Ependion AB

Welcome to Appendian Q3 Report 2025 presentation. During the questions and answers session, participants are able to ask questions by dialing pound key 5 on their telephone keypad. Now, I will hand the conference over to CEO Jenny Shadal and CFO Joachim Lorien. Please go ahead.

Thank you very much and welcome to you all to this Q3 presentation. The heading for the report this time is Earnings Improvement and Continued Investments. And with me here in Malmö, I have Joakim Laurén. And the agenda looks the same as usual, almost with one exception. I will start with the general business update and then I will talk a little bit more about the minority investment that we presented this morning. And then Joakim will move into more details about our financial performance. And then I will finish with some concluding notes and outlook. And after that, we will open up for Q&A. So business update for the quarter. Well, the market is still characterized by uncertainty and caution. We don't see that the projects are disappearing, but we are still seeing that decision times are still quite long for most of our customers. So there is still a bit of a hesitation in the market. However, in the quarter, orders increased by 11%. If we adjust that for the Velotech acquisition and currency effects, The increase was 3%. Vestamo had a weak quarter once again. Also, we saw that same pattern in the third quarter of 2024. This is mainly due to less orders from the train segment, which we see is a bit of a holiday effect as most of our customers that order larger volumes are Europe-based in the train segment. Positive is that Bayer Electronics show a growth of 12%. And in particular, it's nice to see that the core offering, the HMI products, actually grew by 22% in terms of order intake. And that is a good sign. In terms of sales, we saw an increase by 10%. Again, if we adjust for acquisitions and currency effects, the development was stable. We had an unfortunate production stoppage in our main plant factory in Vestamo here in Sweden due to a very strong strike of lightning. in the quarter and so that was a real challenge for us. The team has worked really hard on restoring the production capacity and we almost managed to catch up but we see that we had to finally push deliveries of some 10 million Swedish kronor into this fourth quarter. but no major effect on customers, which is very positive. Clearly improved results and strengthened our EBIT margin to 11.6% compared to 10.3% in the comparison quarter. As you have probably seen as well, we have quite strong FX headwinds in terms of our volumes. They are affecting us some four percentage points. And if we look at the EBIT, side, we have a negative effect of 12 million Swedish kronor. The minority investment in Razor Secure was made actually today after the end of the period. I will come back to that. And we also want to mention that we have launched an initiative in both business entities to evaluate the possibilities of strengthening our positions in the defense sector. Both business entities have business in the defense sector already. And now we are looking at that more in depth to see how we can strengthen our positions there. so going a little bit more into the business entities some of this has already been mentioned but if we start with vestimo orders at plus 10 percent organically and currency adjusted minus six and again i mentioned it the decline is mainly due to a decline in the train segment due to holiday effects, as I mentioned. Our recent acquisition, the German company Velotech, continues to develop very, very well with good growth, and also they contribute well to the profitability of Estimo. And we saw a sales increase of 24%, driven actually by Velotech, who had a very good start in the group, and the Stora Sundby, the factory incident, as I mentioned, delayed 10 million SEK into the fourth quarter. However, we managed to improve profitability mainly due to good gross margin development and also good cost control. And I also want to mention that the Vestamo India establishment is developing really well. We see a lot of interest from our customers on the Indian market. So lots of positive things happening there. The investment in Razor Secure I will come back to in the next slide. Bayer Electronics I think developed positively. I mentioned the order intake pickup there, which is good. Sales declined a little bit, but we should also remember that we have a volume that we had last year that is not there anymore of the phased out low margin products, which is in line with the strategy. Positive though, and that is also an effect of this strategic choice, so to say, and the improvement in the product portfolio, we see improved gross margins as expected. And in combination with the lower cost base that we now have following the different restructuring programs that we have had in the last years, led to an improved profitability of 12.3% in the quarter. And the real highlight here, I would say, for Bay Electronics is that the new X3 HMI family is now completed in the quarter. So that is a really good achievement. The market reception has been positive. Many customers have placed orders for a few units to evaluate the product. And we expect deliveries to gradually pick up in the coming quarters. And we should remember that with this new range, we have the possibility to go to new customers and really start winning new customers, which was quite difficult with the range that is reaching its end of life, so to say, in the coming years. So very positive from that respect. I want to talk a little bit about what we announced this morning. I think that most of you have heard us talk about cybersecurity for quite a while and we have actively been looking at ways to actually take some important steps forward in this area as it is really the top of mind topic for all our customers. And in particular in the rail industry. So Razor Secure is a UK based company that we have been in contact with and known for several years. And this morning we entered into agreement to acquire a minority stake in Razor Secure. They are a leading specialist in cybersecurity software solutions for the rail industry. It's really all about monitoring what's going on onboard the train and in connecting systems. There are a lot of vulnerabilities in the train networks and the EU Commission is putting a lot of attention when it comes to critical infrastructure and putting in place cyber security regulations connected to that. The investment amounts to 2.7 million British pounds and we will take a seat on the board of this company. We also have put in place a technical and commercial strategic cooperation framework as well as, and this is important for us, an option to obtain full ownership of the company. And this option is exercisable earliest after the close of the 2027 financial year. RACI Secure was founded in 2015. So in this area, they have been around for quite a long time. And they have, as I mentioned, established themselves as a leader, focusing solely on the rail industry. And this is a market where we see strong growth and that growth is driven mainly by, as I mentioned, the EU directives that are being put in place in order to protect critical infrastructure. It's a relatively small company still, 25 people turnover of about 2 million pounds, but they have a very good name in the industry and they serve a global customer base. And in combination then with the best and most very strong position and relationships in the rail industry, we think that this is a really good fit. The transaction is subject to approval by UK authorities in accordance with the National Security and Investment Act and therefore the closing of the transaction is expected to happen during the fourth quarter of this year. Looking at the volumes in a little bit more graphical format before I hand over to Joakim, orders came in at 505 million Swedish kronor or 11% versus last year. Adjusted for acquisitions and FX plus 3%. Sales at 544, 10% increase. stable if you look at the organic growth and take the FX into account. So the book to build still slightly below one for the quarter, but we still have a healthy backlog overall of 1.1 billion Swedish kronor. So with that, I hand over to you Joakim.

Thank you very much Jenny. We start with the Pendion perspective. And I'll take you through more details on the numbers. As Jenny pointed out, order intake of 505 million, sales of 544 and an EBIT of 63 million or an EBIT margin of 11.6 for the quarter. As Jenny pointed out, we do have a headwind with negative FX impacts if you compare to last year and that amounts to around 12 million, which is then mainly transactional variances. Also worth pointing out with the tariffs that has been a lot of impacts all across, we do not see any material financial impacts of the tariffs within Ependion. Vestamo is presently exempt from tariffs into the US. Bayer Electronics, however, they are hit with 20% tariffs, but there we have increased our prices to compensate, and that also works. In terms of cash flow, we came in positively at 30 million, some lower than last year. And the reason for that is that we had more of a reduction in the working capital area last year, and we have less of that this year. And that is the reason for the somewhat lower free cash flow. Net income improved to 40 million compared to 31 million last year. And EPS at 126 compared to 1.08 that we saw last year. Yes. Then we have Vestamo, order intake of 305 million, sales of 334 million and an EBIT of 48 or 14.3%. Here, as Jenny said earlier, we do see a growth on the order side, but if we adjust for the acquisition of Elotech and then also the FX effects that are not unsignificant then we do see a drop to of the order side of six percent Mainly, as Jenny pointed out, due to the somewhat lower bookings in the train segment and the book to bill came in at 0.91 with that low order intake that we had in the quarter. Sales at plus 24% for SMO, very much driven by Velotech. Excluding Velotech and FX, we are just 2% above. And the impact here of the delays from the stoppage that we had in the Stora Zumbi site. impacting around 10 million that is then of course reducing the the level of sales profitability in the quarter of 14.3 driven by good gross margin development and a solid cost control we do have some acquisition related costs in the quarter of about a million We also want to highlight that the Velotech acquisition, they are contributing in a good way. They are showing a nice growth and contributing also well to the profitability. Then Bayer Electronics, here we had an order intake of 201 million, sales of 210 and an EBIT of 26 or 12.3%. um also said earlier but worth noticing is that the order bookings that's a 12 growth where the hmi part of it is actually growing on the 22 level and the book to build is 0.96 for for bear electronics sales here we drop compared to last year but again as jenny said the phase out products is the reason why we see a drop in in sales and if we look sequentially it's actually basically on the same level or slightly above last quarter and in bayer electronics we see good gross margin development with the better mix compared to what we have seen previous years and then of course that we have reduced our cost base that is driving the improvement in profitability and we are We are, I wouldn't say happy, but it's good that we see a good development in terms of profitability for Bay Electronics. And compared to what we see in the other quarters this year, it's a step upwards and we are now at the 12.3% level. Also worth mentioning is that we have, over a period of a few years now, spent a lot of money in R&D side on the X3 family. And as we are now launching it, we will gradually reduce the level of R&D activities within Bayer Electronics. We do also want to point out that now when we have released the X3 family fully, there will be a step up in the amortizations of hitting the results going forward somewhat in the coming quarters. That concludes the financials. So back to you Jenny.

Okay, very good. Thank you Joakim. So to conclude, we still believe that Epenyon is very well positioned in attractive markets that are driven by the big mega trends that we like to talk about. The strategic investments and the continuous improvements that we are driving across the group, we believe make us well equipped for the future. And as I mentioned in the beginning, we continue to see stable activity levels among our customers despite the challenging times, although decisions tend to take a little bit longer than when the economy is more strong, so to say. So medium and long term, we are definitely confident when it comes to our ability to continue to grow profitably. As I mentioned, because the demand for our products are driven by global trends. So we are focusing what we can influence right now. So we are balancing cost discipline with strategic future investments like the India establishment, like the investment that we now did in Racer Secure. And we are, of course, every day working to create value regardless of the markets. conditions. And that is also reflected in our financial targets, which remain. This is what we are working to achieve every day. So we want to come back to a 10 percent average annual growth, organic growth with acquired growth added to that. We definitely believe that the profitability level of the group should exceed 15%. And with the foundation that we have now built and the cost base that we have, this is a volume game. And we believe that with some Tailwinds from the market, hopefully in the future we are going to move in the right direction here. And the third one, we should be a dividend paying company. So we still keep, of course, these financial targets in front of us. So coming back to the outlook, as I mentioned, we are active. We are working in attractive markets with good underlying growth. So we believe we have good prospects in the medium term to achieve the targets that I just mentioned. In the short term, however, we see that the uncertainty remains. And that is why we are stating that the near term outlook is difficult to assess at this point. So with that, we would like to open up for Q&A.

If you wish to ask a question, please dial pound key 5 on your telephone keypad. To enter the queue, if you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Henrik Alveskog from Red Eye Ab. Please go ahead.

OK, hello. Hi. Hi, Henrik. Hi. Hi. So first, regarding Bester Moe and the seasonality in the train sub-segment there. I mean, like you pointed out, last year was also weak in the third quarter, but going back several years, it didn't look like that at all. And I'm not just referring to the very strong period here, but also before that. So... Has anything changed when it comes to that seasonality or your mix of sales or something related to that?

I don't think that the mix of sales has changed very much. And you are right, if you look back at 22, 23, we did not see that. But those years were very much affected by the component crisis and the order pattern of our customers changed completely during these years. But But the fact remains that a pretty big chunk of our customer base in the rail industry is actually based out of Europe. And we see that there is lower activity due to that in that segment. Then, of course, we know that the order intake in the rail segment in general can vary a lot between quarters. There are projects, so to say. at the back of that. So it's hard sometimes to tell what is the pattern, but we have seen this now two years in a row. So that's the conclusion that we have drawn.

Yeah. Okay. And then regarding the incident at the factory, you mentioned that, well, you have insurance covering most of the damages, but Was it affected in terms of operational costs during this quarter? I mean, you were struggling, I guess, to keep up production and deliveries, etc., etc.

Yeah, there were machinery or part of the machinery that was broken that was needed to be repaired. The cost for the repairment of the machines, that is basically covered by the insurance setup. So you could say the net effect is basically zero on that one.

then of course we have a standstill insurance set up as well but that is not reflected at all in in in this quarter okay um and then um just on on uh what you mentioned about um the defense segment uh like you said it's been a part of your business in each business unit uh I'm just trying to understand, are you now doing some sort of coordinated effort between the business units or is this possibly a new focus area for you? I'm trying to understand what, well, the reason why you mentioned it.

Yeah, so it's something that we are working on in our decentralized model, so to say. So both business entities are looking into the sector from their perspective. And I think it's quite natural, of course, to start doing that, looking at... how this sector is developing and of course our product ranges are very robust and of high quality and so on so even with little adjustments they can be suitable for certain applications within the defense sector so that is the reason why we are starting to look at this we see that We have an existing business and we mention it because we think it's worth communicating that we are starting to look into this sector.

But it's not a jointly activity in Bayer and Vestamo. It's an activity in both business entities.

Yeah.

Right. And then regarding Razor Secure, have you done business with them before or what has been your relationship up to now?

Yeah, we have done a little bit of business with them in the past, but mainly we have been exploring joint opportunities, so to say, because Racer Secure is a pure software company and there is hardware needed on board the trains to actually run these intrusion detection systems and different applications that Racer can offer. So we have been looking into you know, collaboration regarding hardware, Vestamos hardware and Razer's software. And that is how we have gotten to know them, you can say, in the last years.

But so far you haven't used their software?

No, not really. But they have used our hardware in a few cases.

Yeah. Would you care to tell us what your owners share in the company?

We will not communicate the ownership in percentage at this point.

Yeah, I got it. And then just finally, HMS networks, I'm sure you're very familiar with them. reported this morning and they were quite excited about the north american market and the energy and infrastructure segments in particular that rebounded and i'm just curious do you see any signs of this also um or is it in in a different part of their business

Yeah, I think we are working in different parts of that value chain. So I cannot comment actually at this point on our development in North America in particular.

All right.

Thank you. That was all for me.

Thank you, Henrik. The next question comes from Marcus Almarid from DNB Carnegie. Please go ahead.

Yeah. Hi, Jenny. Hi, Joakim. I'll start with continuing a little bit on Henrik's question on the train side. Can you talk a little bit about, have you seen any changes in like September, October? What is kind of mood like in this that confirms that it is summer or is it still, you know, the volatility is, we know it's there and this is still impacting or is difficult to say?

Yeah, it's difficult to say, and typically we don't comment, you know, parts of the quarter or how this quarter has started. What I can comment is that our opportunity pipeline is still strong. There are a lot of projects out there and nothing has changed in that respect, actually, in the train segment or in any other segment by that matter.

Okay. So it's mainly this hesitation that you were referring to, which is behind the slow, is how you see it.

Yes, I would think. And in train network, the order intake doesn't always reflect the underlying demand, so to say, because there's always a delay on, because some of these orders are with very long...

horizon so to say so it's a little bit hard to do the connection between your intake and and the real demand but our position has not changed with the customers at all no yeah yeah and would you say that if you if you if you if you look at the talks you're having and the discussions you're having that is kind of unchanged there's no change in either the upside nor the downside in terms of pipeline or how discussions are going, etc.

No, no, definitely not. That's, that's, that's true.

Okay. Okay. Then on on Velotech, when you write about the opportunities, I mean, it's very early days, is it? Do you see already any, any kind of sales synergies there? Or is it mainly Velotech, per se standalone, which is, which is doing well at the moment?

Well, it's too early to, because we know that the business cycles are longer than three months, so to say. So it's too early to see real sales synergies. But what is very promising is that we have already been performing several joint customer visits where we have presented the full combined portfolio to both Yellowtech customers and also to Westernmost customers in the energy segment. So that is very, very, we're off to a very positive start in Yellowtech.

And then for how long was the machines in Stora Sundby standing still? Was it a big part of production or was it like a smaller part of production?

Yeah, it was not the whole production set up, but it was the surface mounting line actually, and it was standing still for approximately three weeks.

Okay. Is it fair to say then that, I mean, even though the actual cost was covered by insurance, you're still standing still, so that you had some underabsorption in that time and that there was some

indirect cost effect absolutely absolutely and to to catch up and to make sure that our customers will not was not affected we really had to run with very high activity once we get all the machines up and running again so of course there's some cost of that one as well yeah and and can ask when in the quarter when when was it standing still was it in the summer or was it in september or when Quite early in the quarter.

Yeah. Early in the quarter. Okay. Okay. And then on Bay Electronics, a couple of questions. If you look at the HMI compared to the second quarter, that is the sequentially, did you see an improvement or was it stable?

I would say similar levels. If you look, take the sequential, if that's your question.

Yeah. Yeah.

Yeah.

And then the Hyundai order, it's strategic, but is it also quite a small order even though it's important, or is it larger?

It's a small order initially because they are an existing customer that are looking to transition from X2 to X3. So the order is not very big because they are ordering test units, so to say. But it's a very good sign that we have a very good story when it comes to transitioning from the X2 to the X3 series. And most of our customers are eager to take that step.

And how long does it usually take? I mean, if you look at history for Bay Electronics, when you have these kind of test orders, how long does the testing go on before they decide to go bigger or?

yeah i don't think the test phase is is actually that long that could be maybe a couple of months or so but then of course it depends on the customers product portfolio and and their generations of different types of equipment or machines so therefore it can take longer of course because before they transition because they might wait for for a new new generation of their products and so on so it's really it's it depends on the customer and and their product portfolio planning, basically.

Okay, perfect. That's all for me for now. Thank you very much. Thank you, Marcus.

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.

Yes, thank you. Yes, we have one written question. It's from a gentleman called John. And he's asking if we can clarify the percentage ownership now with this minority investment. And then also the question is how is the mechanism for the valuation of exercising the call option? As stated to Henrik before, we are not disclosing the percentage ownership in this investment. What we can say about the call option, is that that is predefined and and agreed and there's a price mechanism agreed and that price mechanism is based on result and it's a combination of result and annual recurring revenue which is a normal kpi that you have for software companies

So, and there are no further written questions here. So with that, we conclude the presentation. Thank you all for listening and have a good day. Bye-bye. Bye.