Ependion AB (EPEN) Earnings Call Transcript & Summary

Hello, and welcome to the Beijer Electronics Group Q3 Report 2021. [Operator Instructions] Today, I'm pleased to present Per Samuelsson, President and CEO; and Joakim Lauren, Executive Vice President and CFO. Speakers, please begin your meeting.

Okay. Thank you very much. And first of all, welcome to all of you listening in to our quarter 3 report 2021. And the way I see it, we have a positive report to present. And I will directly go in and say that the most important for us is that we could see that there is a good and stable demand situation still in the market. And that is, of course, the most important starting point. It also means that we have an order intake for the second quarter in a row that is passing SEK 0.5 billion. And those of you that follow us knows that we have sales normally in a region of SEK 400-plus. And if we then have an order intake in the level of SEK 500 billion, that tells something about the future, if I put it that way. We also -- a couple of more words about the demand situation is that we can see that on the order intake, but also the different type of customer contracts that we have, we see still that there is a good demand from most of the markets, if I talk about geography. I mean, Asia Pacific has been strong for a while, Europe came for us last quarter, and we now also see some good signs coming up in the U.S. And also, we can see that a year ago, it was a little bit not that good when it comes to, for instance, the train segment because of there were delayment of projects and so on. But basically, now we can see that most of the segments we're in as well is also starting to place orders as we have seen in the last 6 months. So overall, I would say there is a stable positive demand in most of the market that is really the main message. And once again, I mean, we can also see on the order intake side, that it's equally spread in a positive way between the entities Beijer Electronics, Westermo, and also Korenix. And that means also that we had a sales increase in the quarter. We are stating here that it's 23%. But also, as we said last quarter, we still had a backlog because of the component shortage situation. And we state that we -- roughly 10% of the sales -- so we could have had 10% higher sales in a situation with no component problems, if I put it that way. We are coming in a little bit also. If I take a couple of words on -- I will come into the component situation a little bit later, but still, that is far from solved. It also means that we, after quarters in the pandemic in 2020, we can now see the EBIT start to come up to more and more healthy situation. We are showing an EBIT of SEK 42 million, and that is a margin of roughly 8%. And it's been -- and most of you know also that our target is at least 10%. But you see now, we're starting to come very close to the target, by the way, and which is, of course, compared to how it was 1 year ago, a very good and positive situation. A couple of words also on the different entities. Westermo, they have also, during a long time, have had a stable situation, and they have, of course, been affected by the pandemic, but still, they have been on a profit all the time. And this quarter, the good news on the order side was that Stadler, a German train manufacturer, placed a good order, and the -- it's not only the order in such, but it shows that they have been choosing us for their future trains. And that is, of course, also positive because in the next couple of years, we -- hopefully, we will get some more orders from that company. We bought a company, the German company called ELTEC, took in -- they are in our numbers from 1st of April, and that continues to develop in a good way. And it seems to -- I mean, we are quite happy that we bought it, and we can see that it will be a very good fit going forward and complement the technology, especially on the train side as you know, they are very good in onboard communication systems as well as Wi-Fi onboard. Then, I would say, now in quarter 3, it's Westermo that has had the toughest situation because of the component shortage. And I foresee that, that also will continue. But I also foresee that we step-by-step, we will improve, but we don't foresee that for Westermo that this will be -- that it will be -- that we will be out of the problem in the near future. One, the other positive thing is that we could see Beijer Electronics. Once again, I mean, Beijer Electronics has been fighting for several years. They were up in really good figures end of 2019, and then, they had probably came down again 2020 because of the pandemic. But now, they have started to come back and show profit, which for Beijer Group, is very important that both Westermo and Beijer Electronics started to perform. So personally, I'm -- this is probably the most important thing in the report is that Beijer Electronics starts to earn money again, and we can see that, that will continue going forward. And as you can see on Beijer Electronics, both quarter 2 and quarter 3, they have a good order pace, which is good. We can also see that the Korenix, some of you know that we -- more and more, Beijer Electronics works together with Korenix, and we can see that the product offer fits very well. And we can see now that more and more customers appreciate that. And so, once again, I'm happy about the future for Beijer Electronics and Korenix going forward. A couple of words on the component situation. This, of course, creates -- lot of you that is in this call, I know you follow other companies and you read quarterly reports in a lot of places here. But, of course, we see that some specific components, then there is a shortage of those ones, you can then see that some actors take advantage and increase prices very heavily on those components. And you can also see that some is then putting some of the components end of life, quicker than earlier forecasted. So it creates a lot of problems, but also, lot of work for supply chain in the different entities. Basically, in my position, I'm saying like this -- we have an overall very professional organization, and they are handling this situation in a very good way. But still, we have situations where we had basically most of the product manufactured, but then, we are missing one or two components, and then, we have to wait to supply until we get that product or component. And this is, of course, a problem. Secondly, it's also -- there is frustrations around the transportations. And also, I think all of you on this call is well aware of that situation. But it means also that you can't -- not all the time, you can trust that you get the deliveries exactly as forecasted. Another is, of course, means that we take action in different ways, and then, we -- what we do is that we try to increase inventories in order to be more safe going forward. And that, of course, increased inventories, that affects the cash flow, and that is why we don't -- but we don't have a positive cash flow that we normally have. But I think it's a strategic decision for us to -- and we have take that in -- for the whole group that we need to prepare ourselves for component shortage the next couple of quarters. And therefore, we buy more components and put them on the -- in the -- in inventory side. I foresee that if you go another 2 or 3 quarters ahead, probably inventories will go down. And then, the cash flow is coming back. So I see this as a sort of a short-term effect. If we then continue look at the slides, you can see on the order intake. And this, I would say, if you look at the left side in the order intake here, you can see where we are coming from. And we -- that slide shows already from Q1 2018. And as you see, we had Q4 2018, we had 1 quarter with a SEK 450 million order intake, and that was actually a big order from Westermo that hit that quarter. But after that, we have not more or less been over SEK 400 million, and then the pandemic came in 2020, Q2, Q3 and now you can see that end of 2020, it started to come back in Q1, a little bit increase, but now Q2 and Q3, we are on the level of SEK 500 million order intake, which is, of course, very, very good for us. Compare that with sales level of SEK 412 million, then everybody realizes looking into this that if we go forward, we will probably become closer and closer going forward to if not all the way up to SEK 500 million, but, of course, we will be able to increase sales going along with better component supply. So basically, best figure for us this quarter is the order intake at SEK 500 million, second most important is actually Beijer Electronics starting to earn money again. And then, as an effect of this is, of course, that the backlog increased to SEK 850 million. And I would say a year ago, that backlog wasn't down to SEK 450 million, I think, something like that. So we have a very -- we have a quite good situation there. So by that, I handing over to Joakim to go through the Group.

Thank you, Per. I will then take us through the numbers for the Group and our three business entities. We start with the Group. And as we all understand from past statements, it's a significant profit improvement. But still, the component shortage impact our ability to deliver. Order intake of SEK 502 million, sales SEK 412 million, and an EBIT of SEK 32 million, corresponding to a profitability level of 8%. And as Per said, the level of impact of the component shortage is around 10%. During the quarter also, we have seen a pressure on the margins due to the fact that we have been forced to buy components where we, short term, have higher prices, we need to go out on spot market from case to case to secure our ability to deliver. And by doing so, we need to pay much more -- in some cases, much more than we normally do for these kind of components. And that puts pressure. We have, in previous report also, informed that we have adjusted our prices. There is a time lag between the fact that we implement the prices and the fact that we could see effect in the book and very much given the fact that we have already all the confirmed orders, that is, of course, problematic to go back to customers and change prices, et cetera. So we have a time lag here. During the quarter as well, we have had a wave of a COVID loan that we received in the U.S. already Q2 2020. That one, we have been then -- been forgiven and in the quarter, and that affects the result of about SEK 9 million. And what we say is that what -- the kind of impact that we had on the margin of the component cost increases, we partly offset that with the fact that we have got this waiver of this loan. Then, looking at the activity level. We -- I think all -- you all know that we introduced a cost program in 2020. That, in combination with the balanced approach on activity levels, we have been able to maintain a reasonable level of the costs impacting the bottom line. We also want to highlight that we have had a relatively small but negative impact of currency on the EBIT of just about SEK 1 million negative in the quarter, then mainly transactional variances. Bottom line, we end at almost SEK 22 million at the net income level. As Per said, free cash flow negative SEK 21 million in the quarter due to the fact that we have been forced to increase our inventories as Per laid out earlier. Westermo, here, we state a positive market development and strong order intake. The order intake of SEK 290 million in the quarter, sales of SEK 203 million, and an EBIT of SEK 26 million, corresponding to 12.7%. And we did, earlier in the quarter, send out a press release on the Stadler order of about SEK 50 million. And, of course, that one is a good one to note in the quarter, but also underneath on other markets, there is a general market pickup. And so, it's not only Stadler order in the quarter, we see it in other customers and wider, not only in the rail side, but also trackside, we see a positive development in the market. As said, the sales have been hampered by this component shortage situation. And we do have some tough challenges in Westermo as Per pointed out before. Still, the profitability came in on a decent level to 12.7%, giving the fact that we have a good cost control in Westermo. ELTEC acquisition has continued to develop well. And we have, also, in the quarter, continued to launch new products in the -- for the Energy segment. Final comment here on Westermo. We are also now in the quarter been opening up a new sales entity in Spain, actually, where we see good opportunities in the markets of train, trackside and energy, and this entity will focus then on the Iberia region. Beijer Electronics, as Per said, it's good to see a profit on the bottom line for Beijer Electronics. It's a good profitability improvement, and it's driven by the added volume. As we have been stated, many times during the last years, I would say, order intake of SEK 192 million in the quarter, the sales of SEK 186 million, and then, an EBIT of SEK 15 million or 8.3%. If we look at the regions for Beijer Electronics, we saw already in last quarter that APAC or the Asian region is -- we've seen a good traction and it continues. And we are happy now to say that the EMEA region is also showing a good development. While U.S. still, it is on a lower level, but it's still improving, but still low compared to what we've seen before. So there is more to come in Beijer Electronics. The component shortage has limited sales also in Beijer Electronics. But here, we see some signs of improvements for Beijer Electronics in the quarter. The cost increases that we -- I talked about earlier on the Group level is as valid for Beijer Electronics, where the waived COVID loan is basically compensating for the time lag that we have in the price increases. And as we have stated before, we have continued with the cooperation between Korenix and Beijer Electronics, and that develops in a good way. Then, finally, we have Korenix. We do see a growth in Korenix and a result improvement. But still, we are just below 0 in this quarter. We had an order intake of SEK 25 million, a sales of SEK 28 million, and an EBIT of minus SEK 0.7 million. If we comment on the order side, compared to last year, it is in the growth. But if we look sequentially, it's kind of moving sideways compared to Q2 on the order side and that is mainly because of the fact that Taiwan had another impact of the COVID, which led to that they had to introduce COVID restrictions during the summer, quite rough ones. And that led to some postponement of projects that we otherwise would have expected to get. But still, we want to state that the pipeline is promising in Korenix. So there's no general concerns, you could say, from the market perspective in Korenix. Also in Korenix, the component shortage has limited the sales. And by that, also, of course, the profit generation. So last quarter, we were just above 0 in Korenix, now we came in just below 0. You could say that we are hovering around breakeven in Korenix at the moment. And also, here, of course, needs to be stated that the cooperation between Beijer and Korenix is working well. That kind of concludes the numbers. It's -- then, it's over to you, Per.

Thank you very much, Joakim. A couple of comments quickly that I want to state is that we have discussed -- I mean, when you have the component situation as we have and you get heavily price increases on the supply side, it's, of course, important for us to pass those cost increases over to our customers. And we have already talked about time lag when you increase prices, but we can now foresee that Q4, but I would say, mainly Q1, the next 2 quarters, you could see -- you will see the price increase effect on the top line as such. So I think, it's important it will come step-by-step the next 6 months, and you can see it. And the way we see it, we will also continue to increase price, probably -- not probably, it will come new price increases end of this year, beginning of next year in the different entities. And that's -- it's never fun to do that, but you need to do it, and then, we are onto it. And I would say that the salespeople are handling that in a good way. During Q4 -- and I will not going to put a focus on Q4, but we are in the situation. You can -- if you look at the order intake and the backlog, I mean, the level we can perform in Q4 is more or less depending on how much we can deliver. And we don't have any big restrictions when they come to total capacity. I mean, we have installed capacity in all entities to deliver at least on the SEK 500 million level on a quarterly basis as such. So it's very much now depending on how much the component shortage will affect the quarter. However, I state that I think we have a better situation for Q4 compared to Q3. That's so much I'd like to say going forward. But as you also know, is that we are quite volume-sensitive. And you can see now that when Beijer Electronics started to come up to a little bit another level on sales, they directly start earning money. And we can now foresee -- and it's the same, by the way, with Westermo, but they are on a high level, and it's a little bit the same on Korenix. So for us, of course, now the big drive is to continue to increase sales every month and every quarter, and we have now order intake and backlog in order to do that. And then, there will be quicker effects on the EBIT. And those of you, once again, that follow us knows exactly what I'm talking about. And then, a quick word on Korenix also. There is a very good pipeline when it comes to projects on -- but all those in Taiwan, but also some other places. So I foresee also now when it starts to open up a little bit again, hopefully, we will see some good orders coming in on Korenix as well in the near future. When it comes to outlook, I mean, the only slightly change we have done is that we're now -- we -- the Group view, I mean, you can -- you have seen it before, full year 2021, we said it should be better than 2020. Should be, but now we say it should be significantly better. So that is what we have stated in this situation, and that gives us sort of perhaps a small hint on what we believe going forward. So summary. Order intake on a good level, demand is there. Beijer Electronics start to earn money and complement Westermo in a good way. Cash flow negative because of inventory buildup, but that is to ensure that we can start to deliver even in the component shortage situation. We will still have component problems in Q4, but probably not that much as Q3, if I put it that way. And that concludes our presentation, and then I open up for questions.

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

Very good. Nice numbers, I'm going to say. If we start by the profitability and the EBIT. So I mean, we've talked before about the order intake is significantly higher than sales. And then, once you get the orders coming and converted into sales, and you would see EBIT sort of lift up, which is what we're seeing now. And we're also seeing order intake is still significantly higher than EBIT, so -- all the sales. So is there any reason to assume that we wouldn't see the same kind of effect as that sales is converted as well? That is, this should continue right?

Yes. I mean, yes. A short answer, yes, it will continue. I mean, we -- it's a little bit like, you call it, the old no zero-based budgeting is that we have a cost level that will probably slightly increase during Q4 because now we start to travel and go to exhibitions and things like that, again, especially in Europe. But we are -- as soon as we can get more sales as we take from the order intake into sales, then -- and you can -- we have also said that we had normally gross margins on the level of 50% something, then you can calculate yourself that a lot of that will come down to the EBIT line as long as we -- so that is -- you're correct, and I just confirmed what you're saying, Markus.

And I mean, simply, all else equal. So -- well, I mean, you've already answered that, I guess. I mean, 10% of -- 10% higher sales if components will be there and then, a gross margin of 50% on the that is basically what the effect on EBIT that we're missing.

Yes, exactly.

So my second question is on Beijer Electronics, where sales is coming up and order intake is continuing strong. Any specific areas, which is picking up?

So no, not really. It's more overall. I mean, we -- I think that in the beginning of the year, Asia Pacific was there quicker. But -- and during the quarter 2 and 3, and mainly 3, we can see now that the EMEA or Europe is back a little bit to start to close up to the '19 levels. And I think that is probably the most important thing for the quarter is that the European business is performing in a good way. But otherwise, I would say it's, generally speaking, in most markets that has increased. It's not one specific market or two markets, it's more or less, generally speaking. And we also could see now that are starting to be good signs also. There is some increases in the U.S. already, but we now foresee the next 6 months or the U.S. to come up a little bit better level. And they normally in the U.S., sell more of the X2 extreme products that we have higher margins as well. So therefore, I'm looking forward to that actually.

Okay. Okay. And in terms of end markets, it's the same thing, it's a broad recovery. So no specific end market, which is very strong. I mean, I assume that shipment, that should be very strong. We saw the order intake numbers keep coming up in the shipyards, et cetera.

Yes. No, but generally speaking, it goes all along the four major segments in the Beijer Electronics. I would say, all of the segments are quite okay.

Okay. Okay. And then, my next question is about the Energy segment. So you said you released some new products in that segment. Anything else you can share with us in terms of momentum and interest, et cetera?

Yes. So what we can see is that now you are specifically coming in, I think, to the Westermo business as such. And we can see now that they have done a very good well -- done well in introducing the new products, probably a little bit slow into sales because of it's difficult to sell to new markets if you can't meet customers. And -- but they have done a very well good job in -- with the products, but also digital selling, if I put it that way. But I would foresee that during second half of 2022, we can talk about more substantial changes -- so sales into the Energy segments with your new products. But I think most of you that follow us, if we have new products coming in -- coming out that has been coming over the last 6 months, for instance, then to get those specified at customers and get -- I mean, it takes 6 months, 12 months, 18 months and so on. So it will take some time. But I have said several times that wait another 3 to 5 years, then I think the Energy segment will passing -- will be passing the Train segment, by the way. There is very good prospect into that segment.

Okay. Okay. Excellent. And then, one final question about the components. You said that little bit, but you are -- in Electronics, you said you see signs of some easing of the difficulties. Is that a general comment that you also see in Westermo, or is it -- I mean, are there any signs that this is kind of starting to resolve itself or work through? Or how do you want to put it?

I said, the short answer would be no. We don't see that it -- we see still a lot of complications. And then, we said, mainly in the Westermo segment, then, of course, you try to work it through. You're trying to find alternative suppliers, you do some change of specification into the products. So you need to do -- you do all these things. And you buy very expensive some of the key components and put them in inventory. So that's why you can see in the sales number, for instance, the Beijer Electronics that they have been passing most of it. But we have still a situation. When I were younger, we talked about just-in-time deliveries and things like that, and that we can't talk about at all at the moment. So a little bit to grab the components you can get. So -- and I can't see that we, in the next 6 months, have a normal stable situation. But we have been better and better to handle this rough situation. That's why I think we could -- we can handle it in a step-by-step better way. So as you can see, we are selling for over SEK 400 million, I think, we will sell more in quarter 4, but we could have sold even more. So that is -- so -- but once again, I mean, you can read all different reports, and you can see that there is a long way to go before we are there. Then, of course, on top of that, you have this transportation problems as well that also affect the supply chain. But it will take a long time before we're coming back to sort of just-in-time deliveries. That's the way I see it.

And we have one more question from the line of Mark Siostedt from Redeye Equity Research.

You have already touched upon some of my questions, but the first one. You have now 2 quarters in a row of an order value exceeding SEK 500 million. Could you elaborate a little bit how much is the order intake boosted by the fact that your customers might place orders for delivery longer time ahead than usual because of the longer lead times?

That is, of course, a good question, and it's not easy to -- I said it's not easy to have a good, easy answer on it. But I would say this, there is an overall good activity by the customers. We were more afraid of inventory buildups, I would say, beginning of the year. If you look at the big customers that we are supplying to. And now when we try to investigate and talk to our customers, do they really use our products and so on, we can see that the products that we are supplying are not ending up in their inventories. So -- but I'm sure that there are some effects somewhere of this. But generally speaking, I would -- I will argue and stress the point, I think that most of our customers are really having a good demand situation themselves. And we can see also that there is a push from -- more pressure from our customers that they want to have more supply than we could supply. So that also tells -- and they don't want that because they put it on inventories. So I would definitely state that the way I see it is that there is an overall demand on that level from the majority of our customers.

All right. All right. And a question also on the order intake for Beijer Electronics specifically. You said that it was general demand, a European order intake had increased, but Asia Pacific has been a strong area during 2021. So I've read in some Q3 reports that the Chinese demand is very strong, especially in the industrial market. Do you see the same thing for Beijer Electronics right now?

Yes. So we see that. We see that. And -- but now, we -- I mean, we are not that big compared to other people over there or other companies over there. But yes, we definitely see that. There has been for -- at least from beginning of the year, there has been a good demand situation in China. That's for sure. And obviously, when it comes to infrastructural things that they are building a lot over there, and we can see that there is a demand. And we can see, we are landing orders. And by the way, more and more also from our good products in the X2 series. That is also important to note. So earlier a couple of years ago, it was more of our low-margin products over there, but it's starting to be a good -- better mix there as well. That's also good news.

All right. And one last question. You talked a little bit about it that you see the power distribution segment be, perhaps, the largest sales segment in few years. Now, when you are out meeting customers again at trade fares. How is the response on the new product lines, such as Merlin?

I said so far, I mean, it has been very well received. And the important thing now is to get those products into tests, so we can see that when they're checking up the products technically that they are meeting the demands, but I'm quite sure that it will do that. And so, we are quite -- that will be very interesting to follow that side. And I think that the more you read about the energy sector and whatever goes on politically, I mean, renewable energy in different ways, the wind, solar, energy and so on is coming more and more. And then, they need equipment like this in, for instance, the substations around the world. So that's why I'm so optimistic of this segment, if you take for another 3 to 5-year perspective because a lot of big countries need to change this type of equipment in their substations all over. So that's -- and that's why, of course, it starts with good products. So yes, I'm quite happy about that.

And we just have a quick follow-up from Markus Almerud from Penser Bank.

Just wanted to follow-up on that last point on the energy sector substations. So just on the ground where you've discussed these with big customers. I mean, is this based on -- you said that this needs to happen, everybody knows that this needs to happen at some point, but where are we in that journey? So how are your customers discussing this right now? Because we read in the papers about difficulties with energy, and we have a lot of energy up north in Sweden and not too much in the south, et cetera, et cetera. So everybody knows that this needs to happen. But where are your customers in this? So is it -- at this -- are we at the point where this is rational, so this needs to happen? Or are we approaching a point where this is actually happened? It would be interesting to hear some color around that.

I'm sure that there are other people that are more experts than me. But the way I see it and also from where we are sitting in Beijer Group, I think, it hasn't really started to happen in big yet. You can see still that yes, the Swedish discussion, but also in other countries where the energy prices are very high. And one of the reason is that they haven't really the capacity to distribute energy within countries and between countries in a good way. So there, they need to do more. And for instance, down here in South Sweden, if I buy a car and load -- as a Tesla, for instance, and then, I load it with -- should load up the battery, it will be coal from Germany, that will be used on the electricity. So there is a big step to go. And that's why I'm always saying 3 to 5 years ahead because before they have specified exactly what to do, then to get projects to do it, and then really do it, it takes some time. So I would see that it -- sequentially, it will increase step-by-step, hopefully, starting second half of 2022. And I'm not only talking for our products. But once it starts, then, I think it will -- it's not a neverending story, but then, it will be 5, 6, 7, 8 years to get it all because there is a lot of demand to change a lot of things in the world. But I would say on your question, Mark, that's a good one. It hasn't really started yet. That's the way I see it.

And how long does it take? If we stand here today, and you've launched a new product, and they started to do specifications, et cetera. How long does it take to build a substation? So when should we realistically see orders from this?

But I think it's two things, Markus. First of all, I don't think you need to build completely new substations. You normally need to upgrade some part of it and some sort of equipment, for instance, the switches and things like that. So therefore, it could go rather quick once you start because normally, they try to utilize the existing energy transportation places or whatever we call it. And so -- but then, of course, there will be completely new one as well. But generally speaking, it's more also to sort -- to have the technical solution. And as such, so there are normally system integrators into this as well. But short answer there, Mark, it -- first of all, you need to decide, now we do it. And secondly, exactly what type of technical solution. And then, once you're specified, then, I'm sure that in a lot of the big companies, they will utilize the same solutions in a lot of substations. So once again, it's not that you need new substations, you need to upgrade a lot of the existing substations. I think that's important.

Okay. So basically, once with them -- once it's specified, it's -- we can see quite -- I mean, quite a lumpy, quite fast, rapid uptake of...

Yes.

Of bills. Okay.

Most of the business we have, Markus, on the total Beijer Group is that once you are specified with the right type of product, then normally, they will continue to order from us. And that's what we've seen -- I've seen in the last couple of years, actually.

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

Yes. First of all, thank you very much for listening and all of you, and also for good questions and a good discussion. And now, we will continue to try to work with supply issues in order to get all the products out from the Group. And otherwise, we are looking forward to the next couple of quarters and wish you all a very good day. Thank you very much.

Thank you.

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