Ependion AB

Thank you. Hi everyone and welcome to the quarter one update for Ependion. As usual, it is myself and Joakim Laren 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 a 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 five percent and both business entities contributed to this. Vestimo with two percent and Bayer Electronics with eight percent. Sales, however, came in lower than last year, driven by both business entities. Could be important to remember that Vestimo in particular had a very strong comparison quarter in 2024 due to some catching up effects from the components crisis in in twenty three. 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 nine percent driven by the weak result in Bayer Electronics. So this is a step in order to safeguard profitability going forward. Earnings then came in at forty nine million kronor or nine percent. 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 ten million Swedish kronor. And 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, Vestamo, 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 Vestamo can vary quite a lot between quarters due to how larger orders from our train 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 this entity officially together with customers now in March. And it was very, very, very well received by our customers. And we also received our first local order of 11 million kronor in March. And that was from 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 .7% for the period. This actually also includes acquisition related costs of 2.5 million. So taking that into account, we would be at 16.5 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 are no order, 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 costs, we came in at the very weak .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 quarter for the first quarter. We do hope, of course, to see that becoming bigger, so to say, going forward. But at least 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 the substation so that you can actually remove. More and more hardware and replace it with with software functions running on on such a computer. So Velotech is really focusing on on large system integrators in the energy sector. They also play in the manufacturing segment with strong relationships to 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 Lair 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 margin is likely below Vestamo 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. So looking a little bit on on the energy market, it's 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 with many of the key players in this industry. So with that, I hand over to you Joakim to give a little bit more detail on on the financing of this acquisition.

Thank you, Jenny. Yeah, some facts on the acquisition and some words about the financing also. So the initial payment at closing will be 35 million on a cash and debt free basis. And there's 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 the 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 in 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 the standard act and 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 Saldor together, they own about 45 percent of the shares in the Penda. That completes the words on Velotech. So then let's move forward into the financials. More details. We start with the Penda. The headline order growth and challenging profitability. Order intake of five five one million in the quarter sales of five forty five and then an EBIT of forty nine million or nine percent. 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 the restructuring costs within Bayer Electronics of three point four million. We have transactional costs in related to the Velotech acquisition invest in two point five. And then we have the balance is some one of items within the parent company. Efex as stated, that was against us in the quarter, about four 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 a pendent regarding the tariffs in the quarter. We have ongoing activities to prepare for mitigation of the potential impact both in Weston, the one 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 one point 10. Let's move on to Vestamo. We can conclude a solid profitability development for Vestamo in the quarter with an order intake of 317 million, sales of 321 million and an EBIT of north of just north of 50 million or 15.7 percent. Look to bill invest in Vestamo at point nine nine. 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. So good gross market 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 two point five in the quarter for Vestamo. So the stability and good profitability in Vestamo 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 to 35 million for the quarter sales to 26 and an EBIT of 15 or six point seven. Orders then plus eight as stated and. As Jenny also stated before, HMI's were up at 18 percent. So that is a really nice development that we are happy to see. Book to bill for Bayer Electronics at one point oh four 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 presentation last quarter presentation. And as stated before, the effects is impacting quite heavily for for for Bayer Electronics in the quarter minus four million. We have the restructuring cost of three point four and this unfavorable makes that is the reason why we came in as low as these six point seven percent. 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 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. It's 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 a pendion. 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 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 Henrik Alveskog from Red Eye AB. Please go ahead.

OK, hello. Do you hear me?

Yes. Hi, Henrik.

Great. Thanks. Hi. So first on gross margins, 54 percent is quite impressive. Is this then all related to improvements in Vestermool, considering you said that their electronics had an unfavorable sales mix?

Yes. Do you want to answer that Joakim?

Don't you hear me? Yes, very good. Yes. Right. So the 54 is driven by Vestermool. 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 or?

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

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

When it comes to tariffs, there is also some exceptions. So some products are actually exempted by for these tariffs. And some of our product range is actually within that range for now. And as we all know, these can 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. And that to mitigate somewhat. And that is also looked upon when it comes to handling or compensating 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 that is now ongoing. But we are not ruling out the fact of using the price mechanism to compensate ourselves.

OK, thanks. And the cost cuts that you're doing now in their electronics, is that entirely related to the face 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 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 then just on the acquisition of Velotech, I'm interested in 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. Yes, go ahead. 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.

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 very, very strong development. And then we will be happy, our shareholders will be happy, and so will be the sellers. That's why you have earn out mechanisms in acquisitions like this.

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.

Yes, okay. Great. That's all from me. Thanks.

Thanks, Henrik.

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

Hi, Marcus from Carnegie. Can you hear me? Yes. Hi, Marcus. Yes, perfect. So my first question is just to make sure that the mix effect that you're seeing, the audio intake for the face-up product is zero. So that means that the mix effect going forward 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 audio intake was up by 18% in the quarter. Can you say anything about 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 Krona dollar movement that is behind 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 Taiwanese dollars versus US dollars going in the different direction in the quarter in Bay electronics. But the exposure is as said, euros or US dollars. Okay. And the Krona has strengthened. You should be clear that what we're talking about here is what you compare with and what we are comparing with the quarter last first quarter last year. And here we see the Swedish Krona being significantly stronger than we saw one year back.

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 day by day, but it's actually worse and 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 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 and dollars because we do have purchasing in dollars. Lots of electronics is actually bought or in prices related to US dollars. So there is 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 of costs in the corporate line. Can you what was that?

Yeah, let's say let's put it like that. The majority of that was related to one of the 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 five on your telephone keypad. 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.

No, 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.