Ependion AB (EPEN) Earnings Call Transcript & Summary

Welcome to the Beijer Electronics analyst conference. [Operator Instructions] Today, I am pleased to present Jenny Sjodahl, President and CEO; and Joakim Lauren, Executive Vice President and CFO. Speakers, please begin.

Okay. Thank you very much for that. Hi, everyone, and welcome to this quarter 4 call for Beijer Electronics Group. With me today, I have, as usual, Joakim Lauren. We are currently in Malmo, and we will walk you through our quarter 4 and 2022 results. As usual, I will start with a business update, then Joakim will move into more details around our financial performance. And then finally, some concluding those and outlook. And then, of course, we open up for Q&A. So let's move right into the summary of the quarter then. We are happy to see that we have achieved another strong and stable quarter. It's a strong ending to a record year for Beijer Electronics Group. And if we start with the customer demand side, which is, of course, where it all starts, so to say, we can see that the customer demand continues in general, on a good level, and we posted our fourth consecutive quarter above SEK 600 million in order intake. Driven mainly by Westermo, I would say, in the quarter, who had a fantastic strong order intake, but also Beijer Electronics came in on a stable level where for Beijer Electronics Americas and Europe were strong, and the China market actually showed some weakness. In terms of sales, we posted a new record quarter of SEK 589 million. That's 26% up on the same quarter of last year. And both business entities contributed to that. Westermo came in finally up SEK 300 million, and which was a significant step up in delivery. So that was good. However, we do still see constraints due to the component situation, which I could say that those problems are gone. They are mainly gone, I would say, in the Beijer Electronics business entity with the components that they are using. But on the Westermo side, with a very high spec components that we need, there are still a number -- a few pure, but the number of suppliers that are still letting us down, so to say, in terms of the capacity and are pushing out confirmed deliveries, which are still causing issues for the Westermo delivery situation. Earnings came in at 10.7% for the quarter, some was lower than quarter 3 of last year. There are some explanations to that, which Joakim will come back to in just a bit. In terms of Westermo business entity, as I mentioned, a good increase in sales and an EBIT level of 12.3%. And as I mentioned, the component situation continues to affect us quite a lot. We are prioritizing deliveries to our customers. And in the quarter itself, we were forced to buy components on the spot market to an extra cost, so to say, of SEK 12 million in quarter 4. And we have seen that issue throughout the year. But just to point out that this is still having a major impact on the earnings in Westermo. Beijer Electronics came in with another very stable quarter and post an EBITDA of 13.9%. So they are staying on that higher level, so to say, that we have seen over the past quarters in that business entity also with a nice sales volume. When it comes to the global situation, so to say, we -- there are, of course, as we all know, a lot of uncertainties still out there. And we of course, follow that development and we are preparing for different scenarios. However, for the time being, we are not seeing any major effects on our demand side related to that. And today, the Board has decided to propose a dividend of SEK 0.50, same dividend as last year. basically based on the fact that there is a lot of investments and good things that we would like to do during 2023. And that is the reason why we want to -- why the Board proposes to stay on that dividend level. Okay. I think I mentioned already quite a few things about the business entities. In Westermo, we see that the high demand that I mentioned is driven by mainly our focus segments with the Train and Energy segments really sticking out with very, very nice order intake from our key customers there. And of course, despite the component issues, we -- the organization is fully focused now on continuing to step up the sales volumes. We have a very, very strong backlog, as most of you are aware, and we need to deliver that backlog to our customers. Beijer Electronics, again, stable demand. Americas, very strong growth. In the EMEA, Europe, Middle East, Africa, also on a good level. We are seeing a weakened demand in China at the moment due to the issues that they have over there right now. But we believe that, that situation will somewhat improve throughout the year. The delivery situation in Beijer Electronics is on a good level. There are a few issues related to capacity of suppliers, so to say, in components. But it's -- in general, we are in balance now with the order intake. And as I mentioned, a very stable profitability level now for this business entity. Okay. Here in the graphical format, orders and sales, order level again, it came down a little bit, as you can see there, because of the Beijer Electronics a little bit weaker demand in Beijer Electronics, Westermo still very strong, but you can see fourth consecutive quarter above SEK 600 million, which of course, historically is very, very high level. Sales, 26% up compared to last year, almost SEK 590 million. That's an all-time high for the group. We have an FX effect that you can see here in the quarter compared to last year. And our backlog, as we have been talking about before is at an all-time high of SEK 1.5 billion now going into 2023. So with that, I hand over to you, Joakim, to give some more meat to the bone.

We start with Beijer Group and up in the left corner, you see that the order intake came in at SEK 603 million. The sales was SEK 589 million and EBIT almost SEK 63 million, representing an EBIT percentage of 10.7%. As Jenny pointed out, it is the fourth consecutive quarter above the SEK 600 million mark, despite the fact that China market has developed quite low when it comes to order bookings in the fourth quarter, where they have had a very good or very strong early 2022, but the last quarter was weaker. Sales, as Jenny pointed out, all-time high and the EBIT level, well, it's almost 3x better than last year. And in the second quarter now that we are well above the 10% mark. If you look at the graph, you see the orange line, the solid orange line that is the last 12 months development. And the trend there is, of course, in the direction that you would like to see going upwards. FX impacts and with the weaker krona in total for the group, we have a positive impact of about SEK 4 million in the quarter. We have been struggling for quite some quarters during 2022 with cash flow. Now by the end of the year, we post a quarter with, I would say, positive free cash flow of SEK 57 million. Still, our working capital, it's a bit challenging with the component situation. So we stated still on too high levels compared to where we want to be. But still, we show a positive cash flow in Q4, which is, of course, good for us. Net income, bottom line, SEK 51 million compared to SEK 11 million last year, and EPS increased nicely from 0.73 -- 37, sorry, last year to SEK 177 this year. So let's go to Westermo. Westermo order intake, SEK 326 million, sales of SEK 300 million and an EBIT of SEK 37 million, representing 12.3%. The order intake, all-time high as well. Fifth quarter about SEK 300 mark, very strong development in Westermo, as Jenny pointed out. And we're also happy to see that we have been able to step up the deliveries, giving us the SEK 300 million in invoicing in the quarter. But still, I mean, you should look at the pace that we are booking orders compared to what we are delivering. So we still have a way to go when it comes to increasing our ability of deliveries. EBIT margin, 12.3%. Decent is what we describe it as, but we should be aware, as also stated before that we needed to do expensive spot market purchases of some components to be able to deliver. And as Jenny said, we are prioritizing deliveries towards our customers -- and then we have to do these kind of activities that will or have affected the result with the SEK12 million, as we pointed out before, in the quarter. And it's -- what to expect when it comes to the component situation, well, it is still challenging for us and it will impact us in the short perspective. Of course, with the inflation and the cost increases that we are facing, we are active on price management and also our strategies when it comes to working with development to make sure that we have the latest technology that's needed with those focus segments that we have. So we continue that on full force making sure that we will be competitive and open up for the growth going forward. Beijer Electronics, we have an order intake of SEK 279 million, sales of SEK 290 million and an EBIT of SEK 40 million, representing the 13.9% EBIT. If we are comparing to Q4, we stated a stable bookings where China has said, has had a weaker development. But Americas and also EMEA, they are developing in a good way. So it's -- the slowdown in order bookings is not general. It is limited to the Asian or specifically the Chinese market. And deliveries stable development without too many hiccups -- in balance with what we are booking orders. Profitability, well, we can conclude another quarter around the 14% level. It's actually the third quarter in a row where we've been on this level. Also in Beijer Electronics, of course, we need to be active on price management and that we are doing. We have, for quite some time, talked about the integration of [ Korenix ] into Beijer Electronics. Now when we close this quarter, we can conclude we've done. It's fully in place, and we will now basically globally operate under the name Beijer Electronics only. And also in Beijer Electronics, its full focus on R&D activities to maintain the position that we have and to make sure that the offerings that we have, both hardware and software are competitive and the best to offer to our customers. That concludes the numbers. So over to you, Jenny.

Thank you for that. And this is really just a summary of what has already been said. The takeaways are that we are seeing a stable overall demand where Westermo continues to show a very strong development, and Beijer Electronics is stable. Good profitability development compared to where we come from. We are not happy. We are not content with that. There's still much more to do to reach the financial targets that we communicated in November of last year, and that will be the key focus, of course, for us going forward. The component shortage as much as I would want it to be over, we still see issues with a handful of components causing us challenges regarding the delivery capacity, specifically in Westermo. And again, global outlook is somewhat uncertain still. As we have mentioned before, we are not directly impacted by the Russia war on Ukraine. But of course, the inflation and the risk of recession and so on is something that we monitor very closely, and we prepare ourselves for different scenarios. And then outlook, yes, this is early days, so to say, looking at 2023. But as I mentioned, our target now is to strive to reach the financial goals that we communicated in November and the fact that we operate in attractive markets with good underlying growth driven by digitalization, sustainability, electrification and so on. It gives us a certain optimism for reaching both the growth and profitability goals in the medium to long term, and it also gives us some optimism for 2023. But again, difficult to tell how the market will develop. So that's how we look at it right now. So with that, we would like to open up for Q&A.

[Operator Instructions] And currently, we have 2 questions in the queue. First is from the line of [ Mara Costus ] of [indiscernible].

So I have a handful of questions. First, could you expand a bit on the slowdown in China and perhaps also on what signs that make you cautiously believe that it could potentially rebound a bit in the second half of 2023.

Yes, maybe we take them one by one, otherwise, we will forget it. Well, if I start with the China situation and then maybe Joakim would like to fill in. We are seeing a slower demand basically related to the lack of liquidity in China and the overall economy is slowing down there due to the COVID situation and so on. So that is something that we see. But what is making us cautiously optimistic still about the China market is that quite a few of the customers that we have in China are global exporting companies like the big car manufacturer, BYD, Build Your Dreams that are exporting their products globally. And they have become an important customer to our -- to us. We are delivering our X2 panels to -- they are actually making electrical batteries or batteries for electric cars, and we are delivering equipment or panels to the production equipment of those factories. And that's a global business and those kind of customers. There, we see a continued strong demand going forward. So that's the reason why we are cautiously optimistic about China coming back and picking up again.

There are quite a few Chinese customers that we have design wins that we believe will lead to order intake later in the year. So that is the reason why we are cautiously optimistic still despite the weak Q4.

All right. Interesting. And -- so during the Capital Markets Day, you discussed the growth opportunities in infrastructure, such as EV chargers and in the grid network. Are you looking to recruit perhaps more sellers or other support personnel in the U.S. specifically and increase the local presence in 2023. Would you have the organization in place for this growth opportunity.

I think overall, we have a strong organization in place in North America. We have strengthened the Westermo team during last year actually specifically to focus on the energy market in North America. So we have already recruited a couple of people -- and we will probably continue to strengthen our presence there during 2023. And also in Beijer Electronics, we have increased our capabilities, so to say, to support these new segments in North America but also in other geographies. So selectively, we recruit and add resources where we see there is a growth opportunity that we want to capture.

Right. And are there any other like high-margin pockets or interesting growth areas that you see -- so I mean, you have talked about like mining, ports, water, facilities, et cetera. Is there anything that is like standing out?

I think that you can say that the Energy segment overall, which is a focus area, both for Westermo and for Beijer Electronics represents a higher-margin segment. It, of course, depends on the different applications, but it is a segment overall that is growing and where we see that we can get good prices, so to say, for our products. So as we grow that segment, I believe that we have a positive impact on our gross margin.

All right. And so before Korenix and Beijer Electronics merged, you wrote in the Q4 in 2021, I believe that Korenix, you wrote about the Korenix extensive product development and the new Korenix switch OS platform. And in this report, you also mentioned JetNet and JetWave, et cetera. So I'm just curious to know, especially since you have talked about a few larger deals about how Korenix is doing in the new business segment and whether the investments have gone to.

Yes. What -- part of the fact that we are integrating the Korenix business into Beijer Electronics, we have, of course, looked at the portfolio and the focus areas. And you could say that we have limited the scope of the former Korenix from more wide and to focus more on supporting the Beijer Electronics development. I think about a year ago, we talked about the [ TSMC ] order, that is still a very good business, where we still see good progress going forward, and there's a lot of opportunities in that area, which is then the digitalization of production or manufacturing 4.0 applications. There, the offer that we have where we combine the Beijer Electronics and the Korenix side, we see good opportunities, and we believe that we are very competitive.

All right. And one last question. So it's on the component shortage what are your like suppliers telling you on the outlook of getting into balance once again?

Yes, they were telling us early quarter 4 that there would be improvement in capacity and so on with the consumer electronics demand going down. So that made us feel a little bit optimistic actually about the situation. And I can say that the situation has improved in terms of -- there are less components now that are on the critical lift, so to say, so less components, less suppliers to deal with, but the ones that are still critical, those suppliers, which is basically 2, 3 suppliers are still having major issues with the particular components that we are using and are pushing out deliveries with very short notice that had already been confirmed. So we are, of course, having a very close dialogue with the suppliers trying to get attention and priority, but the hard allocation situation that has been around for more than 18 months now is still there for those components. And you can end up having no allocation one quarter, for example, and getting to know that very late. So there seems to be still supply chain imbalances for some specific electronic components, and it's very hard to understand exactly why that is, but that's what we are seeing.

Sorry. So one last question then. Do your customers understand this -- your end customer?

Yes, I think they understand it, and we are also asking for their help, so to say, in some cases, they can help us push and help us get priority and so on. So I think that there is a good collaboration with our major customers. And again, the reason why we are doing this spot purchases to a very high cost is that we want to serve our customers. That's the priority #1 after all, so that we can have a [ light ] also after this situation is done. So that has been our focus area. And I think most customers appreciate that. But we are still -- we have 2 low lead times still, and we are working hard on getting the lead times down and improving our delivery, our on-time delivery, basically.

And we currently have one further question in the queue. [Operator Instructions] And next question is from Markus Almerud of Penser Bank.