Ependion AB (EPEN) Earnings Call Transcript & Summary

Welcome to the Beijer Electronics Group Q1 Report 2023 Conference Call. [Operator Instructions] Today, I am pleased to present Ms. Jenny Sjodahl, President and CEO; and Mr. Joakim Lauren, Executive Vice President and CFO. Speakers, please begin.

Thank you very much. Hi, everyone, and welcome to this quarter 1, 2023 report for Beijer Group. So next slide, please. So the ones present in this call from our side is myself, Jenny Sjodahl and Joakim Lauren, as mentioned previously. So next slide. Agenda for today is as usual, I will start with the general business update, and then Joakim will dig deeper into the financial performance. And after that, we will do have the concluding notes and also outlook. And after that, you will have a chance to ask questions. So let's get started. Next slide. So to summarize the first quarter of this year, we are happy to conclude that this was a new record quarter for the group. We managed to get the delivery situation significantly improved, meaning that we had a record in sales. And thanks to that and the volume leverage that we get from that, we also had very strong earnings in the quarter. When it comes to the demand side, we do see that the customer demand, in general, continues to be stable. We see continuously strong demand on the Westermo side, whereas the Beijer Electronics business entity, especially compared to the very strong quarter 1 of last year, is a little bit weaker in terms of order intakes. But nevertheless, another quarter with an order intake level above SEK 600 million. I mentioned the sales number at a new record level. We have never been above SEK 600 million before. So we are happy to see that we reached SEK 623 million. And the main reason behind that is that, we do see an improved component availability finally, which is, of course, very, very nice. And that has especially helped the Westermo business entity to ship out a lot of products in the quarter, whereas Beijer Electronics has also performed on a stable level in terms of sales. And as mentioned, when we do get good volumes out, we see the volume leverage working actually quite well. And we reached an all-time high earnings level of 13.7% for the quarter, which is a significant step towards our financial goal of reaching 15%. And what is also very good to see for us is that, both business entities are performing on a high and stable level here. Record high EBIT level for Westermo, 16.4%, and Beijer Electronics, another very stable quarter with an EBIT of 15.1%. During the quarter, we have also made a small acquisition. It was the Beijer Electronics business entity that acquired a German company called Smart HMI, a software company specialized in web-based HMIs. So that's really a very nice complement technology and product offering-wise to our portfolio. As we all know, the geopolitical situation and the economic development are still uncertain. And as usual, we follow the development and we are prepared for different scenarios. Next slide, please. So if we talk a little bit about -- more about the 2 business entities. As I mentioned, we see a continued strong demand in Westermo with a new all-time high order intake. And in this quarter, that was driven mainly by the train segment. And as we mentioned in our report as well, there is an effect in the quarter where our order intake in Westermo is boosted somewhat by a larger customer actually extending its order horizon. Most of the customers are now kind of shortening their order horizons again after this very turbulent period. But this particular customer is extending the order horizon and that gives an effect on the order intake for Westermo in the quarter. Very good progress when it comes to increasing the delivery capacity, a new record level of sales and what I'm pleased with about that, of course, is that, we are starting to serve our customers in a better way. We are starting to take down the late deliveries to our customers, and that is, of course, a very, very good thing. I mentioned that the component situation has improved in general. There are less components and less suppliers causing issues. The problem is not completely gone yet. There are a few components still remaining challenging. And that has impacted our cost side in the quarter this time as well at approximately the same level as it did in quarter 4. And it also continues, unfortunately, to drive up our inventory levels. But we have prioritized to be able to ship product to our customers. And then, of course, we need to work really hard on managing the inventory side of things. But despite these increased costs that are very clearly there as well in this quarter, we see a record level for the operating margin, thanks to the nice volume development. When it comes to Beijer Electronics, another very stable quarter in terms of revenue and profit, as I mentioned, and actually a new record there as well for the operating margin. The order side, lower than last year. We had a very, very strong beginning of the year in 2022, thanks to customers extending that order horizon and also some last-time buy effects from older product ranges. And compared to that, we are seeing a weaker demand side. We see that customers are going back to more normal order horizon. So that has an effect in combination with some uncertainty in the market, and we know that Beijer Electronics is somewhat following the general economic industrial development. So this is kind of expected in today's economic environment. And we also see that this effect is mostly present in Asia. I'm also very pleased that Kristine Lindberg has started now taken office as the new CEO for Beijer Electronics business entity. She came in the 3rd of April and has already started in a very, very good way. Next slide, please. So if we look at this in a more graphical format, starting with the order side, you can see that, again, compared to the very strong quarters in 2022, we are down by 7% compared to the same quarter last year. But sequentially, we are actually slightly up in order intake. So a stable development there, I would say. What I really like is the right-hand graph here on -- if you look at the sales side, as I mentioned, where we have the wheels are turning faster now, and we managed to get deliveries out on a very good levels on both business entities. So plus 42% in sales. That's a pretty strong number actually. We have some FX effects in the quarter on the order side, adding on 3%. And on the sales side, 6 percentage points in the quarter compared with last year. And it's also worth mentioning that our backlog is still at a very high level of SEK 1.5 billion. This quarter, order intake and sales were, you can say, almost in balance, so the backlog remains at the same level. So with that, I hand over to you, Joakim.

Thank you. Next slide, please. I will then take you through some of the details in the financials. As you can see, we have order intake of SEK 617 million, sales of SEK 623 million and an EBIT of SEK 85 million, representing the 13.7% EBIT margin. As Jenny stated, I mean, stable order bookings. And as also said, the fifth quarter in a row with orders above the SEK 600 million with this underlying mixed picture where we have prolonged order horizons in Westermo and shorten order horizons in Beijer Electronics. And as also stated, all-time high on the sales level, then very much driven by the improved component availability, but also the fact that our organizations have been able to ramp up in a very good way and also handle the situation because we still have challenges when it comes to the component availability. And it's nice to see that we can deliver a good result with the increased volume and the SEK 85 million tripled compared to the quarter -- same quarter last year. Worth looking at the LTM graph, we're going in the right direction. We are above the 11% mark on a last 12 months rolling trend. If we look at FX impact with the weaker krona, that is helping us as we have quite a lot of revenue in dollars and in euros. The EBIT effect is SEK 7.6 million positive in the quarter. Unfortunately, the situation with the component availability that we are still having challenges with, that means that we have been able -- or we have been forced to actually increase our inventory levels. We need to increase our safety inventories on some critical components, and that has affected the cash flow that was negative in the quarter of minus SEK 39 million. The bottom line, SEK 56 million, a significant step-up compared to the SEK 16 million that we delivered last year, and the EPS improved nicely to SEK 1.95 for the quarter. Next slide, please. If we dig somewhat deep into Westermo, you can see that the order intake was SEK 356 million. The sales SEK 335 million, so still higher order intake than the sales, giving an EBIT of almost SEK 55 million or 16.4%. It is a very high level, good growth on the sales -- sorry, on the orders, and it has been then boosted, as Jenny said, by 1 customer -- one larger customer extending their order horizon impacted then the quarter number. We have talked about the sales step up. Very nice to see and the fact that it's then giving the nice 16.4% EBIT margin in the quarter despite the fact that we have had spot purchases of some components as you have seen the previous quarters. So despite this, nice to see the good profitability in Westermo. And we just wanted to remind you that we are continuing our activities when it comes to developing our products according to the strategies that we are working so that we can continue to see growth going forward with an attractive offer for us. Let's go to Beijer Electronics. Next slide, please. Beijer Electronics came in with orders at SEK 265 million, sales of SEK 291 million and an EBIT of SEK 44 million or 15.1%. And it is a lower level of orders as stated. The last year was really high or record levels. So the comparison is very hard. It is expected that we will come in somewhat lower than this. And we do see order horizon being more normal in Beijer Electronics, combined with what Jenny laid out earlier that we see some market uncertainty, especially then in Asia that we also highlighted last quarter. Asia is basically moving sideways similar level as we saw last quarter. Deliveries on a good, stable level. We do see challenges in the component situation also in Beijer Electronics, but it has been handled well and no major effect on the deliveries. It's a stability. And it's also very nice to see that we have been able to deliver another quarter with good profitability now on 15.1% level, which is actually a record. And it's due to that we work well with price management and also with a mix that's favorable for us. But it's -- stability is the key word here. Also here, we continue to develop our products and our offering going forward. We have informed about we are setting up a new supply unit in Sweden. That is fully according to plan, and it will be operational in the last quarter of this year. And Jenny talked earlier about the acquisition that was done early April, we acquired the company Smart HMI. That kind of concludes the financials. So over to you, Jenny. Next slide, please.

Yes, thank you. So to summarize all that, we can say that we see a stable demand in the quarter, although the picture is a little bit fragmented. Westermo on a strong level still, while Beijer Electronics are actually seeing some uncertainty in the market, which we will be following closely going forward. We are very pleased with the work that the teams have been doing. We are reaching a good profitability level in the quarter, taking a big step towards our financial targets, but we are not yet there. So there is still more to do to get to the 15% level. Extremely pleased to really start to see now that the component shortage situation that has been plaguing us for so long actually has improved significantly. As I mentioned, it's not over, there are still some challenges for certain components, but it's a lot better than it has been, and it's handled well by the organization. And we should also mention -- we didn't mention it before, but you have maybe seen the press release, there is a proposal on the table for the general assembly to change the name of the group from Beijer Group to Ependion. The reason for that being that there are so many listed and not listed companies that shares the main Beijer with us. And it gets confusing for everybody and also the fact that we have a business entity called Beijer Electronics also causes some confusion. So with the changes that we are doing in the group, we feel that it's a good time to actually solve this problem once and for all. And we are happy with our new name, Ependion, which actually comes from the Greek word for investment, which is what we want to do. We want to invest in detail, in technologies, in products and so on going forward. Okay. So then we have the outlook. Next slide, please. So of course, we are striving to reach the financial goals that were decided last year and were communicated in November. As we all know, the world situation and the global economic development are a bit uncertain. But with a stable demand that we are seeing now in the first quarter in combination with the very strong order book, gives us confidence about the development in the near term. So with that, I think it's time for Q&A.

Yes.

[Operator Instructions] Your first question comes from the line of Mr. Mark from Redeye.

And so, first, could you start to talk a little bit about the acquisition of Smart HMI? And how this company set to strengthen Beijer Electronics offering and at least compared to competitors? And also what makes the WebIQ very good?

The WebIQ product, what was the -- okay. Yes.

Why is it good?

Okay. Yes. So I can start and maybe you fill in Joakim. So the acquisition of Smart HMI is a technology add-on, you can say, to the Beijer Electronics business entity. And what they have done and is that they have developed a web-based, HTML-based HMI platform, and that means that you can actually build HMIs that can be displayed and used on any device. It doesn't have to be an operator panel. You can use it on an iPad or a phone or any device actually, which gives great flexibility and it's a complement to the more traditional operator panels, you can say. So that is the idea. This complements the Beijer Group -- Beijer Electronics offering in a very nice way, and it widens the scope, so to say, and the offering that we can sell to both existing but also to new customers.

All right. And did you acquired the company like due to initial user feedback or because of like positive impact from your engineered sales or something else?

I think it was a combination. This is a company that we have been working together with for a few years already. So the organizations knew each other. We were very familiar with the company and the offering, and we had already seen evidence, so to say, that this offering would complement our existing offering. So that was a good starting point for a closer collaboration and for the acquisition.

Yes. I mean, we believe to be -- to provide both the fact to have embedded iX software solutions in this more traditional HMI scope in combination with offering the web-based. Some customers would like to have that, and it's a trend towards that kind of solution, and we believe that we would like to have that offering in-house, and we know this company well, and we believe that this fits very well into our organization and our offering.

Yes. And does it put you like in the forefront of this trend? Or how are like your competitors doing?

It's hard to tell whether we are really at the forefront, but it definitely takes us a big step forward in offering this technology to our customers. And from what we have seen, we believe that Smart HMI has a very, very good solution when it comes to this web technology. And with the acquisition, we are also gaining access, of course, to a number of very good software developers, so to say, that can also help us developing the offering going forward.

All right. So you mentioned like stable order intake by the mixed picture. How does the market look like in some of your larger markets like China, U.S. or larger economy in Europe? Is it like any market in particular the signs of strength or weakness or any like market segment?

The mixed picture is really because it looks different in the 2 business entities. In Westermo, we have a very strong position in Europe. And there, I would say, that we are seeing a strong demand situation from all our markets, a little bit weaker in China, but overall, relative -- a stable and strong demand in Westermo. And driven, as we mentioned, in this quarter, a lot by the train segment, but we also know that, that can vary quite a lot in Westermo between quarters. Sometimes you get a large order in one of the segments and sometimes you don't, so to say. So -- but overall, strong [ demand ] in Westermo. In Beijer Electronics, we are seeing a little bit weakening overall in the order intake, as we mentioned, compared to the strong quarters last year. And there, it's mainly the Asian market. So China, Taiwan, Southeast Asia, that is continuing to show a weaker demand than previously. Whereas Europe is going quite well and also Americas. So let's see how that develops going forward.

Yes. And on the topic of the normalized order horizon and the one extended horizon for a large Westermo customer. So how much does this impact the 2 business units? And are most customers going back to like pre-COVID levels? Or are they having some buffer inventories?

Well, it is in Beijer Electronics, we see that we go back. I would say if we look at the effects in Beijer versus Westermo, I would say, it's similar levels. We have not guided with an exact figure. But if we look at the effect in Westermo, it's somewhat more than 10%, at least, of the orders that is boosted, you could say, by the longer order horizons.

All right. Understand. And lastly, so you have a strong focus on R&D and you mentioned it on growth from the business unit. So what are like your main focus areas when do you see opportunities to increase R&D spending on an absolute level from today's like SEK 50 million a quarter?

Our target is to keep the R&D spending relatively stable. Of course, as we grow, we also can put more resources into R&D, which is, of course, good. The focus in Westermo, I would say, is very much on our key segments. So continuing to develop our offering for our train customers, but also a strong focus on the energy-related portfolio where we are kind of building up a stronger offering now to be able to reach a larger portion of that market. In Beijer Electronics, it's more about keeping our products at the forefront, so to say, keeping them up-to-date, looking at new generations, looking at new technologies and making sure that we, all the time, have a competitive product portfolio that corresponds to customer demand.

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

Markus Almerud here from Penser Bank. Let me start by just following up on Mark's question about the demand situation. And I'm particularly curious about Asia. So there has been some talk during this quarter of some easening in Asia in the demand pressure towards the end of the quarter. Just curious to hear if you have seen the same thing.

I'm not sure that the -- you can talk about the early part or the later part of the quarter. I would say, in general, it's been a similar market situation or order booking levels that we saw in last quarter. And now I'm talking particularly Beijer Electronics. What we did mention in the report, though, is that, we got an order when we closed the Q1. So it was after the quarter 1. We got a nice order. We have earlier talked about us providing equipment to a very large semiconductor manufacturer that is Taiwanese-based. And we got, you could say, breakthrough order of a new factory that they are setting up in Japan. And that one came in, in the early part of this month. So it's not completely dead or anything like that. There are still, of course, activities ongoing, but it's still not on the high level that we saw in the early part of 2022.

Okay. And my second question is on Westermo, and now was mainly you said the train, which will drive it, but I also understand it's kind of broad. But if you could talk a little bit about the electricity segment, I know there's something you focus on, where you stand and maybe an update?

Yes. We are continuing to execute on our strategy there, and we have a very strong focus, as you know, on the energy segment. And I think we are proceeding well. We have some sizable opportunities in our pipeline that we are looking at. But -- and on top of that, we also have a lot of smaller opportunities because all our markets, there are energy-related opportunities in all markets where we are present. So that's a big difference compared to the train segment, for example, where you have a few train builders spread out around the world. The energy segment is broad, and we are working very broadly in all markets to find new customers and do proof of concepts and help customers with technical solutions and so on. So overall, I think it's going well. In addition, as I mentioned, we are continuously developing and broadening our product portfolio. In the quarter, in particular, we released some more family members in the Merlin product family out of our Irish company, Virtual Access, which also strengthens our portfolio. So there's a lot of activities going on in this area, and we are present at a lot of exhibitions and other events, so to say, related to energy. So the momentum is good, I would say.

Okay. Good to hear. Then I'm curious to have the -- your gains on share during the pandemic. And especially, if I remember right, in Beijer Electronics, you've gained share. Has that sustained when things are opening up now? Are you able to defend those shares? Or do you lose some of that business back? What's your impression?

I think time will tell, so to say, because we are -- it's only now that our competitors, so to say, are starting to come back to more normal or shorter delivery times, and we hear that from several regions. So I guess, time will tell whether customers will stay with us, which is, of course, our intention. We try to serve them really well so that they don't want to move back to their previous suppliers. So we are not seeing anything like that yet that they would be going back and we will do everything we can to keep them, of course.

Okay. And then my final question is on this supply chain hub that you're setting up. So is this something that you plan for a long time? Does it -- what's your view on supply chains are changing? And are you changing with them? That is, are you doing more second sourcing? Are you moving any of the supplies back to closer to home, et cetera? And is this a part of that? Or is it separate?

I think this initiative that we have taken now to start up an assembly of operator panels here in Malmo. It's very much a result of the, I would say, global trend of actually regionalizing our supply chain. It's not viable anymore to only have one site located in Asia, for example. There's too much risk to that. So that's why we are taking this step, and it feels really good because we can also serve our customers in Europe in a better way once we have this production facility up and running. And also, I can mention in Westermo, we are reviewing our supply chain. I mean, it's been a tough time now, and we have realized that we need to focus more on making our supply chains more resilient to disturbances so that we can support our growth plans going forward. So I would say that we have increased our focus on the supply chain side as a learning from the situation.

And it's very interesting. And if you can may you say when did you make this decision about the supply hub in Malmo and starting to assemble panels there?

Yes. It's a few quarters back, we actually informed about it already in the last quarterly report. So it was during that quarter that the decision was taken. And of course, there has been work or pre-work done before looking at how would the setup look like. As Jenny said, I mean, we have been looking at regionalizing and not having everything in Taiwan, where there's also, of course, a geopolitical somewhat risk related to that. And there were some proper evaluation work being done on where we would put such an entity, would it be where in Europe, you could say, would be the best place to have it. And after some proper work being done, we concluded that it is best for us to actually set it up here in Malmo and that was a decision taken.

Thank you. There are no further questions on the phone line at this time. I'd now like to turn the call back over to the speakers for closing remarks.

Yes. We would just like to thank you all for listening in, and we are looking forward to continue to develop the group. Thank you very much.

Thank you.

Thank you so much, presenters. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.