Ependion AB

Thank you very much. Welcome, everybody, to the Appendion Quarter 2 call. The headline for our report this time is Increased order intake and improved earnings in an uncertain market. So, we present in the call is, as usual, myself, Jenny Sködahl, today in Västerås. And with me, I have Joakim Laurén located in Malmö today. And as usual, the agenda looks like this. I will give a general business update first, then Joakim will dig a little bit deeper into the numbers, some concluding notes and outlook from myself, and then we open up for questions and answers. so let's dive right into it so the overall business update for the quarter well i think we all see that the market is still affected by the uncertainty regarding the conditions for international trade giving a slight hesitation among our customers in terms of investments and so on on the other hand of course the world has not come to a stop so there's a lot of activity still going on in in our markets but but still a little bit uncertain market conditions. However, in the quarter, the order intake for Appendion increased by 16%, where we see growth in both business entities, Vestamo at 22% growth and Bayer Electronics at 5%. And as you probably know, we have closed the Velotech deal in the quarter and this company was added as from June and the organic order intake then comes out at 11%. Sales-wise, our sales are still a little bit affected by the somewhat lower order intake that we have seen in end of 2024 and beginning of this year, so minus 5%, with a pretty strong comparison quarter. And there are also some phase-out effects for Bayer Electronics, because as you know, we have been cleaning up our product portfolio We have phased out the display solutions volumes as part of the more focused strategy for Bay Electronics and that has of course had an effect on the sales somewhat because there are no volumes in this quarter from that portfolio anymore. Earnings, we see a slight improvement with the EBIT level at 62 million Swedish kronor or 11%. That's up from 10.2 same quarter last year. I think we are all aware that there is currency headwind with a strong Swedish kronor, especially compared to the US dollar. And that has affected our result on the EBIT level in the quarter by minus 9 million Swedish kronor corresponding to 1.6 percentage points. Strong free cash flow in the quarter at 62 million Swedish kronor. If we look a little bit more into the two business entities, I mentioned that Vestimo sees quite a good order intake pickup, especially in the train and trackside segments, while we see the energy segment at stable levels. VLOTech has started extremely well with us, so to say, and the integration activities are ongoing full speed. A very positive start, the joint offering that we now have towards especially the energy market is very positive and we see that Bielotek has very strong customer relationships in the energy sector that we can benefit from for the full product portfolio. Sales increase in Vestimo 5%, thanks to the addition of Yellowtech. And if we look organically at fixed FX rates, we are basically moving sideways. Profitability improved to 15.1%. We have seen strengthened gross margins in Vestimo over the last quarters and that we see also now and that in combination with good cost control keeps the EBIT level in Vestimo at a stable and rather high 15%. In Bayer Electronics we see an order increase of 5% and that also does not include any of the phased out volumes, so that's actually quite positive. We do see the demand strengthening, especially in the marine and manufacturing segments. And what is particularly good to see, I think, is that the order intake for the HMI product family, which is really the key product family that we want to focus on going forward, increased with 23% in the quarter. And that is actually before the effect of the new X3 series, actually, because that is just now being launched, as I will come back to in just a minute. Sales decreased as I mentioned, that's mainly due to the phased out product compared to the previous year. What is also good to see is that we are seeing improved gross margins now and that was the whole idea basically with the focused product portfolio facing out of low margin products. It's good to see that we are seeing the effect of that now in our gross margins and that in combination with the cost reduction program that we carried out in quarter one will actually lead to stronger profitability going forward when we see higher volumes, but it also meant a slightly higher EBIT percentage in the quarter compared to previous quarters, so 9.2% for Bay Electronics. This is of course not at all where we want to be, and we are focusing to improve this further going forward. Positive also is that the massive investment that we have done in the last years in the new generation of HMIs, the X3 family, is now complete and we are open for orders for this whole portfolio. deliveries will increase during the second half of the year and at the same time we will keep on selling the predecessor X2 because it will take some time for customers to actually transition over to the new family and we want them to be able to do that in a smooth and controlled way. So if we look at the volumes more in a graphical format, I think it's good to see that the order intake, as you can see here, is moving in the right direction, despite the FX headwinds that we have both on the order intake, of course, and also on sales. I think I mentioned the numbers. If we adjust for currency and acquisitions on the order intake side, we are actually up 17%. And the book-to-bill ratio in the quarter of pretty much one, basically. And the backlog also staying quite stable compared to previous year. So with that, I hand over to you Joakim.

Thank you very much Jenny. I will take you through the numbers. We start with Appendion. We have the order intake of 558 in the quarter and the sales of 561 and an EBIT of 62 or 11%. And as Jenny pointed out, we see an improvement then compared to last year. Jenny also mentioned that we have some headwind with regards to FX impacting 9 million if we compare the two years and it's mainly then transactional variances. We also want to inform that we see no material financial impact of the tariffs in the quarter. Vestamo is presently exempt from tariffs and Bayer Electronics, there we have actually increased the prices in the US market to compensate. cash flow positive in the quarter it's a plus 62 million somewhat up compared to last year it does include some positive impact of somewhat lower working capital in the quarter The financial net is somewhat high and the reason for that is that we have a negative impact of the FX or the weaker US dollar impacting the financial net line in the quarter. Net income at 30.3 million, EPS at 0.98 Swedish krona. As Jenny pointed out earlier, we did close the Velotech acquisition in the quarter. And as part of the financing of that, we completed the directed share issue of 300 million in the month of May to then partly finance this acquisition. Then let's move to Vestimo. We have an order intake of 359. sales of 354 and an EBIT of close to 54 million or 15.1%. Jenny mentioned before, we do see the growth numbers of 22% and organically the 15 and the book to bill ratio for Vestamo just above one, 1.01. And also the sales then includes one month of Velotech and leading to that we have an increase of 5% in the quarter. Organically, if we then look at the fixed rates just below the level of last year. Jenny also mentioned that we do see a good profitability development at the stable 15.1%. driven by gross margins and cost control. And we do also want to guide that included we have acquisition related cost of 2.5 million in the quarter. If some of you are looking very closely in the report at the numbers, you can note that there is quite a high level of sales in Velotech in the first month. That is really due to a larger order that was shipped in the month of June. Order intake and sales are not on the same picture, but we want to highlight that we had a really good start for Velotech when it comes to sales and also when it comes to contribution to the result. Well, in line with other Vestamo. That is what we are guiding there. Bayer Electronics order intake of 200 million, sales of 207 and an EBIT of 19 or 9.2%. Jenny also pointed out that the order intake included quite strong HMI bookings at the 23% level, book to bill for Bayer Electronics at 0.96 for the quarter. And the drop of the sales line very much related to the fact that now we do not have any of the phase-out volumes in the shipments from Bayer Electronics as we had last year. And that is the main difference compared to the quarter this year and last year. Bayer Electronics, we continue to see a good gross margin. uh very much driven by the fact that we have less of the phase out products so it's a positive mix and we do also have somewhat lower cost levels as we did a cost restructuring program last quarter as you uh for sure remember um still the 9.2 percent a bit level not where we want to be full focus as jenny pointed out um we also want to guide that now with uh the we come to the end of the extensive or intensive development phase of the X3 family. We will now going forward scale down somewhat of the activity levels in the development side in Bayer Electronics starting the second half of this year. That concludes the numbers, so over to you Jenny.

Thank you Joakim. So to conclude, I mentioned the uncertainty that we are seeing still, but I also want to mention that we do see stable activity levels among our customers, healthy pipelines, we are staying close to our customers. But because of the uncertainty, of course, we are being very cautious when it comes to costs. But also I want to convey that medium and long term we are as confident as ever about our ability to continue our profitable growth journey because we are present in attractive markets that are bound to grow from the mega trends that we often talk about and we are well positioned with our products and solutions to actually take advantage of these global trends. So therefore, we continue to balance costs with some really important strategic future investments. We mentioned in the report, of course, the building up of the most entity in India, which is a very important milestone for us to have an even better geographical coverage. And also, of course, the acquisition of Velotech shows that we are really allocating resources into growing Vestimo. And for Bayer Electronics, continuing to execute on the strategy, creating stability and higher margins in that business entity. And we have invested, as Joakim mentioned, a lot in the new X3 generation, which is, of course, very positive for the future. so with that we stay committed to our financial targets we are have not been really moving in maybe the right direction for some time now but we do see that there is potential for growth and we should be we are targeting to grow 10 percent organically on average and have a 15 ebit margin on the group level and then to actually be a dividend paying company so we stick to these financial targets and that's what we are working towards And then just the outlook. As I mentioned, we are present in attractive markets, so we do see that we have good prospects for reaching both the growth and profitability targets in the mid-term. However, with the geopolitical and economic uncertainty that we are still seeing, it's hard for us to assess the near-term outlook. So that concludes our presentation. So then we open up for questions and answers.

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 Almarid from Carnegie. Please go ahead.

uh hi jenny hi york and marcus here uh from dnb carnegie uh maybe i'll start with with the x3 uh so can you just talk a little bit about exactly where you are in the launch because you said you're now ready but then you had some you've had to gradual ramp up in the past quarters as well and then maybe to talk a little bit about the gross margins if you expect for when you have the ramp up if the mix will drive the gross margin in in in the business entity in Bayer Electronics.

Yeah, so if I should start with the with the launch as such, you're right, Marcus, it has been a bit of a gradual launch where the web version of the product family was launched actually already last quarter and actually a little bit starting in the fourth quarter as well. So that has been going on for quite some time. But now in this quarter, we are really releasing the lion part of the product family with all the different sizes and versions. being available to the customers. So I would say that in this quarter we really do the big market launch and then there are of course a few things remaining when it comes to some certifications for specific markets and so on but I would say that again the lion part of the product family is now launched so that's very positive and good feedback from customers as well so far. When it comes to the gross margin Joakim... I can comment on that one.

Going forward you can expect gross margins to continue to improve in Bayer Electronics. Not really because of X3 compared to X2. rather the fact that we are phasing out the display solutions or the phase-out product volumes that we have talked about some earlier quarters. That mix effect will improve or strengthen the gross margin going forward. You cannot expect that X3 compared to X2 will mean significant changes in gross margin percentage. But going forward from now, you can expect continuous development, as we have seen now in this quarter compared to last year.

And just to follow up, so it has been launched, it was launched during the past quarter, so that is in Q2. the full range of the X3.

It's open for orders, Marcus, but when it comes to delivery, it's relatively small volumes. Many customers are trying it out. We see very little of high volume deliveries of X3 yet, and that will be a gradual ramp up. as we stated earlier. So you can expect parallel deliveries X3 and X2 for at least 12 months or even more than that from now and going forward.

And then if I continue on the electronics, so the HMIs are up 23% in the quarter, and then you're up five in total. So what parts are falling?

Should I take that, Jenny? Yeah, yeah, please. I mean, what it is is that we have no of the face-out products, basically.

Yeah, okay, okay, okay, okay. I get it. And then you talked a little bit about your customers being stable and growing, especially on the train and the track side. Can you maybe, but you also talk about uncertainty. Maybe you can just give us some color on when you are there talking to your customers, given what's going on, and also maybe on the manufacturing side on Bay Electronics. If we can just talk about the moods, are they hesitating? Do you really feel like the decline in the business cycle? Just give us some more color of what you see out there.

Yeah, I think it's a little bit of a mixed picture. Of course, some customers are hesitating to invest or they might be postponing projects and so on because of the uncertainty kind of waiting, wait and see mode a little bit. We see that with some customers. On the other hand, there are projects and areas where investment needs to happen because of legislation, for example, because there is a need to upgrade, modernize and so on. And so a lot of projects are also moving ahead, but it's of course not the very, very strong market that we have seen previously. It's better than it was a year ago because then our customers were very affected by the high interest rates and so on, but it's still not a great market, but it's okay, I would say. And you were talking about Bayer Electronics and the manufacturing segment, I think you mentioned as well. Yeah, a little bit the same thing there, of course. We can see that Asia, for example, is coming back from the low levels that we saw last year. So that is definitely an improvement. On the other hand, of course, the slower business pace in some of the industries, automotive and so on, can have a ripple down effect on some of the equipment manufacturers as well. So it's again not a super strong market, but it's It's okay, I would say. It's relatively stable.

Okay. And then finally, not finally, but then on Velotech, just quickly, you had this strong sales in the first month or in June from Velotech. But if you look underlying, what does their market look like? And is it more, you said it was... profit-wise in line with the rest of Westimo, but what is the feeling, what is the demand for that type of product underlying?

I think we see a very strong demand for their products. Half of Yellowtech's business approximately is the energy sector and there they are very well positioned in this whole energy transition that is happening with the first of all automation of equipment, substation automation is happening right now and then as the next step substations of different sizes will also be digitalized. So that is the work that is going on. All the big Transmission system owners in Europe and elsewhere are working on that and Yellowtech has a good foothold with several of these players. So there I see a positive development. But also with the rest of their business, they have stable customers, they have business development activities. I think that there's a positive outlook for Velotech and especially joining forces now with Vestamo we have a very strong and more complete portfolio so we're off to a good start.

And then finally just a household question just to clarify organic growth and then so when you write organic growth I assume it's including FX but excluding acquisitions

Correct.

Okay, perfect. Thank you very much.

It's at prevailing rates. And when we talk about compensated for FX, then we write so. So, yes. Okay, perfect. Thank you very much. Thank you, Marcus.

The next question comes from Henrik Alveskog from Red Eye AB. Please go ahead.

Okay. Hello, Henrik here. You hear me, Henrik?

Yes. Hi, Henrik.

Hi. So first, I'm interested to hear your right here. And I mean, you've mentioned it before also that development expenditures will be lower in the second half of this year. And so, well, due to the X3 being launched now, could you give us an idea of the order of magnitude, so to speak, and also maybe the timeframe? For how long will it be lower, so to speak? Is the 13, 14% that you've been at of R&D costs related to sales, is that like, a level that you will not return to in the near or mid-term future, you think?

I'll take that one. First, what we are talking about is Bayer Electronics, just to be clear that it's Bayer Electronics we're talking about. Then you have most likely noted that we have had a relation R&D expenditure in relation to sales in Bayer Electronics in the levels of 13, 14, 15, even a percent percentage points now for a period of 18 months or so. What you can expect is that this will go down to levels that we saw prior to us starting up this X3 project. and and though those were around eight to ten percent uh so that is what i expect over time uh that would happen then gradually so it it will not go it's not digital from one month to another of course but but it will gradually go down over time and you can also see that in this quarter compared to what you saw in q4 in last year and q1

this year q2 is somewhat lower but it will continue to go down yeah okay great thanks uh and then um just a quick one on uh best remove and the acquisition related costs uh that you had in this quarter uh are there possibly more um costs related to this acquisition uh after see it right now?

Not any material items that will spill over into the Q3, if that's the question.

And then just finally on the tariff issue, which is tricky, I understand that. But just first off, Västermo is currently exempt from these tariffs to the US, I understand. Do you see any changes in that respect going forward?

I think everyone sees uncertainty on what can come and what will be the outcome of the ongoing discussions. We all know that there are higher tariffs being announced for 1st of August and that there are you could say, counter discussions or statements coming from the Commission. So, it's very hard to predict and we will not predict. We can only conclude that presently the Vestermiljö volume has been exempt. If that will continue, hard to say. Bioelectronics were not. There we had an impact of the 10% tariff. And we have increased our prices in the U.S. market to compensate for that.

Yeah. And regarding Bayer Electronics and this, well, products that you're shipping to the U.S., is there, I mean, just for the near term future, are they, are these products that they sort of cannot substitute for other products because, well, obvious reasons. So you're not so sensitive, maybe in the short term and anyways.

What are you implying is whether or not we have competition that are in a different position than we are? Well, in general, I would say our customers in Bayer Electronics, they have specified in our products into their solutions. both hardware and software wise. And of course, there are some hindrance to short term exchange. But we do not foresee that our position will change dramatically with the increases in price that we have done in Bayer Electronics.

Great. Thank you. That was all for 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 phone questions at this time, so I hand the conference back to the speakers for any written questions or closing comments.

Yeah, I don't see any written questions either, as far as I can see on the screen here. So with that, I think we conclude the call. Thank you all for joining and have a great rest of the day. Thank you. Thanks.