Ependion AB (EPEN) Earnings Call Transcript & Summary

Hello, and welcome to the presentation for Beijer Electronics Group AB's Fourth Quarter 2019 Report. Today, I am pleased to present Per Samuelsson, President and CEO; and Joakim Laurén, Executive Vice President and CFO. [Operator Instructions] Per, please begin.

Thank you very much. So first of all, welcome to all of you. And that is -- we will present BEIJER GROUP's -- me and Joakim will present BEIJER GROUP's last report for 2019 and coming into the new decade. And we will get through it as we normally do. I will start-up and then Joakim will come in and talk about the group and the different entities, and then I will come back at the end of the presentation for some final comments and a little bit outlook on -- coming into 2020. First of all, before we're coming into the quarter, what I think is good when you're looking into the total '19 is that when you compare '19 with '18, with '17 and with '16, we can see that the strategy we're laying out during end of '16, it's working. To begin with, which means -- also means that we have -- every year since then, we have been improving both sales and the results. And also, that is also important is that we are now coming into a situation where we have been taking a lot of costs during this year, especially in the development side, but also on the sales and marketing side, which means that when we now go into this new decade, we have a product portfolio that we think is quite good. We have a customer pipeline and also existing and new potentials that I as a CEO, are quite happy with. And we also have an organization that works. So totally, it would take a little bit longer perspective when we look at the last couple of years coming into this new decade. We have a good possibility to continue a good growth and profit improvement for the next 3, 4 years. Having said that, then, of course, I mean that big business has economic downturns, of course, that could affect us. But with the present situation, where we enter the new year with a lot of opportunities. Coming into the quarter and the last quarter, we have here -- if I could -- past down the slide here. I will just -- here, we are starting to -- we see Westermo. And this quarter, Westermo is, of course, yes, that's the best unit at the moment. And they are proving that both at growth and they have a good profitability improvements. And also, we can see that the inroad to the new segments that we call Power Distribution as well as the rail track side, looks quite promising. And also, together with that -- we then during 2019, have done 2 acquisitions to complement the product portfolio on the wireless side. One Irish company called Virtual Access as well as the Swiss company called Neratec. They have a good -- Westermo is also going into 2020 with a good situation. And we also see that with those 2 units, we can see that -- after the acquisitions, we can see that from 2020 and onwards, we expect them to definitely add also to the profit. We haven't had them for so many months in last year. But from '20 and onwards, they should and they will contribute also on the profit side. It's also nice to see that by Beijer Electronics entered -- landed a 5-year contract agreement with a value of over SEK 150 million. I mean that is, of course, an estimated value, but that's what we believe coming into this. And also, we have had some weak points in the history when it comes to free -- outside the cash flow, but we're also happy to see that now -- and you saw a little bit in quarter 3 but also in quarter 4, we can see that we start to have a cash flow that's also be okay. And that's also good to say. We could see on the order side, and I will comment that a little bit later, a little bit more. But you can see that the order levels, if I look at the group level, you can see that they are more or less on the same level during 2019. And we can see that if you compare with '18 and also a little bit '17, there, we had some single big order intakes, especially on the train side that we haven't had in the same [ volume ] in 2019. But it's still -- we are in a decent level when it comes to order intake. And that also means that we are going into 2020 with a backlog at least on the same level as we came into 2019. So we haven't been eating on the backlog during 2019. And on top of that, of course, the acquired companies will contribute in that effect as well. So therefore, there is an increase totally. When we're coming into Beijer Electronics and their results and their development, we have a couple of quarters been focused and then we're telling you about the situation where we had 4 different product groups again in the history that we called old products group that we needed to transfer. And those of you that have been following us the last couple of years, knows that we called our new product group X2 series. And what happens in this industry is that then you go out to customers as we did end of 2018, beginning of 2019 and told them that, that and that and that product will now go end of life. And if you want to do some lost time by, you have to do it now. And what happened end of '18, beginning of 2019, several of our big customers bought a lot. And you saw that in the development in Beijer here as well. And that was, of course, good. The downside is a little bit that some of these big customers still have old products in their inventory, which in turn means that they haven't really started to put orders on the new X2 series. The good thing is that we have a good feeling, and we also know that we haven't found major customers that have left us. So what we now is waiting for is their inventories of our old product to go down so for them to start to order more on the X2 series. When we do the internal analysis on this side, we can -- we believe that during quarter 1, especially quarter 2, we will see changes when it comes to the order intake on X2 products. So coming into second half of 2020, we believe that Beijer Electronics should be -- how should it had been normalized, and then we have done this transition. And then hopefully, we had 3, 4 years going forward with a more normal growing situation. But that, of course, affects Beijer's situation quarterly. But if I look at year for year, I still quote "I'm not worried on this. They're doing the right things, and I believe this will be okay". Korenix. A little bit on that to the smallest unit. I mean they had a situation where they had several of their big orders that actually were in our books that they were sending it out of 2019, and they've pulled them to, I would say, first half 2020. And one other thing that is important here is that we have also seen that the Korenix product mix, and together with Beijer's mix, when it goes to the IoT market, we can see more and more that Beijer Electronics' existing customers want to buy also some of the product coming from Korenix. And that means that we, in combination with that, we need to expand Korenix' sales channels. This is good fit. So during beginning of this year, Korenix is then partnering up with Beijer Electronics' sales organization. And that means that -- and Beijer Electronics' sales organization in Europe will then sell also Korenix products. We can also see some other possibilities to save some costs by working a little bit more together, especially on the supply chain. When we're coming into a little bit of outlook on the business environment, I mean, we have all these old things with Brexit and trade war China-U.S. and so on and so on. We could see, we have no change in our view compared to 3 months ago, which means that they're still uncertain, but we still have good activity from the customer levels. And we -- there are some customers that, as I said in -- so for example, Korenix are postponing a little bit their orders, but they're not canceling. And then we have other customers saying that, okay, we don't give you the big orders in one step, we did give you orders every month. And that -- so the uncertainty is still there, but we don't see a big downturn as such. We have that -- the same thing with the -- all of you that read newspapers and so on, you have seen the -- heard about the coronavirus in China. And then, of course, that we also are following carefully. We have a Chinese organization, and at the moment, they are forbidden to go to work. And there were some -- a lot of restrictions on traveling and things like that. Now this is in the middle of the Chinese New Year. So it was expected for them to be off anyway. But of course, if this continues, and we still -- if we don't see an improvement, it could affect the Chinese sales. Luckily, in this case, it's not a major part of our business, but I just want to mention it. And of course, there could be some areas on the supply chain that we are now looking into if we will be affected on our supply chain things. But we -- as we can see today, we see minor problems here. But of course, if this continues for -- and if it expands, we need to come back on that this year and see what happens. Before coming into next slide, I want -- again, I want to mention that if you look at the group strategy that we have them coming in -- that we laid out end of '16, we can see that it has very -- it has proven to be quite successful. And for me being the CEO, we can see that, that now we are not discussing on what to do, now we do the different things. And now we are really, really try to -- how do you say it? Make the strategy happen, if I put it that way. So -- and I think that -- so from that perspective, it's quite good. If you then go into the orders and the sales side, and you see here very clearly that if you look at the order intake on the left side, you saw that Q4 2018, we had a very high order intake. And that was in -- you can see, it was SEK 450 million. But there, we have some projects baked for the Westermo and train side. We also -- but we also had a lot of lost time by, as I have already mentioned from Beijer Electronics. But if you look at otherwise, the order intake, you can say, the last 2 years, I mean, 2018 and 2019, they are on a rather okay level. But also, I want to be clear, we expect and we expect to see step-by-step increases in order intake compared to the sales level during first half of 2020 in order to continue growth path. Also on the sales, we steadily have an organic growth on the sales, but also now added on the last quarter, especially we have acquisitions that came in for a couple of months. And as also already mentioned, we have a good backlog the way we see it. We have over SEK 0.5 billion and the 10% increase compared to last year that is actually the acquired entities that adds for them. But basically, we have a good level coming into 2020. And by that, I -- Joakim will comment on each unit and also the group.

Hello, everyone, it's Joakim here. So this slide shows the overall group and the heading says, as Per have laid out, it's a mixed picture in the quarter. But if we look at the full year, we have a good improvement. Looking at the order intake, it was SEK 407 million. We had a sales of SEK 415 million and an EBIT of SEK 22 million. And you see in the graph below that we have somewhat bumpy on the EBIT side, but the longer trend, clearly, there's a good development pointing in the right direction. Some comments then. IFRS 16 that I think most of you know about, we had a limited impact on EBIT. So it's less than SEK 1 million that is affecting the quarter positively for these rules implementation. EBIT, I just mentioned, SEK 22 million in the quarter, and we end up the year well above the SEK 100 million, which is, of course, a step forward compared to last year. There's still no good progress. Beijer and Korenix, as Per laid out, irregularities continue and Korenix did not really achieve. And I will touch base on all these 3 going forward in the coming slides. And as Per said earlier, we're happy to see that the organization is able to create a positive cash flow. We had SEK 70 million in the quarter, ending up with SEK 56 million actually for the full year. So we're getting there, and that's a strong thing to note. The EPS ended at SEK 0.44. In that, we should be clear that we have an impact on the tax line. We had a stamp duty related to the acquisition of Virtual Access in the quarter of SEK 2.9 million impacting the EPS. Okay. So let's move on to business entity, Beijer Electronics. And as the heading says, it is bumpy. We have talked about these end-of-life processes that create the irregularities between the quarters, and it continues also in this quarter. But we also highlight that we have signed an agreement with Otis. In the quarter, we had SEK 198 million in overall intake. We had a sales of SEK 194 million and a profit of almost SEK 11 million in the quarter. As I said, and as Per laid out before, it is these irregularities caused by the phasing out of the 4 older generation that is continue to impact also this quarter. And -- but once we are through with this process, we expect stabilization. And that we will see starting up in Q2, but then more thoroughly in the second half of this year. We want to highlight that despite this bumpy development during the year, we do see a profit improvement if we look year-over-year, and that's, of course, good to see. And finally, we did, in the quarter, sign a supply agreement with Otis Elevator Company. And that is then for display solution products to their Compass product line that we are very happy to note. That concludes Beijer. Then let's move on to Westermo. Westermo heading solid development and in these solid development, delivering these numbers, we do a lot of activities and initiatives that is forward-looking as well. So looking at the orders, SEK 184 million, sales of SEK 199 million and an EBIT of SEK 22 million for Westermo in the quarter. It is a good development. There is the organic growth and a profit improvement. If we conclude the full year 2019, it is a record year for Westermo, both on orders, on sales and on profit. And then, of course, during the quarter, it was end of October, we acquired Virtual Access. And with the addition of also Neratec that was done in the summer, we do have a good portfolio. And that is, of course, something that we will -- expecting to see generating also profit in the year. This quarter, the profit contribution of the acquired entities is marginal. We only have some costs related to the acquisition as such in the quarter. We continue with the activities that we talked about before, where we are investing in products and organization for the new segments, power distribution and rail trackside, that is, of course, then included in these numbers. Last but not least, we have, during some other quarters earlier, talked about our challenges in the supply chain of Westermo. Now we can say that it works well. It's much more stable. They are performing in a good way. And also, we see a positive cash usage in the organization, contributing to the total of the group, of course. And that is also something that's very nice to see. Let's move to Korenix, our small entity. Here we have talked about that the target was to come to breakeven. We had a sales shortage and we created a loss. And as Per pointed out the reason for it, the orders, as such, SEK 30 million in the quarter, the sales was SEK 26 million. Unfortunately, a loss of SEK 2.8 million in the quarter. It was a handful of projects that we write here that was moved into 2020. And we are somewhat too depending on some larger projects for Korenix' sake. It's not in the perspective of the group, but for their side and their size. They are somewhat too dependent on projects. And then if you -- we have movements on those. You will have hits like this happening. And that is, of course, not ideal. And as Per said, we do partner up with Beijer Electronics in Europe for adding on another sales channel to add on to the existing network that we have there. And we do some coordination activities, where we look at supply chain, as mentioned here, with the ambition to benefit the cost base for us. We should note that we have been, and we have continued to have a high activity in the Korenix side where we have now a new model design or a platform for both hardware and software implemented that will be implemented for basically the whole product range going forward the coming year. That kind of concludes the go through of the business entities. And Per, take it further.

Okay. Thank you very much. If I then take -- and I will combine the targets as well as the outlook here on this slide. You can see now, and we have gone through the different units, and we can see that, that Westermo now is contributing on 11%, 12% EBIT level and Beijer is around on the 5%, and there is a small loss in Korenix. We have a target so far to go to an EBIT level for the group, up to 10%. And we have said that, that -- and I still will state that during next year, there will be possibilities to reach that at least for quarters. We could see now going into the year that the product portfolio, I would say, or can say, in all 3 units, but now we will also start with Westermo to come out with new products on the power for the Power Distribution segment. And we still have a very good portfolio for train, but also traditional networks call product is also now start to be quite good. Beijer Electronics, their main task for year 2020 is to make sure that we get good order intake on now the product series, X2, as well as the newly introduced called acirro+. That is, I mean, the -- for cloud solutions, et cetera, but also another product we call BoX2 in relation to that. But there, it is -- if you understand what I'm saying, it's only now to sell, it's not to do more development on this side. And we see good signs on that side. Another comment is that the acquired companies, it's always -- everybody knows that it's not that easy all the time to acquire companies. But the small Neratec acquisition, that, it looks quite good. It's -- they start to get into the culture Westermo-BEIJER GROUP very well. And they will also during next year -- during 2020 change name into this, but there is a very smooth transition. Secondly, Virtual Access that we only have had for a couple of months, but we can also see here, and when we have to look at the backlog and also comments from customers in both these cases, the customers on Virtual Access and they're quite happy that they now belong to the BEIJER GROUP. You can always be uncertain of those things, but that also looks quite okay. We have the backlog, as I mentioned. So coming into 2020, we see -- and that's why we say that we will continue the way we see it today, to increase sales and earnings for the full year 2020 compared to '19. Then, of course, to continue this growth, we could also see that during the first half of 2020, we need to step up one level on order intake compared to coming out of 2019. And you can be sure that everybody is aware of that here and everywhere in the organization. But once again, those -- I mean, if you have been around for a long time, it starts with a very good pipeline, and it start with good communication with customers and that product that the customers really want to buy. So we will do what we can to stay -- to do not change. And I would tell you -- end up with -- so for the next coming years, 2020, '21 and '22, that's in my view, the foreseeable future, we are going into the new decade with good hopes. So by that, I want to thank everybody, and then open up for questions.

[Operator Instructions] We now go to the line of Havan Hanna of Redeye.

If we start with the order intake, I know that it can vary between quarters and Q4 '19 was very strong. But given that, was this quarter's number in line with expectations? Or would you say that you had high targets internally?

That's a difficult question to answer directly because -- but I put it this way. This is in line with expectation totally. But I mean, being a CEO, we always wanted to be higher, if I put it that way. And of course, if you have pipelines and things like that, you can -- that you always want some of them to come earlier. But I mean, the base order intake, I would say, it's okay. We knew already coming into the quarter that quarter 4, as you said, last year was extremely high. And -- but there is not -- no, so my quick answer is no. It's close to the expectations, I would only say on the order intake.

Okay. And when you look at the pipeline, [ isn't this enough ] as it has been in the last quarter? Or do you see any bigger differences in terms of size or type of customers, geographies? And would you describe it as a healthy one, in lack of better words?

Yes. But this -- that's a good question. I mean when we define pipeline, I mean, I have been in business-to-business since, what is it? 1985, I think, I've been working with this. And you need to be very clear how you define the pipeline. You need to be clear that what is a potential for your customer. And we have, I would say, quite good process on that side when we evaluate pipeline because it starts with pipeline and it goes into orders and so on. And I would say that the pipeline is strong and both investment in Beijer and it starts to improve also in Korenix. And then you can see that, that -- what you can see then also is that, yes, somewhat more customers, the interest in customer has come in during quarter 4. But -- and the same, having said that, you can also see that the business climate is such. If this would have been 2 years ago, I would say that we probably would have landed a couple of more bigger projects quicker because now there are some hesitations, meaning that you can see from the customer side, they don't really get the orders as quickly as they did before. And since we -- and most of the customers are specified. So if they get an order, we get an order, that's one thing. So I would say that, that, yes, the pipeline is good, and I think it's fresh that you can probably find a singular market where we can do better in, say, one. But then now, it's up to get it signed because what happens here is that we know that we will get it sooner or later, but we haven't then signed and then you don't get it in. And that is, of course, a sign from the market that there are some uncertainties that don't really dare to push the bottom here in some cases. But if you look at overall, this could be valid for 5% to 10% of the cases. But that's the 5%, 10%, if 12%, we want to have them top of the normal order intake, if I put it that way. I don't know if you get good, wiser after that. But I think you know how we -- when we talk about pipeline, and we think it's healthy, there is a process behind that, if I put it over.

Okay. And just the last question, and I get back in the queue. I'm curious about the agreement with Otis. And just on a high level, what would you say were the main contributing factors in winning this order of competitors?

A couple of ones. I mean here, it's a combination of that the -- take the organization, I would say, in Taiwan, to begin with. When Otis evaluated us, they were also to the Taiwan organization, I mean, the factory as well as the people on the technology side. And they found out that, that was a -- yes, they were quite impressed with what was going on over there. Secondly, there were some good ideas on the product side. But also here, it's relations. We have a couple of persons in the U.S. organization that have old relations with Otis going back 10, 15 years. And where -- and there, where they trust each other that if there is anything to happen, we will sort it out. And then we have during the year, step-by-step in building up relations on several levels. So it's a combination of, I would say, strong organization of supply chain in Taiwan, relations from the U.S. organization starting -- to start it up. And then especially in the Beijer organization, they have step-by-step, I mean, we're meeting more and more people because this is a long-term agreement. So it means that they need to rely on each other a lot. But that's a combination of those things. And we will -- that agreement now, it means that we -- I would say from April, May time, it will start to be more and more regular deliveries from this agreement. And second half, we will full up to speed and then going into 2021. So that's the way it looks like. And just so there is no unclear, we don't -- you don't sign deals like that with volume guarantees and things like that. But what you do is that we know that every time they sell its products around the world, it will be our -- we will do it, so to say. So it's, of course, based on -- you can call it forecast, -- careful forecast, on what's getting on and going on in the future.

[Operator Instructions] As we see, we have no further questions at this stage, may I please pass it back to you for any closing comments and to close the call?

Yes. Then I just want to thank everybody for listening in. I appreciate that. And now we will go back in to do whatever we can to make 2020 a success. So thank you very much.

Thank you very much.

This now concludes today's call. So thank you all very much for attending. And you can now disconnect.