Ependion AB (EPEN) Earnings Call Transcript & Summary

Hello, and welcome to Beijer Electronics Group AB Q2 2021 Report. [Operator Instructions] Today, I'm pleased to present Per Samuelsson, President and CEO; and Joakim Laurén, Executive Vice President and CFO. Per, please begin your meeting.

So thank you very much. And all of you listening in here, nice to talk to you, and welcome to our quarter 2 report presentation in a very hot south of Sweden in Malmö. We will do as we normally do. First of all, I just want to look at the picture on the slide. That this is our new product that goes in Westermo, that's a switch, robust switch, that is now certified and goes to the energy market. So hopefully, the next 4 or 5 years, this product will sell a lot and starting up 2022, the way we see it. But it's -- we think it's nice and it's positive that it's ready. We will go as we normally do, a short business update from my side. Again Joakim will get through financials. And then we will have the sort of concluding notes and a short outlook going forward and open up in the end of the presentation for the questions and answers. You probably, you that are on the call, have probably already looked into the report. And we can see, as we stated the first one here, that there is a very clear sign of market recovery. If I elaborate a little bit on this one is that first of all, we have during the last years, even though we have had a pandemic, we have been specified in a lot of customers around the world in all 3 entities actually. And what we now see is that those specs or where we are specified now, customers starting to put orders in. And as you can see at the second headline here, we have an order intake that is over SEK 500 million, SEK 514 million. And I mean, you see that we have a run rate on sales that is around SEK 1.5 billion, SEK 1.4 billion, and you can see that this indicates a much higher run rate if we can turn around order intake into sales. The good news with the order intake except also the amount as such is that it's coming from more or less all geographic markets. It's coming from the different entities in a good way. And also -- so if I put it this way, the quality on the order intake is more or less the way you want to have it in my position. And if we're then coming in, and we will come into that a little bit more later on in the presentation. But then, of course, you want to sell this and you want to get it into deliveries and so on. And so at the same time, it's quite frustrating and to see that we now have in a lot in our sales units, but especially in our supply chain. We now have products more or less standing in some corridors around in the factories because we are missing 1 or 2 components. And as soon as we get the components in, we can assemble it and we can ship it out. But that gives, of course, a frustration because we wanted to have a much higher sales and we have an order book that could give us a much higher sales. And we have tried to quantify in the report how much we can sell, and it's roughly 11%, 12%, as we're stating. And that is close to the SEK 50 million for the quarter actually. And then all of you that look into that knows then that if we have a gross margin in 50%, something like 50%, then you can calculate yourself what that will mean for the EBIT going forward. Now we also want to state that on the supply chain side, it's very difficult for us to see exactly when these will -- when we will get back to normal situation. The way I see it is that, yes, there are some signs that there will be improvement in quarter 3 and quarter 4, and there is a lot of good signs, but you never know what could happen. But my overall statement here is that I have a slight positive view on quarter 3 and quarter 4, especially quarter 4, but also quarter 3 that we will improve it gradually every month, starting with July and then August and then September. So there is good signs of that we can turn around the order intake also going into sales and then, of course, EBIT. EBIT is a plus and it's an improvement. But of course, everybody realizes that we should have a much higher EBIT going forward. We can see in the different entities, and Joakim will go into that in a little bit more in detail, but there is a good order intake invested, as I said, and there is one larger train order on the level of SEK 36 million. But the good thing in quarter 2 for Westermo is we can see that also the train sector is coming back. Train sector has been good when it comes to discussion with customers and specifications. But we have had a little bit slow order intake on the train side before. But now we can see quarter 2 and what we expect for quarter 3, it looks quite good again. We also want to mention here that we acquired the company, ELTEC, down in Germany, the 1st of April, and they have actually performed very well and have performed a little bit better than expectation in quarter 2. So we welcome ELTEC, we are happy to have you here in the family. Then if I go into Beijer Electronics, once again, those of you that follow us knows that for us to get a good profit improvement, we need to get Beijer Electronics running with profits. And now we have had a second quarter with order intake over SEK 200 million. And we can see that there is steady good demand in the Beijer Electronics or more or less in all markets. If we now have sales levels of some 160, 165 level, you can all indicate -- see that if we are coming up to 180, 190, 200 with the order intakes we have we will be in a good profitable situation. And it's a little bit the same situation with the smaller unit, Korenix. Step by step, we are coming in up to the plus side, which is good. And of course, you can realize that now we are very much focused on improving the supply situation. We have teams also even though we are coming into sort of vacation situation. But we have every second day that our teams sitting up to see that we are handling the supply chain challenges during every week, every month now. And I must say that we have very good skillful people in all organizations who are in quite -- I know that they're doing a good job, and that's why I'm positive that we will have a better quarter, Q3 compared to the Q2. And by that, we can also look at some -- on the orders. You can see here on the slides that the order intake is SEK 514 million. And if you compare that with the Q2 but you can -- Q2 2020, but you can also look at Q3 2020, Q4 2020 as well as Q1 2021. You can see there is a good improvement in the order intake. And also, if you look at the right side, you look at the sales. What I now hope is that the sales per quarter, of course, gets -- are going to close up to the order intake. So there is a big gap now from SEK 514 million down to a little bit below SEK 400 million. But this is the whole idea now that we should step by step increase sales going forward. And you can also realize that there is a backlog. As at the moment is, of course, it's an all-time high, it's SEK 750 million. We have never been close to that before. And my final comment before leaving to Joakim is then that we are writing also in reports that there are some price challenges on the component side. And we, of course, then quickly try to then, of course -- not trying to, we are increasing prices at -- to the customers. And normally, they understand the situation. But there is a sort of a delayment in the figures because as you can see with this SEK 750 million backlog, a lot of those orders came in to the old prices. So of course, we need to first get some of the orders out with the old prices before we can see effects of the price increases going forward. By that, I ask Joakim to go through a little bit around the figures. Thank you. Joakim?

Good morning, everyone. I'll start with group and the heading is in line with what Per has mentioned so far. Strong demand, but the supply challenge is limiting the sales. The order intake as seen, SEK 514 million. Sales, SEK 390 million. And EBIT of SEK 10 million for the quarter. And if you look at the graph in the left corner, still, of course, profit's on a low level, but we are going in the right direction. And then some of the comments. Per mentioned, sales has been hampered with about 11% to 12% due to this component shortage situation. And Per also mentioned the amount SEK 50 million roundabout is what we are talking about in sales numbers. Per also mentioned the increased component prices. That puts pressure on the gross margin. We have adjusted customer prices, and it will be compensating going forward. Also want to mention that the overall cost level that we have in our group. In last year, in the pandemic year, we took the restructuring program. We see effects of that. And we are in our entities maintaining a general cost control, all across, and that's important to see. And then with additional sales volume, of course, we will see an effect on the bottom line. Also worth to mention that the currency, we have somewhat of a headwind on the currency. The impact on EBIT is about SEK 4.4 million in the quarter, and it's mainly transactional variances. The net income level on a positive, yet small level of SEK 1.9 million. With the challenges in the supply chain, as Per mentioned, unfortunately, we have had increases in our working capital in the quarter. That has led to that we've seen a negative cash flow in this quarter. And going forward, hopefully, we will be able to deliver in a higher pace, and so we can turn around the negative cash flow into a positive one. Let's jump into the business entities. We'll start with Westermo. Clearly, we see market pick up, and we see some good strong order levels in Westermo. Order intake, SEK 277 million. Sales, SEK 206 million. And EBIT SEK 20 million or 9.6%. Per mentioned, we have had 1 large order in the quarter. It is from a North American train operator in line with the frame agreement that we signed with them about 1 year or 1.5 years ago. We do have a strong pipeline in Westermo. So the confidence level going forward and the fact that we see more traction also in the train sector, that gives us confidence for sure. Per mentioned about ELTEC. Good start-up in the group, happy to see. And we are very excited to see the developments going forward there. And as for the group in general, of course, the shortage of components to limit the sales also in Westermo as all entities with this group. And as Per also highlighted, we have now launched new products for the Power Distribution segment. And we are -- that is giving us also confidence on a good development going forward. Let's have a look at Beijer Electronics. Also here, we talk about the traction in the market. But of course, the profitability development in Beijer Electronics is limited by the shortage of components. Order intake, another quarter, about SEK 200 million, actually SEK 216 million in the quarter. Sales level of SEK 164 million and EBIT of basically 0 not negative as we've seen many quarters lately, but now at least on a 0 level. The order intake is also, when we talk about Beijer Electronics, it's driven by a very good development in the Asian region and also somewhat in the European or EMEA. U.S. is improving, but it's still on low levels. When it comes to the component shortage, as I said, it's limiting the sales. And of course, with the higher sales, we all know we have said this many times, there is a good leverage opportunity in Beijer Electronics. We have also in Beijer Electronics, launched some new products. We have now introduced a new generation of the X2 base product line. And we also want to state that the cooperation that we have talked about for a while now with Korenix, we continue that one, and it continues on a good level. Finally, Korenix. Positive development, and the result is actually also in black yet on small numbers. Order intake, SEK 25 million. Sales, SEK 24 million. And result SEK 0.1 million. What we can see in Korenix is that I think everyone that's on top of the news flows sees that in Asia, there are some recent lockdowns due to the Delta variant of the virus and we see an effect in Korenix actually on some postponement on projects in Asia due to this. That in combination with the longer lead times on the products and the supply situation, that has limited somewhat the audit order pace growth that we've seen in Korenix. We'll see how that will develop, but that is what we've seen during this quarter. And the fact that we have had or have constantly a good control of our cost in combination with somewhat higher sales at least give us basically a 0 result for the quarter. Going forward, we have good confidence of seeing a good development for Korenix. And as I said, the cooperation between Beijer Electronics and Korenix, we have that on many areas, and then it continues as planned basically. That concludes my comments on the financial side for the business entities and the group. So over to you, Per, for concluding notes.

Thank you very much. Just a slide on the strategy, and I will not go through our whole strategy in a short. But I do want to point out a couple of things. One is that we are now with the different products in the different entities. We are in a situation where we have high-level products with -- so you can call it high-tech product in our industry, both when it comes to hardware and software. And we have now the latest product from Westermo coming out for the energy market, we are now in a good situation like that. And also, if you come to the second point is that as I've said it many times now, when we are specified at customers, and we now know that we have in the different segments that we are working with, we start to be -- have a good spec situation in the customer side. And we now see that they're putting orders in. And we stated also that we have not a recurring business, but we call it repetitive revenues. Meaning that if you look at the next 3, 4, 5 years, with the -- when our products are specified in the customers' products, then as soon as our customers selling their products, we will sell our products. And I think that's quite important to note. A couple of closing note -- comments from my side, otherwise, is that we have said now we are very happy on the order intake and -- but don't also miss that the order intake is good for the quarter. But for the first half year, actually, we have an order intake of SEK 942 million and that is also, of course, a record, and that's good. Joakim has in a good way to explained the cash flow situation. The way I see it, as soon as we get the possibility to supply our products, then, of course, the cash flow will improve because the inventories will go down, and we have that very much in place. Supply chain issues. Well, we have components now and then. But as I said, we have a strong organization in place and we are working with that, I would say, every day, every second day in order to make it as good as possible. And even though we're here in Sweden, we a little bit go into sort of vacation mode. In a lot of places in the world, that's not the case, so they are not in vacation. And also, meaning vacation is not that you're away, you're going in. Our people in this supply chain, they go in more or less every day and look into the situation. So we are on top of it, if I put it that way. The pandemic as such, we don't foresee that we had a demand problem. Now we can see more or less on the markets and the geographic market where we are present. U.S., North America, U.S., Europe and also the Asia Pacific, you can see that with some small exceptions in Taiwan, I'll give you that's the other comment. Otherwise, customers around the world are really up and running in all units. The only challenge we still have is that we don't foresee that we will be able to travel as we did before coming into September, October, November time. We see that there will be some more time before we can go to Asia Pacific and so on, probably within Europe and within the Nordics. But otherwise, we can see that we will a little bit be constrained on that side going forward. By that, you can look at our voices and you can see that -- and also what we are saying is that there is a good potential for us second half of 2021 to have a better result than we have been supplying the last couple of last quarters in 2021, 2020, and we're now looking forward to start to present better and better results in the next 12 to 18 months with the order intake that we have and with the backlog as such. So there is no other big distances coming up. We are looking positive. We have a positive view on the rest of the 2021. And by that, I then open up for questions.

[Operator Instructions] Our first question comes from the line of Markus Almerud from Erik Penser Bank.

Yes, can you hear me?

Absolutely. Yes.

Yes. I have a number of questions. The first one, a couple of housekeeping questions. ELTEC, what was the contribution of that on sales in the quarter? If you could help us with that.

So unfortunately, I don't think we can do that, Markus, as we haven't been writing that in the report. And given in the -- so we said in the -- to give -- we can do the following. We said when we announced the acquisition that they had a sales on the level of SEK 65 million, SEK 70 million. And so -- and it has been a little bit -- I said then you can divide that by 4. And then it's a little bit better in the quarter then I give -- I think I've given an indication of not -- but we haven't given an exact figures.

Okay. Okay. But that's helpful. Then on the price increases, when were they implemented? So I get the whole thing -- that your backlog is mostly old prices. But when were they implemented? Was it during the quarter? Did you start implementing already in Q1?

Some started already in Q1, but it was mainly during Q2 that we had gone through in all the units. So that is something that has bounced.

Will that be some spill over effects also in Q3 or are you basically done?

That would be spill over effect in Q3 the way I see it. But you will probably see higher margin in Q3 because of the price increases. But still as I -- all of the people that has been around for long time and when you are sitting down with customers we have contracts sometimes it gets, you go into sort of negotiation but if you have customers that placed orders end of quarter 4 last year, and then we are coming back in Q2 this year and wants to have increases in existing orders, of course, there is a -- you can call it some frustrations in that discussion. But on the other side, the good news is that this is the component shortages a world problem. So now it's more for customers you have to get supplies. So hopefully, we get the price increases through in a good way. So yes, Q3, you will see improvement and Q4 we will be done.

Okay. And on the supply chain problems and the shortages, would you say is that the main reason why we're seeing Westermo's margin being under pressure rather than seeing as well? Okay.

Yes. I mean, you know us well enough to see that this is volume sensitive. So the more volume we get on the top side, then, of course, margins improve. Slight effect also on currency actually that we have. The currency is mainly hit in Westermo when it comes to the sites. But otherwise, that's the comment I have.

Okay. Okay. And then finally, and then I'll get back in queue. Could you share with us some feedback from the products for the Power Distribution were just released, I assume, I mean, I guess, I specified, et cetera. Any initial feedback on those products you would like to share?

Yes. But that's why if you now could see -- you can't see me, but I was smiling a little bit because we had a good year. Now the feedback, when it comes to, I would say, all 3 units, but if we now talk about Westermo. We have product in Neratec, for instance. We have products in Virtual Access. But also in Beijer Electronics. You normally see that the customer, they like the products. And sometimes, we have internal discussions about that. We should get the product out quicker. But on the other side, when they're coming out, they normally are very robust. They are good. And they are definitely meeting expectations. So yes, the customer likes the product. But then we should be aware of when it comes to the energy sector, that is slightly some new markets for us, a little bit different way of selling. And it's also, first, you need to get the product specified and then you need to get them -- they need to order them. So I would say that, you can see -- I hope we'll be able to talk about improved sales in energy sector from '20 -- first half of 2022 and then '23 and '24 and so on. And as I said before, I think that market segment will probably outperform the train side when we're coming to '25 to '26 somewhere. So that's why these products are very important, by the way.

And how long does the specification process take?

That -- it's difficult, but it could -- sometimes it could get quick. And quick here, we talk 3, 4 months. But normally, it's 6 to 12 months. That's a normal situation. You supply the product, they are testing them, they do protocols and so on. And so 6 to 12 months is a normal procedure.

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

Hello, can you hear me?

Absolutely.

Very good questions from Markus, I have a few additional ones. How much visibility do you actually have over the supply chain situation right now?

That was -- so I could answer like this. We had a very good visibilities on 90%, 95% on what we are doing here. I mean our own capacities, most of the -- in assembled printed circuit boards, components and so on. But then we have bad visibility on 5%, 6%, 7% of the components. I mean -- and the problem is, of course, you need all products in, you need all components on our products. So if we have 1 or 2 components where we have bad visibility on then, of course, we have a problem. But also on the components where we have a shortage, we start now to know -- to have a good visibility. But so far, still, we have too long lead times on some of the components. So we are working extremely hard to improve lead times on some of the components. This is I mean you can get lead times on 3, 4, 5 months. And we, of course, want to have it 1 or 2 months. But I don't know if that answered your question, but this is a little bit the way we -- that -- this is the situation. I don't know Joakim if you have some other comments to say about it.

I think the situation is as it is, and this is not only for us. I think the visibility in the industry, it's harder now. We are in a tougher situation. And we -- our organizations, they are really on top of it. They work every day almost with the main suppliers. We have management calls with the suppliers to make sure that we get priorities, et cetera. So these kind of things are happening all the time. And the situation is challenging, of course, but as Per said earlier, we believe that we -- in general, we believe that the situation should be improving the coming quarters.

You can also -- I could add 1 more thing. What you do when these situations occur is also that you take some of the R&D people. And we perhaps delay some projects 1 or 2 months, and then they need to concentrate and redesign some of the PCBs or whatever in order to get the other suppliers in, so to say. That is also things that you work with in those situations.

And it sounds very easy, why don't you do that? But in some cases, you have certifications with a certain design and certain brands or variants of components. And if you -- for some products, for some certifications, you are not allowed basically to change your component without recertifying the products. This is something that we are working with the product management organizations. They are looking into this all the time so that we are able to come to a better situation. As you understand, it is a tough situation for our organization. And as Per said, we are really working hard, and they are doing really, really well in our organization.

Yes, okay. Understood. And you talked a bit about the Power Distribution. You have new switches there and that is a slightly new market. How are you doing marketing in that segment right now? Have you started? And how is the response?

So the marketing, now has been a lot on, of course, digital market in different ways. We had plans during 2020 to be in several exhibitions around the world in that industry, including the speakers in different conferences and so things like that. That, of course, was more or less postponed all of them. But we have been improving our digital way of marketing, but it's also -- you still have good opportunities to take customer visits digital. And that has surprised me positively. So we have, of course, and we have a central group in Westeros that is really targeting different customers around the world where we are in discussions and also sending products for specifications and so on. But marketing as such is 2 things: digital marketing, and it's also calling, I mean, Teams, Zoom meetings with customers, I would say. That's the new way of doing.

The industry are aware that Westermo is entering into this segment for sure.

All right. And one last question. You talked a bit about the increases on prices. And how is the general response from the customers, not only from like people that signed an order in Q4, but in general.

Generally, as I tried to indicate, nobody likes price increases, and we have had a, I would say, a rather long period with more or less, it's not deflation, so we're not too high inflation and you can call it stable price situations. Now that has changed. And -- but now, I would say that most customers realize that we have a situation with increased prices when it comes to components. So normally, they accept the price increase. Then, of course, there is always discussion of how much. But the important thing now is that if we could guarantee supply of products in the same time, then normally, you get the price increases through because supplier products are now more important than the final percentage on the price, if I put it that way.

And we have a follow-up question from Markus Almerud from Eric Penser Bank.

Yes. A couple of things. Firstly, another housekeeping question. I don't know if you're able to say, but could you help us a little bit what the impact of the supply chain issues was on EBIT? You're talking about 10%, 11% lower sales. Is it mainly the sales? Or I assume there are higher costs in there as well? Any indication would be helpful.

No. But the indication is on -- if you look at 11%, 12%, and we say see that's close to SEK 50 million in sales. And as we've seen in our annual reports and so on, we can see that we have a gross margin in the area of 50%. I think we have indicated quite close what you could see because we don't need -- we don't have hikes on the lower levels, also for instance to be able to supply these ones. So that margin goes more or less directly down to -- we have been -- I think we have been clear enough there. Okay. I think -- I don't, know if you lost the line here, what happened here?

Yes, I lost the line. I'm back, sorry.

No problem.

I missed you somewhere at the 50% gross margin.

Yes. And that so as I've said, I mean, the 50% gross margin, it means if we then have SEK 50 million on sales, then you know more or less are being on the EBIT line.

Yes. Okay. Okay. Okay. And then one final question. So talking about supply chain and supply chain risks. And I mean these are unlikely to go down over time. Now there are problems. But can you tell us a little bit about your thinking how you're working to mitigate these risks long term, if you are trying to find new suppliers on the local markets or within Europe or to mitigate these risks?

Yes. I think that everybody that is in this business, of course, are looking into that, how could you do in order to improve the situation next time you're coming into things like this. And of course, second supplier, third supplier and all of these things is the thing that we work with. And we will probably be better in having, how should I put it, qualified and certified suppliers already done even though we don't take that much and it could probably be that instead of having 1 or 2, it will be 2 or 3 going forward. So that's the type of things you're doing. But we have to keep in mind that when the whole market is doing, I mean, we are not Apple or Intel or whatever. We are a small company in the total world. And so when these situations occur, we will have a problem also going forward. But of course, the way we -- I think my taking from this is that we could have been better in having precertified alternative suppliers. And also, as you indicated here, perhaps I think one trend, I think, will be the next couple of years is that you make sure for the whole industry that we are not only having the suppliers in China, Taiwan and Asia Pacific. I think that will be a trend that you -- a little bit your back, you have suppliers in Europe and also in the U.S. in the next couple of years. So that will also -- so you have a geographic spread a little bit more than -- because there has been also transportation problems even though they are smaller now, but they were bigger before. So yes, we will have more alternatives going forward.

One point to make, so no one gets the wrong impression here. The problem is not internal. Capacity-wise for our factories and supply units, both in Beijer Electronics and in Westermo, we have good capacity. That's not the limit. It is the supplier situation that is causing these problems. Our capacity is -- they are able to handle a much higher level of volumes than we are floating through today. And that is important to note, and we also highlight that in the report. So no 1 gets the wrong impressions here.

Yes, I understand and I've heard anecdotes about ports being closed in China on the back of more COVID outbreaks. So it's not -- this is a global thing. So you're not the only ones. But finally, maybe one final one. You wrote in the report that you see a cautious upturn in North America, and it's quite slow and gradual, and you see more upturn in your printers. And this is a little bit of a contrast to what we're seeing overall, but North America is actually quite strong. Is there any specific segment to speak out here? Or could you elaborate a little bit on that?

Yes. That is a good question. Yes, we have a little bit different situations compared to some others. Historically, we were very big into oil and gas when it comes to Beijer Electronics. The last years, we have been step-by-step moving over also to more energy, meaning also generally speaking, to solar energy but also wind craft and things like that. And that has been taken some time, but also actually some oil and gas is coming back now. I mean, with oil price coming up to $65, $70 -- to $65 and so on, then that started be more actions on that side. Secondly, Westermo, they are in the U.S., mainly supplying to the train side, train industry. And we were -- we got orders coming in now, as we said, this SEK 36 million order was from the North America side. But it was not supplied yet. Now we get an order. So there the supply has been a little bit lower to the train sector from the Westermo side. So that's why that's the 2 major, I would say, effects on that one.

One thing to have in mind on the U.S. side, we're still on a low level and the potential is quite good. So moving forward and with the fact that Per pointed out many times, we have a good specification situation with many of the American customers. And some segments in U.S. is going really, really well. It's going in the right direction, we see, but we are quite confident that going forward, we could see a better situation also in the U.S.

And as there are no further questions, I'll hand it back to the speakers.

Okay. Then thank you for -- that was a lot of good questions today. And I just want to wish those of you that we'll have some sort of holidays, have a couple of good weeks. And thank you very much for listening. And hopefully, we will talk to you again after Q3. And then hopefully, we have transformed some of the order intake into sales. Thank you very much.

Thank you.

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