some exceptions. Some products are actually exempted for these tariffs. Some of our product range is actually within that range for now. As we all know, things can change quite rapidly. And then also you can actually do some activities when it comes to how you handle the transfer or the shipment into the country. That to mitigate somewhat and that is also looked upon. um when it comes to handling um or compensating for for this we have stated that price adjustment can absolutely be one of the ways that we will mitigate but first we need to get clarity on the exposure fully and and that is now ongoing but we are not uh ruling out the fact of using the price mechanism to compensate ourselves.

Okay, thanks. And the cost cuts that you're doing now in Bayer Electronics, is that entirely related to the phase-out product, or is it also something more? And if you could give us some color on that.

That is a combination. As Jenny said, we are not happy with the profitability development. Some of it we have stated before that we will adjust according to the fact that we are facing our products, but also to improve our profitability going forward. So it's a combination, you could say. And I want to express that the program has been done. So it's all done within the quarter.

Great. And just on the acquisition of Velotech, I'm interested in the earn out, the potential earn out. Is that related to improved earnings compared to 2024? And if they don't improve them, there will be no earn out?

I guess that one is for me also, Jenny. Yeah. We won't go too deep into all the details. But in general, yes, the way you express it is correct. To achieve an earn out, you need to see improvements. Yes. So if we see improvements, that could be valid.

Yeah. And how difficult is it to reach the maximum amount? Would you be surprised if you paid the maximum amount?

To reach the cap level, it needs to be a very, very strong development. And then we will be happy, our shareholders will be happy, and so will the sellers be. That's why you have earn-out mechanisms in acquisitions like this.

Yeah, of course. And finally, I read on Velotech's homepage that they expect closing to be June 2nd. Is that also your plan?

That is in line with what we have stated. We have stated that it will take place in the quarter.

Yeah, OK, great. That's all for me, thanks.

Thanks Henrik.

The next question comes from Marcus Almarid from Carnegie. Please go ahead.

Yeah, hi, Marcus from Carnegie. Can you hear me? Yes, hi, Marcus. Yes, perfect, perfect. So my first question is just to make sure that the mix effect they're seeing, the order intake for the phased out products is zero. So I mean, that means that the mix effect going forward is zero. is zero there will be no more all of that is done behind us yes correct and then can you say anything about you saw the HMI HMI audio intake was up by 18 in the quarter can you say anything about the the margin in the order book in Bay electronics I mean without giving specific numbers but if you can talk a little bit about direction of the order book

In general, if we compare to the products that we're facing out, HMIs have good cross margins. And as we've had this order development lately, the majority of the order book is then related to HMIs. So you can expect the level in the order book to be on decent levels.

Okay, okay. And then just on FX. So is it the FX effect is I assume it's mainly the the Krona dollar movement that is behind dollar effect, the FX effect.

The Swedish Krona versus the euro is the majority, but also the somewhat stronger Krona compared to the dollar. We have an element of turkish lira versus euros and and taiwanese dollars versus us dollars going in the different direction in the quarter in bare electronics but the the exposure is is as said um euro sec or us dollar sec okay and the corona has strengthened and you should be clear that what we're talking about here is what you compare with and and what we are comparing with yeah the quarter last first quarter last year and and here we see the swedish krona being significantly stronger than we saw one year back yeah and this is yeah exactly and this is kind of what i'm asking because

I mean, just looking at, we don't know how the quarter will develop. We see a lot of movements, I mean, day by day, but it's actually worsened even further in April. So we see bigger movement in April and that's especially in the dollar rather than the euro. So that's kind of why I was asking if it was mainly the dollar effect or euro effect.

It's mainly the euro effect. It's more euros than dollars because we do have purchasing in dollars. Lots of electronics is actually bought in prices related to US dollars. So there's kind of a natural hedge with our exposure in sales in dollars compared to our purchases that are related to dollars.

Okay. And then the overhead cost, you saw some higher overhead costs. You talked about one-off costs in the corporate line. What was that, if I may?

Yeah, let's put it like that. The majority of that was related to one-off adjustments of our LTI program and the effects of that.

Okay. Okay, perfect. Thank you very much.

Thank you, Marcus.

If you wish to ask a question, please dial pound key 5 on your telephone keypad. No more phone questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.

Thank you for that. We can't see that there are any written questions. Do you see any questions Joakim there?

No, I can't see.

So then we agree there are no written questions. So with that, thank you very much for listening in and have a great day.

Thank you.