Ependion AB (EPEN) Earnings Call Transcript & Summary

Welcome to the Beijer Electronics Group Q3 2022 Report. [Operator Instructions] Today, I am pleased to present, Jenny Sjodahl, President and CEO; and Joakim Lauren, Executive Vice President and CFO.

Thank you very much for that. Hi, everyone, and welcome to our quarterly report session for Q3 2022. As the headline of our report indicate, we are happy to share with you that we have a record quarter when it comes to both sales and earnings. Hold on a second, I'll just show the agenda first. So first of all, I will go through a general business update. And then Joakim Lauren will go a little bit deeper into our financial performance. After that, we'll have some concluding notes and also outlook. And after that, we'll open up for questions. So with that, let's move into the situation after the third quarter. So as I mentioned before, we came in with the best quarter ever for the Group when it comes to sales and earnings. So we're of course very pleased about that. What was especially nice in the quarter was that both business entities actually performed on a good level at the same time, which is of course the reason why we as a Group show a very strong result this quarter. When it comes to the customer demand, we can see that it continues on a good level. We're posting our seventh quarter in a row now with increased order growth. And we came in with another quarter above SEK 600 million, SEK 621 million to be exact. That corresponds to a growth of 24%. And the sales number came in at record high SEK 567 million or 38% versus last year. And that was the result of Beijer Electronics business entity continuing to invoice on a high level and the Westermo business unit, which was really struggling in quarter 2, as you may remember, managed to increase their deliveries quite significantly in the quarter, which led to this good level. However, we do see a challenging situation still on the supply of semiconductors and that is still affecting our deliveries, especially on the Westermo side. So -- but what is positive there is that for the first time, we are hearing some positive signs from our suppliers of electronic components that they do see light in the tunnel and consumer demand going down on electronics components. So even though we don't really see any results of that right -- where we are right now, we do believe that there will be a softening and an improvement in the supply chain in the next, let's say, 6 months or so. The earnings for the quarter came in at 12.2%, again, a record number for the Group. And again, both business entities contributed nicely to that; Westermo, who had a very low level last quarter or quarter 2 of this year I mean, actually came back to a good level of 14.5%, driven by a stronger volume and Beijer Electronics had another strong quarter at 14.2%. When it comes to the macro situation, we all read the papers. It is a bit challenging out there and we of course monitor that closely. However, we do still see a very high customer activity. We see a strong pipeline, especially in the Westermo business entity. So where we stand right now, we don't see a softening in demand, even though we do believe that the Beijer Electronics business entity will see a somewhat lower order intake level in the coming quarters. So if we look a little bit closer on the business entities on this slide here, as I mentioned before, Westermo sees really, really good demand still. And that demand is driven by our focus segments, train and energy. And we see the fourth quarter in a row now above SEK 300 million. And what was interesting in the quarter as well is that we didn't receive any larger orders as we sometimes do in some months and quarters. So it was a strong demand build-up of many medium-sized orders, you can say. I mentioned the supply situation, it improved in this quarter compared to quarter 2, which was a bit of a disaster. But this quarter, we managed the component situation better, which meant that we managed to ship out a significantly higher volume in the Westermo business entity and the profitability, as I mentioned, is now approaching the target levels that we have earlier communicated of 15%. And as I mentioned before, the supply situation is still challenging. We would have shipped -- we would have liked to ship a lot more out of the Westermo factories in the quarter, but we are still hampered by the components situation. So the balance between order intake and sales is still not quite there. If we move on then to the Beijer Electronics business entity, we are happy that they present another strong quarter. Continued high order booking, about SEK 300 million, again, spread out through a lot of regions and a lot of customers. We are happy to see continued orders for applications such as EV charging for electric vehicles and so on, a very interesting segment for Beijer Electronics. And we can also mention that the order intake passed SEK 1 billion now after 3 quarters. In this business entity, we are seeing now a balance between the deliveries and the order intake, which is a good thing. Delivery times are coming down. So that's really positive. And if we then move on to a more graphical visualization of our orders and sales, as you can see here, as I mentioned, strong order intake still. However, a little bit lower than the past couple of quarters, which have been extremely strong, but still above the SEK 600 million mark. And if you look at the right-hand side, you can see that the improvement in sales that we achieved in the quarter. There are some favorable translation parameters adding to this of course, and Joakim will go more into details around that. But I can also mention that we do have an all-time high backlog of SEK 1.5 billion in the Group. So with that, I'll hand over to you, Joakim, for a little bit more of a deep dive into the numbers.

Thank you, Jenny. Good morning to all of you. I will go somewhat deeper into the numbers and I will start with the Group. And as Jen has pointed out, it is a record quarter, and of course, we are very happy to present the numbers to you. We have an order intake of SEK 621 million, as Jenny said, sales of SEK 567 million and an EBIT of SEK 69 million for the quarter, giving an EBIT percentage of 12.2%. Looking at the orders, another one above the SEK 600 million. As said, it's all-time high on sales and it's all-time high on EBIT. Of course, we know that we have a weaker Swedish krona and we have an exposure in euros and in dollars. So with this situation, we have a favorable FX impact. It's about SEK 11 million, where about SEK 4.5 million is translation and SEK 7 million is transactional variances. With the challenges in the supply chain and sourcing components, it's still impacting our working capital and it kind of limits the cash flow situation or the cash flow generation in the quarter. We came in positively at SEK 27 million, but of course, we still sit with somewhat too high working capital levels compared to if we have a more normal situation. [ Bottom ] line net income of plus SEK 51 million compared to the SEK 21 million last year and an earnings per share of SEK 1.77 for the quarter. Let's go to Westermo, SEK 350 million in order intake or 8% growth. I want to point out that looking into this quarter on the order side for Westermo, we have no larger orders in this. And the quarter last year was actually a quarter that had a significant large order. We booked the largest [ Stadler ] order in 2021 of SEK 50 million. So if you compare without the Stadler order, we still have a good growth on the order side, it's about 30%. So the comparison is quite tough. So you should not be too alarmed of the 8% compared to what we see on the other growth numbers. So sales managed to step up compared to last quarter in Q2 to the SEK 263 million, giving an EBIT of SEK 38 million or 14.5% in the quarter. I think Jenny pointed out already that the challenging component situation remains. And we will see continuous challenges when it comes to components. It's not over, but as Jenny said, there are signals of easing in 2023. We are working actively with price management. Of course, we do see cost inflation impacting, but we are compensating with active price management in Westermo, giving this kind of result level for the quarter. So let's go to Beijer Electronics. Here, we have another quarter of orders above the SEK 300 million mark, SEK 308 million to be exact. We had sales of SEK 306 million, giving an EBIT of SEK 43 million or 14.2% for the quarter. In Beijer Electronics, in Q3, we in Europe tend to believe that the pandemic is not impacting, but we have impact in Asia. Our organizations in China and Taiwan are affected by COVID-19. And in China, there has been partial close downs during the quarter. And in Taiwan now, we see an opening up of the opportunity to come in and travel to the country. So still challenging for this organization, but still they managed it in a very good way. Also in Beijer Electronics, we are working with price management to compensate for the cost inflation. And we believe that we are doing so, if you look at the results for the quarter. And as you all know that we are integrating the Korenix business entity [Technical Difficulty] I'll wrap up Beijer Electronics and the integration work with Korenix continues. And there is more synergies to establish when it comes to the joint operations. That kind of conclude the details on the financials. So over to you, Jenny.

Thank you very much for that. So to conclude the message here, again, good order bookings and continued high customer activity levels and we are of course monitoring the situation closely going forward. Good profitability in the quarter from both business entities. That is something that we are happy about. And it also confirms the volume leverage that we have been talking about for quite a while and now we actually see that happening. Component situation, we have mentioned several times now. We are managing the situation to the best of our ability. And we do see some signals of ease in 2023. The global macroeconomics again creates uncertainties. You cannot really judge from history in this situation. So we'll continue to monitor the situation. But where we stand right now, we still see a positive demand outlook. And if we look at the outlook for the Group, this one is unchanged from last quarter. We do believe that we will achieve a significantly better financial performance in 2022 compared to 2021. So with that, we'd like to open up for questions.

[Operator Instructions] Currently, we have one question in the queue. That's from the line of Mark Siostedt of Redeye.

So I have a few questions. The new financing you informed about yesterday, could you talk more generally what you are looking for on the M&A front? Should we expect one larger acquisition or smaller -- a few smaller or [ done ] acquisitions? And have you seen private multiples decline in your markets, thanks to the public market downturn?

As we have stated before, I mean, we have an active M&A agenda. And we are primarily looking at complementary acquisitions to the business entities, both Westermo and Beijer Electronics. But it's -- we have also stated before that if we believe that we have an opportunity for what we could call a third leg, that is also something that we are looking at. We are happy with the new financing agreement because it gives us more muscles to be more active when it comes to the financing side of the M&A. So we are continuously working with it. We have a pipeline. We are working with that. And let's see what happens going forward.

And in the Q2 report, you mentioned that Beijer Electronics have been very successful in mitigating the effects of component shortages and lockdowns, et cetera, and it has been securing deals where competitors did not have the delivery capacity. So I've heard a few quarterly reports this morning and maybe you have already written about this in your new Q3 report. But are you securing more large orders from OEM customers? And how is the capacity levels looking for your competitors now? Are they improving?

That's a good question. We did see throughout this year actually that we were winning orders in the Beijer Electronics business entity because the competitors had problems delivering. So that was a very positive thing for us. We are starting to see the delivery capability of some competitors coming back to a higher level. So that advantage is somehow going away. However, the customers that we won, so to say, during this period, we believe that most of them will stay with us. So that it actually has led to us adding on to our customer base, thanks to the good delivery capability of the business units.

And then these new customers, did you add some big OEMs that could give you volumes for many years or are they mostly like smaller ones or could you comment a bit on that?

There aren't really any bigger OEMs among those customers. It's more smaller customers in different geographies that adds up of course to a nice volume, but no larger customers, I'd say.