Ependion AB (EPEN) Earnings Call Transcript & Summary

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

Thank you very much, and all of you listening in, welcome to this report, a presentation of the report. This is the last quarter of 2020. And in one way, I hope that we will not see the same situation '21 as we have seen in 2020. I hope, and I'm sure all of you know what I mean by that. But we are going to present -- do this presentation as we normally do between me and Joakim. And so I'll start, then Joakim comes in, and then I end up to do summarize in the end. We -- if I start on the business update, a couple of words around the end of the year. We are, of course, not happy with the situation that we reported a small loss in the quarter, quarter 4, because you never -- in either of our positions want to [ see ] this anywhere. But there are, as we tried to explain, we'll try to explain several positive signs and also substantial important things that has happened in the other year that makes us positive going forward, and we will try to explain that in this half an hour. First of all, we are still affected by the COVID-19 situation, and it's mainly -- it's in all units, but it's mainly by electronics that has gone -- we have seen a real effect on the volume side. Westermo during this situation, they have been a little bit lower than expected, but still making profit every quarter and a decent level. And also, we had a tough situation in the beginning of the year, I'm not talking about beginning of 2020, for Korenix. But step-by-step, they have improved, and we are happy to show a small profit actually after a couple of losses quarter in Korenix. But the most important thing for us during -- in a business like this is to look at the order situation, and we had some tough quarters, especially quarters, quarter 2 and quarter 3 last year. But now quarter 4, we start to see now we are coming back up to levels where we should be. And as you can see in the second point there that the orders increased by 28% compared to quarter 3. And we -- as you can see later on here, we are close to the SEK 400 million that is important for us to come up to in the quarter. It's also extremely positive to see that Westermo, they have now entered a supply agreement after the quarter 4, that is in January 2021, with the train manufacturer, Alstom. And that is -- and you can see the value here. It's a 5-year contract, and it's at least SEK 250 million value on that one. This is also quite strategic for us because, of course, it's a nice figure for us. But it's also -- some of you is aware of the fact that Alstom is in the process of acquiring Bombardier's train side. And there was a preliminary okay from EU authorities around this thing. And for us, of course, then that this signals that we have a good position in Alstom, and we have a good position in Bombardier already before. So for Westermo and for BEIJER GROUP, this is quite important for us to get that signatory, if I put it that way. We said already when this pandemic started, let's say, March, April last year, we said in the call of the quarter 1 that we will concentrate on -- we concentrate on the financial situation, cash flow, debt and so on so that we don't come into problems on that side. And I'm happy to say that we have had, I mean, positive cash flows every quarters, especially now the last quarter with the SEK 45 million. And given the circumstances, that I think is good, and that also means that we have lowered the net debt during this pandemic situation. So even though we had a negative result, a little bit hit by currency and things like that, there are some positive signs going forward. If we then go into a couple of words on the entities, I have already said that we see that Westermo, we have already say -- all the times, we have stated that if business goes down, it goes down quicker in Beijer Electronics, but it also goes up quicker. And Westermo is a little bit more, a little bit down, a little bit up, and you can see that during 2020, that was exactly what happened. And Westermo has -- yes, they are now also back up on the order side. They have been profitable every quarter, and we can see also that there is a good backlog going forward. Beijer Electronics has been a little bit hit by -- especially in the quarter 4, that it's different things at the same time. I mean a little bit mix, a little bit higher levels of sales in the Asia Pacific, lower in the U.S. And also, you can call it also a little bit on the product mix side. But the good news there is that we are -- now we can see the order intake going up in Beijer Electronics. We can see that, that will be balanced up again going forward. So there will be a better balance between the geographic regions coming into 2021. And then you will also probably see margins going up again in the Beijer Electronics. I have already covered Korenix. I'm happy to say that they now start to be on the black side, I mean they are making small but profit after several quarters in the red. We have had perhaps -- yes, we have said during the pandemic all the time here that we want the safeguard competence. We don't want to lose competence when it comes to development, but also sales side. And we have put a lot of emphasis into meeting customers digital during the whole period during 2020. And there, I'm quite proud of the organization that we feel that we have still very good customer contracts around the world, and which means that as soon as the customer starts to order again, we will get up again because, as you know, when customers orders, we get the business from them, so to say. And it's also -- we have done some also improvements on the product side. So we are coming out of 2020 with a very good product portfolio, even better than -- compared to when we entered into 2020. We had a confirmation, and I will tell you a little at the end of this presentation that the long-term strategy remains. We can also see that overall market trends with digitalization, connectivity and so on, even perhaps speeding up. So I think we still believe that the products and the markets we are in are good going forward. And also based on what we have seen end of quarter 4, but also now beginning of quarter 1 and based on what we had -- the insights we have of today, we expect a market recovery in 2021, especially second half of the 2021. But it's also important to note that we have a backlog, good backlog going into 2021. The slide and the comments about COVID-19, the way we see it here is that without going through all the details here, but we see that we will still be affected by the COVID-19 when it comes to travel, when it comes to how to communicate internally and with customers. That would -- in our view, that will continue during the first half of 2021. So we see a little bit -- I don't hope it's only wishful thinking, but we hope that coming to summer and after summer, we will be able to start to meet each other again. I would say, as a CEO, if it takes longer time, you start to get the challenge to lead the company like this when you can't meet people. But hopefully, the vaccine and things like that will make that happen. But also now important going forward, we have now said internally, we don't want to talk about the COVID-19 as an excuse not doing business because this is sort of a new normal when it comes to do business, which means that we hope and could see signs of that first -- even first half, it will be improvements, but especially second half, we can see improvements in the business side. If we go into just a summary of the order and the sales situation, the big -- the most important thing is actually the order intake. Everybody realized first, you get an order, then it becomes sales, and then, of course, if you have higher sales, they get profit. But the order intake in quarter 4, for me, is the most important figure in a report. And you can now see that in reality, we now have the same order intake Q4 '20 as we had Q4 2019, especially if you correct for the currency things. And also important is that the overall backlog that we have that is -- you can see there is SEK 492 million is also in the same level as it was 12 months ago. So we are coming out of 2020 in an okay position, if I put it that way. By that, I hand over to Joakim, and he will go through the financial situation.

Hello, everyone. This is Joakim. I will take you through more of the financials for the group and the 3 business entities. And we start with the group. And as you can see, the order intake was SEK 392 million in Q4. The sales were SEK 350 million, and unfortunately, the loss -- we had a loss, minus SEK 5 million for the quarter. The main reasons for the loss is, of course, the lower sales, as Per indicated, and the fact that COVID is impacting mainly Beijer Electronics, but also, of course, impacting Westermo and Korenix. We have the foreign exchange against us. The impact on EBIT is around SEK 6 million, and for the full year, actually, it's SEK 20 million. So we've had an uphill kind of situation with the currency. You that follow us, you know that in Q1, we announced the restructuring program, and we can now tell you that we have basically finalized that one according to plan, and it will give what we said as well with around SEK 25 million, SEK 30 million savings this year -- sorry, 2020. And the yearly effect of around SEK 40 million to SEK 45 million going forward. So that one is done, we can say. Looking at below EBIT on the financial net. There, we also have a currency impact by the stronger krona by the end of the year. It's around SEK 4.5 million. And the total number for the year is SEK 8.2 million, actually. Net income negative, yes. Per stated the good thing is that cash flow, SEK 45 million, in the quarter and SEK 70 million for the full year. Let's go into the business entity, Westermo. Heading here is order growth that Per mentioned earlier, and performance basically moving sideways, similar numbers to what we saw in Q3. Order intake SEK 214 million; sales SEK 183 million and an EBIT of plus SEK 15 million or 8% for the quarter. And the order intake, I mean, we've landed a few, not a lot, but a few larger orders, mainly on the train side in the quarter. So it's good to see. It's not only 1 or 2 orders. It's in quite a few places, which we are happy to note. And Per has already mentioned the Alstom contract that is nice to see, and that is also providing for -- going forward with decent volumes. Earnings at 8%, as I said, full year at 11%. Given a pandemic year, decent is the way we describe it. We should also remember that we have continued to have the focus on our strategy in Westermo. The WeGrow strategy, including focus on the segments, power distribution, track side that will cater for somewhat better growth going forward as well. And we also state that we have been working with a product and then our offerings, as Per said. We have developed a service concept also in Westermo that we believe will add on going forward as well. So yes, all in all, good with the order growth in Westermo. Beijer Electronics, yes, the heading here continued impact of the pandemic. Order intake, SEK 159 million; sales SEK 145 million; and a loss of SEK 11 million in the quarter. The good thing here is that if you look at the sequential view on the order inside, the SEK 159 million is actually a growth compared to Q3 with 24%. That is good to see. What we can say on the regional side is that we still see a tough business climate or a challenging business climate in the U.S. and partly in EMEA, while Asia is actually showing a small increase. So there are a light in the tunnel for sure on that side. In terms of the loss, Per mentioned it, we do have an unfavorable regional and by that product mix in the invoicing that's been done in the quarter. We have lower margins on the Asian side compared to the Americas and EMEA, and that has hit us in the quarter giving the loss. We should be aware that we have taken down the cost, partly then related to the restructuring program that I mentioned before. But it's around SEK 50 million lower level of cost in the Beijer Electronics this year compared to the year before. We have before talked about the cooperation between Beijer Electronics and Korenix, that has continued basically as planned. And we are coordinating the sales channels in EMEA and U.S., and we are working with the supply chains as well. And there are more to do on this matter. And that one, we have been focused and will continue to work with. Finally, Korenix. It's good to see that we have a positive sign as Per said, positive development turning it into the black numbers. Also here, we see a sequential growth of orders compared to Q3, good to see. Sales is also up compared to what we have seen earlier this year. Cost level, we have taken down. And now with the somewhat higher volume, we do see the profit. So that one we're happy to note. We also want to highlight that during the last 2 years, basically, we have been having a relatively high level of development because we have, during this period, redesigned the hardware platforms and also the software or the new operating systems for all the products in Korenix during these years. And that means that going forward, we will actually release quite a few new products. So in these tough times, we have continued to invest, and that's important also to have in mind going forward. And as I said, the cooperation with Beijer Electronics continues with Korenix. That basically concludes my part. So over to you, Per.

Thank you very much. If I start up with sort of outlook, you can see here that we say that although there is a short-term uncertainty regarding the ongoing progress with the information currently available, and here we say that, I mean, as we are sitting here today and if we look at how it looks like in the order intake and say one at today, it looks like that we will have an improvement -- steady improvement during 2021. But of course, if there is a third wave in the pandemic and so when everybody realizes that then we have perhaps another situation, but we can't see that sitting here today. And that means that we should have a good potential 2021 to be able to improve quite a lot during 2021 versus 2020. And I would say and argue that the biggest change should come in the Beijer Electronics during 2021 compared to '20 as such. The -- we have had a Board meeting, and the Board proposed to have, unfortunately to say, have 0 -- so null, 0 kroner, as a dividend. And this is -- that we still feel that there is an uncertainty, and we want also to have cash available for smaller investments and so on. So there is a sort of a safeguarding of that one. But it's important to state that we want to be back to be a company-giving dividend. So definitely, objective is to next year, so 2022, we should definitely start paying out dividends again. That's a clear ambition from everybody in the group here. A couple of words around the BEIJER GROUP strategy. We start saying that at BEIJER GROUP, we state that we're a leading technology company providing secure solutions for a connected world. And the philosophy is based on a high degree of decentralization, and also that independent subsidiaries with profit responsibility, they are then managed with the help of clear values and central follow-up. I mean here, we are saying that we are really decentralized unit, but we have very clear follow-up systems and so on. So we really know what's giving on more or less every day when it comes to the order side and so on. But it's important also for all the investors that are following us, that you understand that the business model is, of course, based on close long-term collaboration with customers. And the finished products that we have is both hardware and software and that they have a long life cycle. And it also provides, you can say, a recurring or repeat and stable income for a long time. Once we are specified at the customer side, and you can see now the Alstom order, that once we are specified into their trains, for instance, then we will get business from those type of customers as long as they are selling their products. And I think that is extremely important to understand when it comes to our business model. And then, of course, in addition, future software updates provide opportunities for expanded business, which means that if you get another 2, 3, 4 years ahead, I'm quite sure that we will also see more and more software sales from our side. We have also said internally that the BEIJER GROUP business entities target a growth by at least 10% organic growth on each entity, and it should have a potential to have at least an EBIT of 15%. And so this is what we want to work with. I mean both the existing entities, I mean, the free entities we have today, should be able to have an organic growth of at least 10%, and they should have a potential in a not so long for the future to have an EBIT of at least 15%. Then we also state that a large part of the growth should be organic, but we could supplement it by acquisitions. As we have seen during 2019, where we made 2 acquisitions. And that is, of course, could be complementary to existing units, but also new independent business entities. By that, I want to end the presentation. And as a summary, I would just say the following, is that we don't like to present losses as we did in Q4, but there is now step-by-step, a lot of things going -- that is positive for us going forward. So we are looking forward to come out -- to come into 2021 with a lot of good opportunities going forward. Thank you very much. And therefore, we -- after that, we open up for questions.

[Operator Instructions] Our first question is from the line of Nicolas Hassbjer from Tequity.

Regarding Westermo and acquisitions, if I remember correctly, you had 2 acquisitions that were counted in. And in the report, you mentioned that the order intake, excluding the acquisitions, is minus 8%. Is that the only business unit that is affected by acquisitions? So it means in that unit, the organic growth is minus 8%. Is that correct?

Yes. Nicolas, that's correct. I mean, we -- the -- you can call it, the old Westermo without acquisition is minus 8%, that's correct. And so that, you can call it, that's the effect, the pandemic effect on Westermo in 2020. So that's correct. Both acquisitions is -- belongs to Westermo, so that's correct.

And both those acquisitions were counted in from 2020, so they affect 2020. But on the other hand, if I remember correctly, you had some major orders that were delivered in 2019. So the comparables are a little bit tougher. So it's not fully as bad as the minus 8%, I guess.

No. I mean that's a valid comment, Nicolas, and that's exactly the way it is. I mean, we had to in Westermo -- if I remember it right, also some '18, but mainly '19, some very big orders coming in. So of course, when you compare '20 with '19, it's a little bit tough. Hopefully, we'll see because we still have potential for '21, and we got 1 or 2 quarter 4 bigger orders coming in, in Westermo, quarter 4, 2020. But let's see now what happens during 2021. But you're correct. It's a tough number to compare with, yes.

And the next question comes from the line of Mark Sjöstedt from Redeye.

I see a lot of initiatives of getting closer to the customers like you launched UNITED, your new partner program. And I see also signs in Westermo, your new service concept, supplementary revenue model. Could you spread some light on these initiatives?

Yes. I mean some of us, unfortunately, have been around for a long time, if I put it that way. And to use bad times and also to use the situation where you can't travel and you actually get some more time in a lot of areas, then we decided directly that let's spend and do as much as we can to develop different customer activities, both digital, but also elsewhere. So we -- you can call it, we speeded that up. And that means that the UNITED, there, we really have a sort of a -- you can call it, a customer club, where you really interact between different customers and ourselves. And that we could see starting that up, that's a good way to do it. And then, of course, we can also see that we have opportunities on the service side when it comes to Westermo. But I think the most important thing is that to try to have different ways of communication with customers ongoing because the worst thing that could happen is that you are quiet for half a year, you don't have an interaction. So you need to find different ways and also where the customers find value to have the discussion with us. I think the most important thing with the competence that we have is that our way of selling is to show the customers that we have a knowledge, that our knowledge about the customers solutions and products are extremely important and are very good. So I think it's around those themes. And some people here on this call is, they know me well enough to realize that I really see opportunities when it's bad times to come out of the bad times in good situation. So we don't -- we shouldn't stop now with customer interaction we have had -- during the whole 2020, so now 2021. And you normally can say invest in bad times and on money in good times, and this is really what we're trying to do now, that we are really prepared on supply chain, customer interactions and so on, to really, really, really selling and supplying during 2021. It was a sort of a long answer on a short question, but that's the way I would say.

Yes. And I see that you have maintained focus on product development, and you have a quite high investment levels. How is the pipeline looking like and the specified process?

A couple of comments that I can make on that one is that, first of all, if you take Westermo, you know that we, 1.5 years ago, entered into -- that we stated that we start to focus on the energy sector and the power distribution side. Here, you will see products that has come out end of '20, but also during 2021. So we start to have a good certified portfolio to that segment that is important. And not -- even if the smallest units, I could also tell you about Korenix. I think Joakim touched upon the R&D on the Korenix side, but during 2021, we will have, I would say, 2025, up to 30 smaller and bigger product releases from that development side. So also Korenix starts to be ready on that side. And then we can also see that, as we stated and report that Beijer Electronics have made an upgrade on the iX software that may, as I said, the combination of the iX software and the X2 panels is now quite in a good situation. So yes, we are going into 2021 with a good portfolio.

Okay, And one last question. You stated that digitalization is one of the primary drivers behind the organic growth and more and more software, the part of revenues, is it possible to estimate more or less how much is software versus hardware right now in your product offering?

To put it this way, this is a question we are thinking about how to handle when it comes to information. But short version now, we can't specify like that. But if the indication I could give is that when we have development ongoing, I would say that 65%, 70% of our development budgets are software, and 30%, 35% is hardware. And that tells you a little bit about the -- how the product looks like, even though we supply a box or HMI, the value of that box or HMI is more than half of it is the software solutions, actually. So that's why we say that we are delivering in hard and a software product every time we deliver something. But as it is today, we are still charging for the units, so to say, but we have now opened up for -- especially in the Beijer Electronics business models that they, from now on, they could do -- they could start to sell licenses also on the software, but there is no significant sale on that at the moment. But let's come back 1 or 2 years from now and see what happens there.

[Operator Instructions] And as there seems to be no further questions, I'll hand it back to the speakers for closing remarks.

Okay, then, thank you very much for listening in. And I'm looking forward to a very nice 2021, both when it comes to the pandemic, but of course, also business-wise. So once again, thank you very much for listening.

This concludes the conference call. Thank you all for attending. You may now disconnect your lines.