Ependion AB (EPEN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the presentation of Beijer Electronics Group AB Q1 2020 Report. Today, I'm pleased to present Per Samuelsson, the President and CEO; and Joakim Laurén, the Executive Vice President and CFO. [Operator Instructions] Per and Joakim, please begin.

Okay. Thank you very much. First of all, hello, everybody. And I guess that now everybody is used to sitting in digital meetings like this. So -- and welcome to the presentation of the quarter 1 report 2020. And as normal, we will go through this. I will take the first section, Joakim the second one. And then I will have some conclusions, some concluding notes, and then we have the Q&A sessions after that. If you have had the time to just quickly go through the report, you can see that -- and what we do there is that we are focusing, of course, and start up to discuss the coronavirus situation. We said -- we are saying that it's, of course, overshadowing most of things. And all of you listening to this knows that, and we don't have to dig into that in detail what happens around the world. But of course, for us, as an organization, it affects us, and I will come back to a specific slide on that thing. But I already now want to tell you that the employees and the people we have at the organization has really been very professional, and they are really doing a good job in these difficult situations, which means that in this first quarter, even though we have had some hiccups because of the coronavirus situation, I must say that there has been a high activity level. And then also the operations, supply chain and so on had been able to work in a good way. We are stating that we have, overall, not seen significantly downturns because of this situation. But we're stating that if we try to do an estimation, we can see that between 7% to 9% downturn because of the COVID-19 situation, and that is mainly in Korenix and in the Beijer Electronics entities. It's, of course, always difficult to do those estimations, but we try to be as -- how should I put it, straightforward on that as possible so we don't overestimate that factor. The big shining star to this quarter is, of course, Westermo. If you have been -- and as you will listen to Joakim later on, they have done a very, very, very strong quarter, and they have maintained a good growth. They have a good profitability. And also nice to see that the 2 acquisitions we made last year, Virtual Access as well as Neratec, both have contributed in a good way during the quarter. And also on top of that, in these difficult times, Westermo had -- did a -- they closed a deal with a train manufacturer -- train company in Northern America. And we estimate the value of that contract to be around SEK 80 million. And that is, of course, also well done in these times. Beijer Electronics, they are one of the 2 entities that has been affected by this coronavirus situation. And I could tell -- talked about it in the following way. I mean we that are doing business in the Asia Pacific regions, normally, there is what we call the Chinese New Year coming up. And this year, it came up around Jan -- between January and February. And normally, you have 1 to 2 weeks around those celebrations they have over in that region, where it slows down or even closes down -- closing down. This year, it was because of this situation, the coronavirus situation, it was longer. And also we had, especially, I would say, in February -- end of Jan but especially in February, there were some issues on the supply chain, meaning that some difficulties to get some of the components into it. But it never ended up in a situation where we need to close down any line and things like that. So that's a little bit what has happened. And then, of course, on the customer side, especially in the Asia Pacific side, but also when you have projects that you want to close, if I put it that way, or start up, then there are some hesitations. It's a combination of supply chain and a little bit that some project slows down, that's why there is a little bit lower sales in the quarter in both Beijer Electronics as well as the Korenix side. But coming back to Beijer Electronics, and I know Joakim would comment on that, but the good thing in the quarter 1 is actually that the order intake was in a good situation and increased up to -- SEK 187 million to -- no, SEK 189, I think it was, million. And that is a good sign for the new products, X2 series, that we will -- we are coming into now. Korenix had the quite -- is the unit that had the toughest quarter in relation to the size and everything. And they lost, I would say, 20%, 25% of the business or something like that. We took a decision very early to take cost program, and we prepared for that more or less directly. And both Beijer Electronics and Korenix  have done that quickly and efficient. And during -- we took the cost now in quarter 1, and we can see -- we will see cost effects from April and going forward. And we can see -- we say that the cost we have taken is SEK 15 million, and the estimated yearly savings will be SEK 40 million to SEK 45 million, starting up now in April and going forward. The comments we are saying -- and our comment is that the overall underlying performance of the group, we will say, is decent level driven by Westermo. And also, we want to state that take-up -- that the cash flow we had -- those of you that are following us knows that during '17, '18, we had -- beginning of 2019 as well, we had some sort of, I mean, issues on the cash flow side. But Q4 last year and Q1 this year, we are -- the cash flow is okay. We're ending up this section by saying that we are preparing ourselves for tougher times ahead. And all of you listening to this, I -- or probably, in some cases, better than me to predict what will happen going forward. But we -- how should I put it, this statement plan for the worst and hope for the best, that I think goes for us. And we have a lot of plans and scenarios going forward for what we should do if things goes worse. And so we could really push the button if we want to do things here. And that is what we -- and I will comment a little bit more how we look at the future in a -- in 15-minute time here. Then if we go into specifically a little bit this corona situation, and I don't need to state, but of course, people's health and safety is first. And we really have done all the things we can in order to avoid, yes, how should I put it, physical contacts and physical meetings and things like that but also how to separate workplaces and all these things. And of course, as a lot of other companies, wherever possible, we work from home, remotely from home. And I could say that we, as all other companies, are getting quite good in digital meetings, even myself, if I put it that way. No, I'm not the youngest one in these cases. But we could also see that it's important that we also meet at the offices. So we are not completely shutting down the major offices. So we try to have a sort of where people are in -- 30% to 50% of the people are in the offices, and then we roll it around. So as my own situation, I'm in the office 2 to 3 days a week, and then I'm working from home the other days and most of the people are doing the same. Then, of course, we have a special group headed by Joakim, where we are looking and exploring all the different, we say, country-specific support packages. And they are -- I mean there are some packages in Norway, some other things in U.K., third one in the U.S., and so on and so on. And of course, here in Sweden, we have our packages. And we are monitoring all these packages so we know what we can do and we can't do once again to prepare ourselves for -- if it gets worse. We have done some things in the different countries, but we haven't been taking the final measurement on financing taking down -- and I'm trying to say the English virtual [indiscernible], but we haven't done that yet. But we have prepared ourselves for it. We have also, in difficult times, it's always important to protect the cash and also to make sure that we had a good situation on that side. And one -- then the Board, they would suggest on the annual meeting to take away the dividend in order to save that money in the company. And I can also say that we have a transparent and extremely good dialogue with our major bank. And I know that if we need it, we will be able to extend credit lines and things like that. But that's not the situation today because as you can see in our report, we are coming out of the quarter in a good situation here. We are saying also that we will -- as BEIJER GROUP, we'll have debt at cost level. And what we mean here is that when market condition changes, and I'm saying when because I think there will be some changes going forward. And when things are happening, then we are -- we'll be very quick to adjust further on if we need to. All of us, of course, hope that does not happen, that we don't need to do that, but we prepare ourselves very carefully on this situation. And some of you know also that we have in the management team here, several of the people that have been around in other crises. So we make sure -- you can be sure of that we will do the actions we need to do when we need to do it and if we need to do it. Last point there, once the crisis is over, because it's not if the crisis will be over, once the crisis is over, then we are really doing everything we can to make sure that the organization, workforce, employees, that these will be intact so we could -- that we will remain attractive to both the customers and employees. Because also, if we have been around before, you know that when it moves -- when it goes the other way, we need to be prepared there as well. By that, I also have a couple of comments on the orders. And you can see here on this slide that -- I know that Joakim will comment a little bit more onto it, but you can see that there are no dramatic changes in the order intake or in the sales. If you see in the quarter 1, both from the order intake as well on the sales side, but a little bit is with the organic growth that was more or less not there if you look at the group. And that the growth on the sales side is mainly -- and a little bit the order intake is mainly driven by the acquisitions. But you could -- I wanted to note that also Westermo is growing, also excluding the new entities, by a good, healthy 8%, and that I think is very well done. By that, I hand over to Joakim.

All right. Hello, everyone. I will take us through more of the financial aspects of the report over the first quarter. We start with the group. And as Per has described, we state stable underlying process, but COVID-19 having an impact in the quarter. Order intake, SEK 406 million; sales, SEK 395 million. We have an EBIT, excluding the restructuring program, at SEK 23 million or 6%; after the restructuring program, SEK 8 million or 2.1%. You can see in the graph below the P&L, the EBIT development. And here, we show in Q1, excluding the restructuring cost, because that is the underlying business generation of the quarter as such. It's not in line with Q1 2019 but actually somewhat higher than we had, if we take a sequential look compared to Q4 2019. When it comes to currency, we have a positive impact, the fact that we had a weak Swedish krona and do a lot of business in euros and in dollars. We have a positive effect of about SEK 2 million in the quarter, transactional variances, mainly. Looking at the bottom line, the net income, of course, impacted by the SEK 15 million in restructuring cost. We end up at plus SEK 5 million compared to the SEK 20 million last year or an EPS of SEK 0.19. As Per pointed out before, we want to state that we have a positive cash flow, not huge numbers but still positive, SEK 3.5 million, mainly driven by good progress in Beijer Electronics, which we are happy to note. Now we take us through the 3 business entities, and we start with Westermo. And the heading here, good performance with record profitability. It's really good to see that Westermo is doing really, really good in this first quarter of 2020. We have an order intake of SEK 202 million, sales of SEK 214 million and an EBIT of SEK 33 million. And looking at the graph of the sales, it's pointing upwards, of course, including the acquisition, the acquired entities. And with those, we have a 25% growth. But in terms of -- sorry, that was orders. But in terms of sales, we -- there is a 35% growth. But organically, as Per pointed out before, it is 8% growth, which is strong to see in a quarter like this. Per has already mentioned the agreement signed with a North American train operator, and that is a good one to note. When it comes to Neratec and Virtual Access, the 2 companies that we acquired last year, they are contributing. They are adding, basically, in line with the rest of Westermo, which is in line what we stated before. And then the last point, we have been talking about the new segments, Power Distribution and Rail Trackside, that's ongoing right now, and there will be new products coming up in the coming quarters. So let's move to Beijer Electronics. Here, we state a mixed picture. Let's look at the numbers. Order intake, SEK 188 million; sales, SEK 164 million; and an EBIT, excluding the restructuring, of SEK 4.8 million; but including the restructuring cost, we come to a loss in Beijer Electronics. And clearly so you see in the graph that we have a drop of the sales in the quarter. We have an impact of the corona situation. But also what we have been seeing during 2019, with the phasing out of the 4 product families and those challenges that we saw during 2019, that has built somewhat over also in the first quarter. The good thing is that the orders increased, and we see a good growth in the X2 series. And that's basically what we planned for, and that's also what we can note in the first quarter, which is something to make a note of, I think. The restructuring is then impacting Beijer Electronics, as stated before. And a good thing that we want to note also is that -- I think most of you remember that we took or we signed an agreement with the company Otis in the U.S. And we have started to do deliveries, pilot deliveries in the quarter, where the regular shipments are scheduled then by the end of Q2. And then we go to Korenix. Yes, it was a tough quarter for Korenix. Being placed in Taiwan with quite a big extensive part of the business in China, of course, they had a tough quarter, no doubt about that. Orders at SEK 20 million, sales at SEK 21 million with quite an extensive loss, where the restructuring program also made it even worse. And looking at the sales graph below it, you note or you see that this is a hard one for the entity Korenix. The restructuring program meant that we had to make adjustments in the organization here in Korenix. Also that we coordinate some activities with Beijer Electronics, mainly on the supply chain side, and that's also part of this restructuring program. And the low sales is basically the reason why we had the loss in the quarter. The last point here, though, we want to raise that I think many of us have seen in the news that things are coming back in China, and that is something that we see also. There's quite a lot of customer activity, both in China and Taiwan and the region, and we saw that in the Korenix organization at the end of the quarter. This concludes the financial side, and back to you, Per.

Thank you very much. First of all, I just want to restate that this quarter, when we come to the performance, we are very, very happy with Westermo. And all the people in Westermo should be proud of what they have done during this quarter. I also want to, of course, that the other units -- people should be proud, but they have a little bit of challenge before they could prove and show these type of figures. But Westermo -- we also had a situation in Westermo, where I think that the segments we are -- segments that we are supplying to are not directly affected in a situation where we have this coronavirus situation. So we'll see. But of course, if this environment will continue then, of course, Westermo will be affected as well. But at the moment, they are doing well. The good thing in Beijer Electronics is -- as we have stated now a couple of times, is the order intake. For us, the proof for the X2 series has been to see now that -- during first half of 2020, that we can see orders coming in on X2, and we see that, that is doing -- that is coming. Korenix, we have said as well, but I must say that they are a smaller entity, but believe us when we say they're doing a good job. And step by step, they will come up of -- come up from this situation, and we can see now that there are more and more activity in the Asia Pacific side. And I'm also sure that the cooperation between Beijer Electronics and Korenix  sales side in Europe will have a positive effect, especially second half of 2020. We have already discussed the cash flow. It's important for us to follow, and we will continue to follow that every week, every month because in a crisis situation, that's the most important thing in the end. And we will still have a huge uncertainty going forward. And as we have also stated in the outcome for 2020 that we have to change. The last couple of months is, of course, we don't really know what will happen going forward with economies in the world. And once again, we prepare for a tough situation, but we hope for that it will be better. But once again, I mean, at the moment, we are getting orders, we are selling, we are also supplying and the customers are paying. So we haven't seen dramatic downturns yet, but of course, it's a little bit slower. And you can see in Beijer and Korenix that, as we said, 7% to 9% downturn in the quarter, and that's really what we see at the moment. For us, we can say that at the -- for the next couple of months, I would say that -- what happens in Europe is the most important thing for us. We have close to 70%, 75% of our sales in Europe in the group. And we will see now if the big countries like Germany, U.K., Spain, Italy, in these ones, if they are -- or France, by the way, if they're starting to open up, and if there are some positive trends going forward, then perhaps we can come out of this in not a very bad situation. But if they start to not open up, and if they have a rebound going down again, then we will have problems going forward. But I'm -- at the moment, I'm a little bit optimistic because we can see that most of the -- our customers and the segments we are supplying, they have not been closing down, more or less. Yes, with a couple of exceptions, they are still running, and we can see that they will continue to run. So I'm a little bit optimistic at the moment for that. But as I've said before, we do everything we can and make -- so make sure that we are -- when we're coming out of this, we will be in a good shape. And that means that we should have supply chains in order, we should have the right people in place, and so we really could be there when the market is starting to go up again. And by that, I think we end the discussion -- the presentation. And as I've already said, this is the outlook. And yes, it doesn't seem that much -- say that much. It says that we -- we don't really know what will happen because of the corona situation. But you can see in quarter 1 that, so far, it has not been that bad. We are, I mean, still doing -- we are working every day. And as I said, we haven't seen quite a big downturn yet. By that, I open up for questions.

[Operator Instructions] Our first question comes from the line of Havan Hanna of Redeye.

Just quickly around the pandemic, and if you can say anything about the activity level during April compared to the first quarter and maybe, first and foremost, compared to the end of March?

Havan, thank you for listening. I'm sorry to say, I can't comment. I don't want to comment anything more than I have already done. And that is, I mean, I have said that -- I mean we are still getting orders, we are still selling, we are still supplying and so on. And more than that, I can't comment on that point.

Okay. Got it. And have you noticed any customers placing larger orders than usual, maybe to secure products if the situation should worsen even more in the coming months?

That's a good question as well, of course, but we haven't seen that much. There were some tendencies in February that there were some of the -- some that wanted to safeguard a little bit, but not in a big extent. You can -- on the other way around, we haven't seen -- you can call it a bigger contract that we normally get, for instance, investment. So it evens out a little bit. So I would say that, overall, a quite -- a normal situation when it comes to that side.

I just want to state, Havan, that we have also written in the report, we have not seen any cancellations of existing orders.

Yes. And maybe a question around R&D and your view and strategy around that. Are you making any changes there? Or do you continue as planned before this whole situation appeared, so to speak?

First of all, no, we haven't done any big changes on the R&D. But when we have the different plans, if we need to cut down anything going forward, then, of course, that will -- one of the area we will perhaps delay some of the projects a quarter or 2, so we have prepared to do that. But so far, we haven't been taking down those activities a lot. There is, of course, one thing we mention is that one thing you do in these situations if you cut down on consultants, for instance. So on the development side, we have some consultants that we have been canceled -- that have been canceled during the course of -- to prepare ourselves for tougher times. But I would say, generally speaking, we haven't taken down the R&D, more or less, at all, if I put it that way. There are also some changes where you try to focus on the short-term customer-oriented things. But I would not say, generally speaking, no big changes. But once again, if there will be a downturn on the order intake and so on, we have prepared ourselves to, I mean, to work from -- I mean work 2 days and be home for 3 days. Then, of course, that will affect how much we can do if that will happen. But we are not there yet, if I put it that way.

Okay. Just a quick update on acirro+. How is that performing and...

This is -- we said in an internal sort of podcast, where -- I mean now when we have this time when nobody could travel and, I mean, the digitalization, how should I put it, the increases in a lot of ways. And we are all selling acirro+ through different digital -- in digital ways. But I will not -- there are no significant in the figures in Q1. My personal view on that one, I will try to really go through that second half of 2020. That's when I start to evaluate if that is a good product or not.

Okay. Got it. Maybe a last one, just around the Westermo order with the North American rail company. Can you talk a little bit more about the order? Is it a new customer? What potential are you seeing going forward? And just, overall, your view of the North American rail market as a growth driver and your plans and ambitions there.

Short version is that, first of all, there is no misunderstanding. It's not an order; it's a contract. And we have supplied to this customer before. And the good thing with this is that -- with this contract is that they are -- I mean pointed at us for the next couple of years. And that will start up, I mean, end of this year going forward for a couple of years. So that is, of course, very good. We see that there are happening things in the North America, so there are also other customers up there that we see more in the pipeline, more opportunities going forward. But for us, of course, those of you that have been following us for a lot of years knows that we had earlier a Toshiba order for the Washington side that kept the American organization going. But now we have got another big one, and that's good also to get other orders in the U.S. That's, I guess, is as much as I can say. But I'm really looking forward to see Westermo's development in the U.S. in the next couple of years because they have a good organization over there.

Stay safe and take care.

Same to you.

You too, Havan.

[Operator Instructions] And there are no further questions at this time. Please go ahead, speakers.

Okay. Thank you very much. Then I just want to thank all of you for listening. And then as Havan said, I also, take care in this time, and we will continue and take care but also do our best to come out with a good result also going forward. So thank you very much.

Thank you very much.

This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.