Ependion AB (EPEN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Ependion Q2 2023 Report Conference Call. [Operator Instructions] This call is being recorded today, Friday, July 14, 2023. I would now like to turn the conference over to your host, Jenny Sjodahl, President and CEO. Please go ahead.

Thank you very much for that. Welcome, everyone, to this quarter 2 presentation. As usual -- let me see if I can change the slide. As usual, it is myself, Jenny Sjodahl; and Ependion CFO, Joakim Lauren, who are going to walk you through this report. Today, we are sitting in 2 different locations. I am sitting at the Westermo office in Västerås while Joakim is down in Malmö. So the agenda for today is the usual one. I am going to start with the overall business update for the quarter and then Joakim will walk you through a little bit more details regarding our financial performance. And then I will finally present some concluding notes and outlook. And then after that, we will open up for questions. So let's get started. The headline for this report as you have seen is new record for order intake, revenue and profits in a mixed market. And I am, of course, very happy to see that we are posting another record quarter for the group, both in terms of order intake, revenue and profits. And -- but the fragmented picture in the 2 business entities remain, and I will come back to that in just a bit. But we have a record high order intake, almost at SEK 700 million for the group or 5% as compared to the same period of last year. We did have a very strong order quarter in quarter 2 of 2022. And if we look sequentially on our order intake, we are up 13% compared to the first quarter of this year. And the demand is very strong, as you have seen in Westermo, while we have a weakening in the Beijer Electronics order intake. And I will come back to explain a little bit more about that as well in just a bit. I'm very pleased considering the huge issues that we have had for quite a while now with the component situation hampering our sales numbers. I'm very pleased to see that we now have a good pace in our factories and especially the Westermo production facilities have really taken up speed now in quarter 2, and we are starting to ship out quite a bit of late customer backlog, which I'm very, very pleased about. So that's a 20% increase compared to last year and 3% up compared to the first quarter of this year. Also in terms of results and earnings, we are seeing another strong level in the quarter at 13.4%, which is in par with quarter 1 of this year and a huge improvement actually compared to the rather weak quarter 2 back in 2022, where, if you remember, especially Westermo had huge issues with getting products out of our factory due to the component situation. Both business entities are contributing to the profit level, which I think is very good. Westermo came out at a strong level of 16.5%, while Beijer Electronics achieved 14.8% EBIT in the quarter. I'm also very happy that we have, during the quarter, strengthened the team quite significantly. Kristine Lindberg took office as the new CEO for Beijer Electronics in the beginning of the quarter, beginning of April and has started off very, very well in her new role. And then we also have Lena Westerholm as Head of Sustainability, who started mid-May. And also there, I see that we can really up our sustainability work, thanks to the experience and knowledge that Lena has in this area. So very pleased about these 2 additions to the group. Looking at the macroeconomic situation. As we mentioned here, we do see a mixed picture. There is, of course, a lot of uncertainty in the market, driven by the inflation rates and the high interest rates, which is kind of dampening the overall industrial activity. However, when it comes to especially the Westermo side of things, we see that investments in critical societal infrastructure, such as rail and energy, electricity transmission and distribution and so on, is really keeping up, and we don't really see any change in that. We see that there is a need to continue to invest in these areas, driven both by legislation and of course, by the need to move towards a more sustainable society. Okay. Let's look into a little bit more details about each business entity. As I mentioned, Westermo had a very strong quarter in almost all regards. Order intake was at record-high levels, driven by in this particular quarter, particularly the train and trackside industry verticals. We did receive, as you may have read, a very nice and strategic order again from a big Swiss train manufacturer. And that really strengthens our position with that customer and also shows what a strong position we actually have in the train networks area. The order intake in Westermo is boosted in the quarter by about SEK 100 million. That's a one-time effect, and it is due to one of our large customers having decided to extend their order horizon quite significantly in the wake of all the issues that we have seen in the world over the last 24 months. So this is a one-time effect. However, we do see that the overall demand on the Westermo side is still strong. And if we look at the energy sector, we didn't receive any larger orders in the quarter in that area. But I can see a very, very high activity level in the whole organization related to energy, and we have a very strong order opportunity pipeline in that area as well. And customers want to talk to us, and that is very, very encouraging. And I can also mention, when we talk about Westermo, that we have started now to run a very strategic and important supply chain project. And the reason why we want to do that now as we come out of this difficult component situation is to -- is not because we have a capacity issue right now, but it's really about making sure that we have production capacity to actually grow in the coming years. So that is the main reason why we want to really invest in our supply chain now and make sure that we have the capacity and the resilience in the supply chain that we need to support our growth plans going forward. I mentioned the high earnings level in Westermo, 16.5%, and that is despite the fact that we still had some higher costs in the quarter related to spot purchases that we did earlier in the year. And if we then move over to Beijer Electronics, we see that there is a weakening in the demand. There are a couple of reasons for that. First of all, we do see, as some of our colleagues in the industry have also noted, a changed order pattern with our customers. Now that delivery times are back to a normal situation, so to say, customers place orders with shorter notice normally. And they also -- some of them also have inventories that they need to deplete before they place new orders. It's still mainly in Asia that we see a clear slowdown. Europe and Americas are keeping up in a better way. However, thanks to the strong order backlog that we have in Beijer Electronics, the sales level is stable. And I think that we have managed well with both the pricing side of things, but also being cautious on the cost side as we see the volumes coming down a little bit. And that has resulted in a very good and stable profitability level of 14.8% in the quarter. Kristine and her team have also decided to initiate a strategy review for the whole business entity. That is not related to the short-term situation, but rather to make sure that we have a very clear and crisp plan for profitable growth going forward. So that work is going to start here now in the autumn just after summer. Looking at the volumes more in a graphical format. I already mentioned the numbers, but you can see here that a very strong order intake quarter, after having seen 3 quarters in a row with a little bit weaker levels. But this is the sixth consecutive quarter we see with an order intake above SEK 600 million. And on the sales side, as I mentioned, we are very pleased to see that we are starting to convert our order backlog into sales. And in particular, in Westermo, that has been an issue, as most of you know, and now we are starting to really ship out the late backlog so we can shorten our lead times as well. Translation. The FX effect because of the weakening Swedish krona is about 4 -- between 4 and 5 percentage points in the quarter compared to last year. And despite the fact that we are shipping now at quite high levels, we still have an all-time high backlog of SEK 1.6 billion on the group level. And as I mentioned before, we are pleased to see that the component situation has improved significantly, I would say. There are still some issues, some suppliers pushing out deliveries on short notice, but it's much more stable than we have seen in the last 18 months. Also some EMS suppliers that we are using are having a very big backlog. So we are struggling somewhat to get deliveries from some of them. But I would say that overall, the delivery situation is much improved compared to before. So with that, I'd like to hand over to you, Joakim.

Thank you very much. This is Joakim here. Hi to all of you. I will take you through some of the financial details. We start with Ependion, the group. Order intake of SEK 698 million, sales of SEK 638 million and an EBIT of almost SEK 86 million or corresponding 13.4%, as Jenny pointed out. And as stated before, there are some boosting of the one-time effect, the SEK 100 million related to this larger customer extended order horizon in the month -- sorry, in the quarter. And the sales, as pointed out, it is an all-time high level that we are happy to note. EBIT more than double compared to Q2. And as Jenny said, Q2 wasn't the best quarter last year. So the improvement is relatively high, more than double that. Should point out that the weak Swedish krona has a positive effect on our profitability. It impacts our EBIT with about SEK 12 million in the quarter, mostly of those are then transactional variances. If we look at the cash flow that we have, last quarter concluded was negative. We have turned that around to a positive free cash flow of about SEK 30 million in the quarter, still not where we want to be in terms of working capital. We still are on a high level on the working capital, very much due to the component situations in our supply chains. The net income positive, record level of SEK 58 million and also the earnings per share then ended at a nice level of SEK 2 per share. Looking at the graph in the lower left corner, I think the trend of the EBIT percentage is trending strongly and positively and the direction is nice to see, I think. Let's move into Westermo. Order intake of SEK 496 million, sales of SEK 368 million and an EBIT of SEK 60.5 million or 16.5%. Very strong order development, as Jenny pointed out, and the supply chain then pacing up the deliveries even further and lowering the delays that we are -- where we expect in the next quarter to catch up and be back to normal delivery times. The component shortages, as Jenny pointed out, has led to that we have some expenses spot purchases impacting then the gross margin in the quarter, but still these kind of levels. And the supply chain project is also, of course, affecting as we are having quite a lot of activities on that one, but that is also included in the quarter. We do want to point out that our R&D activities, it's full focus according to the plan and where we are then working towards even a better and more attractive offer for continued growth going forward. And the bottom line, 16.5% is a strong level. Beijer Electronics. Order intake of SEK 203 million, sales of SEK 272 million and an EBIT of SEK 40 million, corresponding 14.8% EBIT percentage. The lower level of orders, as Jenny pointed out, it is market and it's changed customer behavior. And we should also note that last year, we had a very strong level where the customers also changed behavior and prolonged their order horizons. And now we have the opposite direction in this quarter. When it comes to sales, we want to label it as stable. Most of the products are being delivered at normal delivery times. We do have some product ranges that we're still struggling with. But overall, it's a good situation when it comes to availability in our products. Price management and cautiousness on the cost side and spending is helping and also providing for a decent profitability level. And also in Beijer Electronics, we are continuing on the R&D activities according to plan, where we focus on the future and future growth. When it comes to the profitability of the 14.8%, I do want to point out that it is the fifth consecutive quarter there where we, in Beijer Electronics, landed in the range of 14%, 15%. So stability in terms of profitability, we do want to point out that. Last point, we did an acquisition. We acquired the German software company Smart HMI early in the quarter. And the development and the progress for that entity within Beijer Electronics is according to plan in a really good way. That kind of concludes the financials. So back to you, Jenny.

Thank you for that, Joakim. So just to summarize the message here. Overall, a very strong quarter demand-wise, as we have mentioned, the mixed picture with a very strong development in Westermo, thanks to the good position that we have in industries that are growing despite economic uncertainties, while Beijer Electronics is actually affected by the overall economic downturn, the inflation rates and interest rates and so on that are affecting our customers at the end of the day. Very good to see that we have made progress in our supply chain. The situation is much, much better than it has been for a long time. And most of all, I'm happy because we can actually deliver the goods to our customers that are actually waiting for their products. So that's a good thing. I will come back to the financial targets in just a bit. So I think the whole organization is fully focused on executing on our strategies, talking to customers, finding new business opportunities. And -- but at the same time, of course, we are keeping an eye on the market developments and take actions according to that as well. But if you look at the group overall, I think that several steps in the longer-term plan are now in place, several pieces of the puzzle are now in place with Kristine joining, Lena joining and I feel confident about our journey going forward. And just to remind ourselves of our financial targets that we launched, that we decided on, the Board decided on end of last year. If we look at the revenue side, right now, after 6 months, we can see that we are above our revenue target of an organic growth of 10%. We are at 25% currency adjusted at this time. However, there is, of course, an element of catching up and delivering on our big backlog included in that number. But anyway, we are -- on that side, we are actually showing a strong performance. In terms of profitability, we said we want to reach 15% on the EBIT level. We are not yet there, as you have noted. But I think the last quarter's performance kind of shows that, that target is actually within reach going forward. So I think that's quite good. And on the dividend side, yes, Joakim mentioned earnings per share is looking a lot more positive. So that's, of course, something that we will stick to being a dividend paying company also going forward. And then finally, looking at the outlook. It's a little bit difficult right now, of course, to give an outlook. On the positive side, we know that we are operating in very attractive markets and the underlying growth drivers such as digitalization, electrification, sustainability and so on are, of course, driving our markets overall. So over time, we think that we have very good prospects for reaching our targets. However, the world is looking as it is right now. As I mentioned already, the high inflation rate, interest rates, et cetera, affect the global economy. We know that Beijer Electronics is more exposed to that than Westermo because it is affecting above all the manufacturing industry. So therefore, we are saying that the mixed picture we have seen so far for some time now is expected to remain for some time. Let's see how things develop. So with that, I'd like to open up for any questions.

[Operator Instructions] Your first question will come from Mark at Redeye.

I have a couple of questions. First, could you expand a bit on the weakness you see in Asia? It was down quite a bit even compared to the first quarter of 2023.

Yes, exactly. Well, we have seen this trend in Asia for Beijer Electronics for a few quarters now. We had exceptionally high order intake in Asia in the first quarters of 2022, and that was, to a large extent, driven by extended order horizons from our customers, but also by a very strong demand from their customers internally when it comes to electric vehicles and different end customer segments. And what we are seeing now is a combination of shortened order horizons with our customers. They seem to have built -- some customers seem to have built up inventory during this period that they want to deplete before placing new orders. And I think the inflation situation has also caused the end customer demand in some segments to weaken, for example, when it comes to electric vehicles, which is causing some of our customers to slow down their investment pace basically. So it remains to be seen how fast Asia will rebound. We do believe that it will pick up, but it's, of course, hard to tell exactly when that is going to happen.

Okay. And I think you said like in the Q4 that you were cautiously optimistic about the order intake going up again in China specifically. And I think you mentioned a car manufacturer, BYD, I think. So is that trend, it's more cautious now, less optimistic? Or how do you see that? Could that like be enough to flatten the order intake trend in the second half of 2023?

Well, it's, of course, not only depending on one customer. It's, of course, the pattern of several customers. But I think that we have seen -- compared to fourth quarter in last year, we have seen the trend that the consumers are being more cautious when it comes to investing in new cars, for example, and that trend has kind of shown more clearly now in the last 6 months, I would say. So I think that is a bit of a change. And I think a lot of people thought that China would -- the Chinese economy would pick up quite significant to the second half of this year previously, but now I think we are seeing signals that it might take a little bit longer than was expected previously. So yes, hard to tell again, but at some point, it will pick up.

Yes. Okay. Meanwhile, the rest of Europe and America seem to be very strong. Is this broad-based, or do you see any specific area that is standing out?

Well, I think a little bit difference between Asia for Beijer Electronics and Europe and Americas is that our customer base, especially in Europe but also in Americas, is broader. We have a stronger base business in both Europe and Americas. And so we are not dependent on a few key customers. And that is one reason I think why we are seeing those regions keeping up better. And those customers are spread out in a lot of different applications and segments and so on, which makes it more resilient to this kind of situation.

Okay. I understand. And a bit more specific. So some time ago, and you have mentioned like you signed American Electric Power, for example. Has this order or similar larger ones given any ripple effects in the American markets for like, what I know, parts of the American infrastructure are in need of a major facelift? Do you see some ripple effect there?

Yes. When it comes to Westermo on the North American market, we see the same picture as elsewhere, so to say, that there is -- the segments that we are active in the energy sector, as you are mentioning, there is a huge demand for modernization and upgrading of the infrastructure. And the money that the government has promised, so to say, in this -- that is called Inflation Reduction Act now. That money is starting to ripple down now into the different states and are being used finally to actually invest in different projects. So there is, of course, a time delay until the projects are started and until they need products from us and so on. But overall, we are looking very positively at that development.

All right. Interesting. And could you also just mention a little bit what kind of supply chain projects are you conducting at Westermo?

We have -- it's -- on the Westermo side really that we are using an external consultant that is very experienced in the supply chain area to really look at how can we ensure that both our capacity and our resilience in our supply chain is supporting our growth plan going forward. We don't want to be in a situation again, so to say, even if it has been due to some very special circumstances, we don't want to be in a situation again where our supply chain is kind of limiting our growth. That's not how it should be. So therefore, we want to proactively now look at how to redesign our industrial system so that it can actually support our growth plans going forward. So that has to do with where should we be producing things, how many factories do we need and where, what should we do ourselves and not and so on. So all the usual aspects of the supply chain area, you can say.

Just a comment on that one. Just I sensed maybe in your question, Mark, it does not mean that we will build a new factory somewhere. That will not -- meaning a lot of heavy investments and cash flow. That is not happening. We do have, as you know, quite a few entities now as part of the acquisitions that we have done in the last years. So there is something to work with, if I may put it like that. So it's not -- it will not lead to any excess investment or costs related to that going forward.

Your next question comes from Markus Almerud at Penser Bank.

Yes. A couple of questions left. Just -- maybe it's just me being thick, but the SEK 100 million in orders in -- or it's in an extended order in Westermo, how does it work? Is it simply an additional order? Or what do you mean by extended order?

Well, it actually means that our larger customers have typically a certain order pattern towards us. In this case, the customer has been placing order a little bit depending on their locations, but either on a 3-month horizon or on a 12-month horizon. And what they have done now is that they have extended that horizon up towards -- more than that, so to say, up to almost 2 years' horizon. And that, of course, gives then a one-off effect when they are placing their orders for that extended period of time. And then what will happen in the coming quarters is that they will, of course, month-by-month, place new orders for the end of that period and also adjust, of course, the needs in terms of their demand. So I think it's quite a positive thing actually because it means that there's a stability and there's -- it gives us better chances to plan ahead as well when it comes to component needs and so on.

But it could have been so that these orders, I mean, theoretically could have come on just a rolling basis going forward instead of you getting that SEK 100 million once. That could have happened just to understand how it works to take more.

Yes. I think that could happen as....

Okay, okay, okay. And then on the electricity side, you're talking about the good pipeline and you talked about the ripple-down effect from the Inflation Act money in the U.S., for instance. Can you talk a little bit about that pipeline? I mean, how firm is it? What kind of conversations you're having? Is it more that you're having conversations? Or do you expect for some of these to actually -- I mean, how far gone is this pipeline is what I'm trying to understand?

Yes, and that's a tricky question to answer. But I think it's a mix here. First of all, of course, we are talking to a lot of distribution companies in Europe and elsewhere that have actual projects ongoing where they are digitalizing, especially the edge of their distribution networks where they need to modernize and connect all their equipment close to the consumer, so to say, in the electricity landscape. So there's quite a few projects going on that has to do with that. And we are also talking to some pretty large players, I would say, that are also looking at modernizing their whole transmission and distribution infrastructure over the coming years. So -- and then there's also a lot of smaller customers like municipality utilities that have smaller projects, but where we are also in dialogue with the customers locally in the markets where we are present. So it's really a mix between different customer types. But what I find interesting is that even though we are not a big player yet in the energy market, we see a clear interest from customers because they know us from other segments. They know what we stand for in terms of robustness and quality and resilience and so on. And those are values that resonate really, really well with customers in the energy sector also. So I think even though we are not seeing any huge increase in order intake as of yet, I am confident that the work that we are doing is going to result in increased business in the future.

And it's fair to say that there are a fair amount of projects out there that are ongoing and will need somewhat this type of equipment that you're providing from you or somebody else. It's not just something that is in the future, and they may or may not, but there are projects that do need these equipment that have started, but you're further down the line.

Yes, lots of projects. Yes. Definitely.

And on the profitability side, so we talked about Beijer Electronics holds up quite well despite -- and you talked about quite a lot of quarters in a row where there are 14% to 15% margin despite the fall in sales. Is this a level where they should be? Or should we see that they are protecting it and that there is further upside? Or how should we look at the margin potentially in electronics, in particular?

And you want to answer that one Joakim?

Yes, absolutely. What we have seen in Beijer Electronics and what I'm trying to point out also when I did the presentation earlier is that we have had an ability to maintain profitability on this kind of level. And I do point it out because there are historical developments if you go back quite some years back for Beijer Electronics where we've been on very much lower levels. So of course, when it comes to compensating for volume changes, we are onto that all the time. And we can conclude that we managed well in Beijer Electronics to compensate for that somewhat lower. It's not in huge downturns, but somewhat lower volumes in this quarter compared to earlier but still maintain the profitability. And it is related to price management, efficiency in the supply chain and also then being cautious on the cost side. We do, of course, watch closely what's happening. We will also take the necessary steps that we needed to take if things change going forward. You won't get any predictions of what kind of level. We have stated the financial targets and that is something that we're aiming for. We have proven that we can in Beijer Electronics. And yes, those are the considerations that we have right now.

But it's still fair to say, I assume that, I mean, given that you're still protecting the margin as you're saying, so when volumes come back, we should assume a leverage effect there as well, so to say?

Oh yes, Markus. There is a leverage effect definitely. Adding volume, adding growth, that will contribute to the bottom line. Absolutely. That has not changed. But the thing is it goes in 2 directions. And you have to compensate and compensate if you have loss in volumes as well. So that's how it normally works.

Yes. And in terms of the strategic overview that you're starting this fall, I guess, when should we expect an outcome of that?

For you, Jenny.

Yes. I don't want to give any predictions regarding that. I mean if you want to really dive deep into your customer segments and really look into where you should -- where you want to play and then how you're going to win in your selected playing fields, it does take a little bit of time. So I want to let Kristine and the team carry out that process. The important thing about it is that it's being done in a thorough way and that it results in a crisp strategy. So I don't want to give a time line for that at this point.

Okay. Fair enough. And then finally, if I can just ask, the facility that you're building for HMIs in Malmö, what's the status of that?

The status is that the project is running according to plan, and we will be able to start the manufacturing in that site in the second half of this year. So by the end of Q3 or beginning of Q4, we will start manufacturing HMIs in that location.

At this time, we have no further questions, so I will turn the conference back to Jenny Sjodahl for any closing remarks.

Okay. Thank you very much. Thank you all for listening, and I wish you all a great summer. Thank you.

Thank you all.

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.