Ependion AB (EPEN) Earnings Call Transcript & Summary

Welcome to the Beijer Electronics Group Conference Call. [Operator Instructions] Today, I am pleased to present Per Samuelsson, President and CEO; and Joakim Lauren, Executive Vice President and CFO. Please begin your meeting.

Thank you very much, and everybody, welcome to this quarter report where we will present quarter 4 for 2021. We will do as we normally do, I will go through a summary of the quarter and the year, and then Joakim will come in and get through the financials for the total and for the different entities. And then I'm coming back with a sort of wrap-up sum-up in the end of the call. First of all, if you look at the slide, I hope you can see it everybody, you can see then that we -- and if you see the report as well, that we are quite happy to announce and to show that we have a continuous growth during last year, and the demand situation continues to be very, very good. We passed SEK 2 billion in order intake and compared to the size of our company, that's a big number. And also quarter 4 was close to SEK 600 million in order intake. And those of you that follow us know that we were quite happy with the SEK 500 million level quarter 2 and quarter 3, which means that now the quarter 4 has taken another step up. I will give you a couple of minutes on the demand situation because this is, of course, the most important thing in the report here. We said a couple -- yes, when the pandemic started, I would say, quarter 2, when we announced quarter 2, I think it was 2020, that -- and it started to be, you can call it the downturn because of the pandemic. First of all, we never believed it will take this long, that's one certain. But we said already from the beginning that our objective is to keep product development on a good level that we should continue to work close with customers, even though it was digital. We also said that our objective is to keep sales organization and service organization intact, so we could get out of the pandemic in a good way. And the internal objective was to -- how should I put it, get out of it in a better situation than we got into it, if you understand what I'm saying here. And we started to realize that, that was a good strategy, I think, beginning of last year. And we can see now during 2021, we have got several, and I would say, it's more than 10 different big customers that have been coming to us and thanked us for the way we have handled the situation. And you can also then see in the order intake during the year, that is a very good order intake, as I have said. Of course, there could be some sort of change of behavior when customers are ordering, meaning that they are perhaps placing a little bit longer-term orders compared to how they did it before. But it's not a big thing. And I would say that if we talk to customers, you can see that they, in their turn, has good demand situation and they deliver more or less the products directly when they got our product in. So we can see that there is a good quality in the order intake as well as the backlog that now is up to close to SEK 1 billion when we go out of 2021. So I would state and say that there is at the moment and at present and with all the information we have today, there is a good demand situation. It's also important to state that it goes all over the regions, meaning Asia Pacific, Europe as well as the US is contributing in a good way. And it's also in all the 3 entities and within the entities also within the segments. So we can see that there is a good spread in the order intake over the year, which also gives good feedback. The challenges has, of course, been as we have said, a lot of quarters now that the component situation has been a sort of a problem, which because we can't get as many term components as we want to. And we also took a very conscious decision mid of last year that we should do whatever we can to make sure that we get the components so we can deliver to our customers. And before trying to get heavy increases on prices to the customers, so we concentrate on get the material. During quarter 4, we see that we have an increase of cost on components that is SEK 20 million. And that is, of course, not good because it hits the result. However, we have during the quarter also gone through all customers with new negotiations when it comes to customer prices. And we are ready with all markets, all customers. So when we go into 2022, you will see step-by-step during quarter 1 and quarter 2, increased prices to the customers, which means that we will compensate those SEK 20 million step-by-step during beginning of this year, 2022. So once again, margins will definitely step-by-step increase during first half of 2022. And you can all go back and forward if you -- how you should handle those situations. We took this decision and we concentrate them on trying to get material for the customers before having the quick price increases. If that's right or wrong, but that's what we have done. Also, another comment here is, of course, having said this, we were successful in increased sales in quarter 4. So the increase, if we compare it to before, we were on the SEK 400 million, SEK 420 million level. Now we got to up to SEK 460 million level, and hopefully, we'll be able to increase the sales going forward in 2022. One other comment here is that we are happy also to announce that we're starting to give dividend again. So the Board will take that as a proposal to the shareholders. And that is, of course, I think it's a good signal that we start to be a company paying dividend again. I have already said and commented on the segments, and I would say that the sequential sales increase also was roughly around more than 10%. But if we then take into account the component cost, and adjust for the extra cost, we are now close to the 10% profitability on the EBIT margin in the quarter. There are also one other thing I want to take up, and that is that we had a breakthrough order in Taiwan, where Korenix and Beijer Electronics together has been fighting to get into very important customers over there. And it's also proof for us that the combined offer that the Beijer Electronics now will do together with Korenix, it works. And that is, of course, also quite important for us. During 2022, there will be a big focus on continuing on the price management, and of course, also on the component sourcing, so we can continue to increase sales quarter-by-quarter. But I also want to state that it's still -- we have -- we are not through the component shortage. So we foresee that still the first half of 2022 will still be, how should I put it, shorter tips on the component side, and that could also be -- how should I put it, price increases because we need to buy on the spot market as we have been doing in the last 6 months. Here, we have some slides. And of course, those ones you want to show every day in the week. And if you can see that in Q4 on the orders on the left side, you can see that if we have been moving around SEK 350 million, SEK 400-ish million, and then you can see that quarter 2, 2021, it started to increase up to the SEK 500 million. And now we are up to the SEK 600 million in quarter 4, and that is, of course, quite happy to see. When do I look at the sales, I have said a couple of times before that normally, it takes a couple of quarters before the order intake transfers into sales. And -- but you can see very clearly that also sales are coming up at least the SEK 450 million level. And hopefully, we will be closing up and coming closer to the SEK 500 million level once we come in further into 2022. And as I have already stated, the backlog is now up to close to SEK 1 billion. And when we started the year, it was a little bit more than SEK 500 million. By that, I hand over to Joakim, and he will now go through some of the figures for the Group, if we start here.

Hello, everyone. As Per said, I will take you through the finance numbers. And you see the heading there as past dated record volumes, but the component cost limits the profitability leverage that we have been talking about many times before. Order intake, SEK 597 million, sales of SEK 466 million and an EBIT at SEK 22 million for the quarter. As said, Per said, it's been a conscious decision to focus on the supply. And obviously, it pays off, as you can see that the sales in the quarter is still up 13% compared to last quarter. And this -- the price increases that has been implemented and done, there are lead times before we see that in the numbers, and that's why we see the somewhat low profitability in the quarter compared to where we want to be. Added to this, we have had some headwinds with regards to currencies. It's actually SEK 7 million in the quarter, relatively high one. Part of that is actually the Turkish lira. As you know, we have a Turkish entity. And that we've had a deterioration of that currency, and that has actually impacted us quite significantly in the quarter. Overall, the activity level has somewhat increased in the quarter. Some travels have been done compared to where we have been earlier in the year, some fares have been taking place. So somewhat higher activity but not any dramatic increases in the quarter. The bottom line net income positive almost SEK 11 million for the quarter. In terms of cash flow, you know that we have had tough times during this year, we've increased working capital as part of focusing on deliveries and making sure that we have some components and forcing ourselves to take some spot purchases of some components. Now in the fourth quarter, we came to a positive cash flow. Still, however, the full year is still somewhat negative. And the final point, as some of you remember, we bought the company Virtual Access in 2019. There, we had an earn-out setup that has been finalized in this quarter, with a result impact of 0 for the quarter or for this transaction. That was Group. Let's go into Westermo. Strong demand as on the total, and it's been a record order level in Westermo and for the full year. But still, the challenge with supply is, of course, also impacting Westermo. Order intake, above SEK 300 million, SEK 317 million to be exact, sales of SEK 234 million and an EBIT of SEK 22 million for the quarter. And we should maybe say also that in the SEK 317 million of order intake that we've had in Q4, we have not had any of the larger orders. And with larger orders, we talk about SEK 30 million, SEK 40 million, SEK 50 million. And so it's widespread. It's all the segments, as Per pointed out, and that is, of course, a strength. We've had a challenge to source components, but I still want to highlight, if you look at the graph in the left corner, you see that there's been an upshift in delivery in the last quarter. So we have been able to increase the deliveries to our customers that, of course, then to the fact that we have been forced to pay somewhat higher costs for some components. We want to state that the ELTEC acquisition that we did by 1st of April in this year -- sorry, 2021, continue to develop in a good way. Let's move on to Beijer Electronics. Kind of similar heading here. I mean we have a wide order growth also in Beijer Electronics, and we've also been able to step up the deliveries in Beijer Electronics. Order intake, SEK 234 million, sales of SEK 208 million and an EBIT of SEK 11 million. Also here, all segments, all regions showing a good strength. And also in Beijer Electronics, we have had some higher costs for some of the components that has been impacting the profitability in short term in the quarter. In terms of activity level, also in Beijer, we've had somewhat higher activity level, but no drama, and it's been balanced, but somewhat more moving around and meeting customers, we start to do that. And we have been talking about the cooperation between Korenix and Beijer, and I think the order that Per mentioned before and that we even have on the front page of the report, giving a good example of we are doing the right thing to cooperate. And as communicated during the quarter, we will have a joint reporting of Beijer Electronics and Korenix as of beginning of 2022. That's the structure going forward when it comes to the business entities. So let's move on to then Korenix. It's almost a double order intake in the quarter with its order intake of SEK 52 million in the quarter compared to the SEK 26 million that we had last year. The sales of SEK 29 million and an EBIT that's just below 0. So the breakthrough order, SEK 24 million actually is something that we are very happy to conclude that we have been able to take. Also, in Korenix, we have had some component shortages that's been challenging us in our deliveries compared to what our customers would like to have. And also here, we have the time lag in the price increases, and that has then led to that we end up just below breakeven and not in black numbers. That kind of concludes the go-through of the numbers, and I hand over to you Per to take the concluding notes.

So thank you very much. Well, once again, if we try to do a summary of the report of the situation, it is a strong demand. And I would argue and say that the customer focus that we have had in the pandemic strategy from the beginning, it really pays off, as I said here. So that I'm very happy that we did it that way. Uncertainty on components situation remains, and it's a short term. I mean, we don't know when this will open up, so to say. But we -- at least we can see that there will be an uncertainty first half of this year, and then we'll see what happens. We, of course, will comment this every quarter as we have done before. You can hear on my -- a little bit my voice is that we have a positive look at the demand situation and that we see that we look quite positively on 2022. But however, we are, of course, also aware of that we have a global political tense or problems when it comes to Russia, Ukraine, China, Taiwan and so on. And of course, if things happens there, then, yes, as I don't hope it will do. But of course, we are on to that and follow that very closely. We also need to be aware of that, that if you look at possible inflation and the interest rate from different -- what can happen on the interest rates. And then, of course, that effect on business climate, I think that is a little bit more long term, but that is, of course, also important. But whatever what we can see and when we talk to customers here and now, we see that there is a good situation, demand situation going forward in 2022. We have, of course, the increase of delivery capacity in focus. If you look at for the next 6 to 9 months, our sales level will be totally set by how much we can deliver. So at the moment, it's not how much we can sell. It's actually how much we can deliver. So of course, we have a lot of focus on getting components in place and so on. When you look at the order intake of SEK 2 billion, then of course, you can ask a question, do we have capacity longer term to deliver those levels? And the answer is yes. We are still in our facilities operate in between 2 to 2.5 free ship levels. So we have more capacity to take out in more or less all places where we produce. So capacity shouldn't be a problem when it comes to that situation. I have already said that on the price management towards our customers, we have done a lot of actions now before end of last year. And when we now go into 2022 and continues, there will be a lot of price increases that will kick in during quarter 1 and quarter 2. And I think that is important because when you then will see quarter 1, 2 and 3 in 2022, you will see that the margins on the EBIT level will go up, which is most important at the end of the day. And that also means that we are quite confident and confirm our targets on the entities that they should have at least a 10% organic growth and also have a potential to reach the 15% EBIT. And once again, those of you that follow us closely knows that there is a sort of threshold. And when you pass certain volumes, the margins go directly down to the EBIT level. And I think that is -- we can see that very clearly. And I also want to say one other statement on 2022. And I'm also looking forward for 2022 to see Beijer Electronics together with Korenix both to come into a profitable situation. You can see end of the year that Beijer Electronics started to come back to profit levels. And I would argue and say that there is one unit where we had a good potential for growth on the profit side during 2022. By that, before I open up for questions, I just wanted to also to state and to see that there is -- yes, you can see here, there is a new CEO, management director, taking on from 1st of March. I will be 65 this year. And even though I don't feel like that, I have to look at the passport and that's the situation. But the most important thing is that we have internally [indiscernible] Jenny Sjodahl, extremely capable. So I'm very, very happy to hand over this very nice company to Jenny Sjodahl. Because of what I have said, I also want to state in the outlook that Beijer Group, as we said, has a good potential to achieve better financial results, 2022 compared to 2021. And as we have said a couple of years, there will be -- there are all good fundamentals that we should continuously be able to improve results going forward. And by that, I want to open up for questions.

[Operator Instructions] Currently, we have one question lined up. That's from the line of Markus Almerud of Erik Penser Bank.

Markus Almerud from Erik Penser Bank. A number of questions. Firstly, what made you change focus on deliveries in this particular quarter? Was it anything in particular driving that to do that now?

I think what we realized Markus was, of course, that we have real asset for a long time, but it was more and more obvious for us that to be able to secure deliveries for the customers during quarters to come was one of the key factors in order to get a good order intake from customers. So we focused even more to, how should I put it, yet, whatever components we can get around in the world on the spots market. So yes, so the more we could prove to our customers that we have delivery capacity for them during 2022, that will, of course, realize what the key factor for us going forward. And so therefore, we concentrated more on that and also in the discussions with customers compared to short term really get the prices up in quarters... But I don't think if that was the answer on your question, but that's the way we saw it.

No. No. Well, it wasn't. So it's good enough. Then -- so if I read you right, that we've been talking about in Q2 and Q3 about how much the shortage of components have been punishing sales. And I would assume that with the strategy that you have now, there is no such impact in Q4?

That's not really -- sorry, that perhaps we haven't been clear enough on that one. So we take it out. There is still a shortage in the quarter, I would argue. We especially in Westermo, but also a little bit in Beijer, we could have delivered quite more. And I think we are still on the same 7 to 9 percentage level when it comes to -- we could have been able to deliver quite more in the quarter, given -- if we would have had the components that we needed, if I put it -- so there is still a backlog on that side, yes.

So if I understand you right, then you focused on increasing the deliveries, but there's still a shortage, but that rather led to the SEK 600 million in orders because the customers were more secured putting in the orders because they know you could deliver. But the kind of, I think we talked about SEK 20 million in the last quarter, that kind of level still there.

Complete. That's a good summary, and I agree to what you're saying there.

Okay. Okay. Excellent. And then in the Taiwan order for the large semiconductor manufacturer in Taiwan, how do you look this or is this kind of a -- I mean, given what's going on with the semiconductor investment arena, could we see that as a kind of a test order that you expect that to be more? Or how should we look at this?

No. But this is definitely a test order even though it's a very big test order. And if you look at the potential for the next couple of years in that industry, if we do this in a good way, we already now see possibility to follow-up orders during 2022. So yes, this is sort of a little bit compared to when we got into Otis a couple of years ago. I foresee that this customer will be with us for lot of years to come, and there is a very good potential on that one, yes, definitely. And of course, as you said, why quite an interesting industry to get into. So we are very happy for that.

Yes. I mean a lot is happening in the back of the situation.

Then just a couple of more, if I may. Have you -- I mean, given what's going on in terms of the shortages and delivery problems, et cetera, have you seen any impact on demand at all? I mean, have you -- I would assume that if this would continue, let's say, then at some point in time, there would be a negative impact on demand. Have you seen that? Because I don't read -- I haven't seen that anywhere, but just interesting to hear what you see on the ground?

No, still not. I mean we are, of course, very close to that discussion and close with the customers. But we haven't seen that yet. No, there is still a demand that is quite high, and we haven't seen it affecting it downwards. But I totally agree, you need to watch up and it could come, but we haven't seen it yet as we speak.

Okay. It's good to hear. And then one final one for me. Within the what's called major group on top [indiscernible] the number of people being sick has been shooting up in the beginning of the year. And then I think we saw some of that in Q3 as well. Could you update us where we stand at? Do you see this as a concern, especially for the first quarter?

Yes, of course, it's a concern because what has happened in the last month on the COVID side is, of course, dramatic. But it's -- to give you a number, we had -- it peaked in our factory in Westermo, there shouldn't be where we had manufacturing that they peaked on 7% sick leave. And that's not that high. It's too high. But now that has gone down again. So to give you an example, so we haven't had 20%, 30% away on that side. So -- the short answer on that, no, it hasn't affected us negatively so far. We have the same situation, I would say that hospitals and school service that people stay home because they are in quarantine, but they normally are not sick. It's a good work from home. And of course, when it comes to manufacturing, they need to be in place. And as I said, we had 7%, 8% when it peaked in [indiscernible], that's the highest level we have had.

Okay. Okay. All right. Well, that was my question, but I still would like to take the opportunity to thank you very much for the time we've been working together and wish you the best of luck in the future.

Thank you very much.

Our next question comes from the line of Mark Siostedt of Redeye.

Hello, Per and Joakim, I have a few questions. The first one is, of course, of the component shortage. Is the group of certain key components that is in shortage shrinking? Or is it more or less constant compared to Q2 and Q3? Or is it new kinds of components or...

So first of all, I would argue that it's constant. It hasn't changed so much now compared to Q3, Q4. But then, of course, there are -- when you get some sort of key components, then all of a sudden, you're missing some other components. So it's a little bit -- it's not exactly the same components all the time. But it -- so I think that's the best answer I could get here. It is volatile on that market. And I would say that when you build a switch or whatever this we're doing, -- then I would say we have 80% of the material to build it, but then we are missing 1 or 2 components to make the final assembly, so to say, and that's what is so frustrating all the time. And the problem is also related to that, even though we have commitments from suppliers that we will get certain numbers every week. Then all of a sudden, we get the information, we can't do it. And then on top of that, of course, there are still some sort of problems on the transportation network. So there are challenges and there will be challenges. But as you can see on inventories, and of course, we have tried to buffer up on different ways. So that's why we have the cash flow negative in '21, and that's also why we have higher inventory because you try to -- we try to buffer up in order to be safer and safer going forward.

And a question then on the gross margin in 2021 as a whole. How much do you estimate that the gross margin has been impacted by cost increases and spot market purchases of these components?

Yes, this is -- I'm trying to think about on the percentage, but we stated that it was roughly SEK 20 million extra cost in quarter 4. And I would argue, I would say that probably -- but I need to look into that before I give you a more certain number. But quarter 4, we said in millions, it was SEK 20 million, and then you can calculate yourself on the margins there. Then the reason I'm hesitating is that you also have a sort of a mix situation if you look at the back, so I need to look at that. But I can't give you a straight number or better number than that.

Yes. It's fine. Yes. And then on price management, I have a question. Could you comment a little bit on the gross margin of your new product launches and on pricing in general, especially since your software share is increasing, is the gross margin then on, for example, the Merlin range on -- or on the new Beijer Electronics products higher than on historical product launches or acquired products of a similar character?

As to what happens now is that when we now look at the order intake last 6 months last year are now beginning here, you can see that on the Beijer Electronics side, it's more and more X2 products Pro X2, X3, as you know, and they give us so the mix will also improve -- make the margins improve during 2022 because there are some older products that we had in Asia Pacific that is moving out, and then there are some newer products on the X2 series coming in. So there will be also an element of a better mix going forward. And then, of course, the new products, we, of course, try to be very clear on that, I should have a good model are when we start to sell it. So short answer on that, Mark, is that, yes, I think the mix and also the already negotiated price increases with customers will improve the margin step-up during 2022.

All right. Yes. Interesting. And another interesting thing that in the report is Korenix breakthrough order. And what was the deciding factor giving Korenix the win together with Beijer Electronics over the competition?

I would say 2 things. One is actually that I know what happened is that there was tests with also when I had competitors in place. But our setup worked more or less directly because this is a complex setup where you also be able to send information. I mean it's the connectivity as well as it's quite important here. And you work with the vacuum and all these things when you have these type of factories. And the setup when they setting up our system and also talk to our people, they were impressed on the technology level on the people as well. But the most important factor was that our system works more or less directly when they tested it. And then also, we found here that the combination of the competence from Beijer Electronics with the competence of Korenix was a very good fit. I would not say it was lucky, but it was -- and the competitors didn't have exactly that setup. So that was a combination of those 2. So it was not -- the most important thing was not price here. It was that it worked. So that -- so that, of course, is -- that was good for us.

Okay. Interesting. I have 2, 3 more questions, if I may. So it looks like Westermo is able to attend many trade fairs again, and I've seen them like in AusRail, TechAdvantage, Enlit Europe, a lot of these trade fairs, not posting about it. How important are these trade fairs for your medium-term order intake and perhaps especially for new product launches that you are launching?

I would say and argue and say that exhibitions they are good, but they are not vital. I think you can always -- I mean, for medium term, I don't think are vital, exhibitions, there is always put back and forth, if you need them or not. But I think that now there is a big demand after the pandemic to meet. And so that there, they had a big impact when you -- people want to meet again, so to say. And then, of course, when you launch a new product, that's a good place to get a new product out in a very good way. But I would say also that the pandemic has learned the whole industry to also work more digital. So it means that the other platforms you can get out with new products better than we did a couple of years ago. So I would say that we'll see if you have a lot of exhibitions 5 to 10 years from now, but I will not stay to see it, by the way, but I will see. We'll see.

And last question. Is it possible to more or less quantify how much of your order intake is follow-up orders from already won design wins and the new sales. It would be really interesting to see if your customer base is ordering more and more and more and how much it is because it looks like you have a wide order growth from yes, the impact from it.

That's a good question, Mark, but we don't have a good information to go out with here now because we have been discussing also to take design wins as a very important factor, as you know. And -- but we don't have, at the moment, a good follow-up system. So we dare to go out with external information on that one to be very clear. But we had this -- I would say that the order intake we have is, of course, a combination of already design wins when they continue to order, but also some new customers with the combination. But basically, most of our orders is coming from existing customers that I would argue and say that probably 85%, 90% of the order intake is from existing customers. So that is actually -- that's the absolutely most important factor for us that existing customers are ordering more. That's result.

All right. Thank you very much for taking my questions, wishing you the best, Per.

Thank you very much.

[Operator Instructions] Okay, there seems to be no further questions coming through at this time. So I'll hand back to our speakers for the closing comments.

Yes. Thank you very much for listening to -- and for me, as you -- some of you know, this is my last quarterly report for Beijer Group. And on the picture here, you can see that I'm handing over to a very competent Jenny Sjodahl. And I just wanted to say that I have enjoyed every minute even then we have had problems underway, but this has been the most inspiring job I have had since 1981. And even though I don't feel it myself, it's time for me to do something else. But also, I know that if you look at the next 5 years, I'm sure that Jenny will do a better job. So I think it's a very good timing to hand over to Jenny. And I don't need to wish a good luck because she doesn't need that. she has competence in any way. But once again, thank you very much for listening, and I will, of course, being a shareholder, follow Beijer Group for a long time to come. Thank you very much.