Ependion AB (EPEN) Earnings Call Transcript & Summary

Welcome to Ependion Q4 Report 2025 Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Jenny Sjodahl; and CFO, Joakim Lauren. Please go ahead.

Thank you very much, and welcome, everybody, to Ependion's Q4 report presentation. So as usual, it's Joakim and myself. We are down here in Malmö today. And the agenda looks the same as usual. So I will start with giving an overall business update then Joakim will move into the financial performance more in detail, and then I will take the concluding notes and outlook. And after that, we will open up for questions and answers. So looking at this quarter. Well, first of all, we see that the market environment is largely unchanged compared to previous quarters in 2025. The geopolitical uncertainty remains, so that we can conclude. Nevertheless, order intake increased in the quarter by 12%, and adjusted for the Welotec acquisition and the negative currency effects, the increase was 4%. Westermo had a good quarter. If you remember, we had a weak quarter in the quarter 3, driven by weak order intake from the train segment. A little bit similar to last year, that order intake bounced back now in this quarter. So that was good to see. And as we have pointed out many times, order intake, especially from the train segment, can vary a lot from quarter-to-quarter. Beijer Electronics showed growth adjusted for currency with 3%, and the positive sign there is that the core offering, which is, of course, part of the new strategy to be focusing on the HMI product family that increased by 7% in currency-adjusted numbers. Sales increased a little bit by 1%. Adjusted for acquisitions and currency, we saw a decrease by 2%. The Westermo growth was, in this quarter, thanks to Welotec who had a good development, whereas Beijer Electronics was impacted quite a lot by the phased out products that we have been talking about before compared to last year. That effect was actually some SEK 20 million in the quarter, and we didn't manage to compensate for that in this market environment. Due to the relatively weak volumes, earnings came in lower at SEK 58.3 million or 10% for the group in the quarter. As we stated in the headline for the report, we don't normally talk so much about currency effects. But in this particular quarter, the effects on the Ependion are quite brutal, and that is also why we highlight that we had a total negative currency effect of SEK 16 million in the quarter. And on top of that, the result in Westermo is impacted by the amortization of excess values connected to the Welotec acquisition, and that corresponds to SEK 4.9 million in negative effect in Westermo. We had a good free cash flow in the quarter, SEK 68 million, and the Board proposes an increased dividend of SEK 0.25 to SEK 1.50 per share. I can also mention, it's not written here as a bullet, but I can also mention that we do see our gross margins strengthening, and they have strengthened throughout the year, actually in both business entities. So with increased volumes and without adding fixed costs, we have quite a strong operating leverage in the group now. All right. So moving a little bit more into the details in both -- in the 2 business entities. Westermo, orders came in at plus 22%. If we adjust that for the Welotec acquisition and currency, we came in at plus 3%. As I mentioned, we do see a pretty significant sequential improvement, especially for the train and trackside segments. So that's good to see. The Welotec integration progresses is very, very well. We are very pleased with the performance of Welotec as part of Westermo, and it has already generated concrete new business with a combined offering. So that's very positive. Sales increased 6%, but that was actually thanks to the acquisition of Welotec, organically in currency adjusted at minus 6%. The sales gap that we see is mainly related to less of project deliveries this quarter compared to last year. We had expected to ship a little bit more in the quarter, but there were some delays as well. Again, a significant currency headwind, and the Welotec amortization led to decreased profitability. So overall, we came in at 14.3% for the quarter. However, if we look beyond these 2 significant impacts, we do see a healthy profitability in Westermo and, as I mentioned, improved gross margins as well. We mentioned the defense industry last quarter. And this quarter, the Board of Directors actually decided to add the defense industry as a focus segment within Westermo, and we also mentioned in the report that our current business within defense represents some SEK 30 million in 2025, and we do have a couple of very good customer references in this area to actually to build upon. So we are targeting to significantly increase this business in the coming years. For Beijer Electronics, order intake at minus 5% and currency adjusted at plus 3. We see a stable development in the marine sector and also a good growth for the rugged segment, while the manufacturing industry still remains weak. I mentioned before, the HMI range increased with 7% in the quarter compared to same quarter last year. On the sales side, we did see a decline, minus 8%, but currency adjusted basically flat. As I mentioned that last year included the SEK 20 million of phased out sales volume, which we did not manage to compensate. Profitability at the low side in the quarter, 8.6%, impacted significantly by negative currency effects corresponding to 2.7 percentage points. And also, as we talked about last quarter, we see a sequential addition of amortization on the X3 development, which also negatively impacts the EBIT. But of course, despite the fact that we have decreased costs and so on, we are not satisfied with the results for the quarter. So we continue to work on that. On the positive side, very good customer response to the new X3 family. There are some 120 customers that have actually placed an order on the new series as of now, for evaluation mainly. And what I find really, really good is that some 20 of these are actually new customers. So this fact is very promising for the future because we are, of course, targeting to acquire a lot of new customers with this product family. So if we look at the volumes more in a graphical format, you can see on the left-hand side, the order intake picking up quite nicely. Sales came in at SEK 582 million or 1% last year, and minus 2% adjusted for currency and acquisitions. On the volume side, orders and sales volumes, the currency effects represent some 6 percentage points negative. Positive is that we have a book-to-bill at 1.10 for quarter 4. So that's a significant increase in book-to-bill ratio, so that's good. And the backlog now stands at SEK 1.1 billion. So with that, I'll hand over to you, Joakim.

Thank you very much, Jenny. So I will talk somewhat more about the numbers. So we start with Ependion, we had then an order intake of SEK 639 million in the quarter, and that is actually the first time we are above SEK 600 million for quite some long time. Sales at SEK 582 million, as Jenny said, and an EBIT of SEK 58 million and an EBIT percentage of 10%. As stated by Jenny earlier, there are relatively high FX impact compared to last year, and the amount is SEK 16 million. Main part of that is transactional variances. The translation part is SEK 2.9 million. So the main part then transactional, and that then corresponds to 2.8 percentage points on the EBIT side. And as Jenny said, in the quarter, Q4, we did the PPA for Welotec as we informed about in the last report. And now the effects of the amortization on the access values impacts than in Q4 that we haven't seen earlier in the year, and that is the amount is SEK 4.9 million. Free cash flow, quite positive, SEK 68 million, still somewhat lower than the record quarter that we actually had last year. SEK 68 million impacted positively that we have been able to lower the working capital somewhat. So that is then a good thing. For you that look lower than the EBIT, you can notice that the tax cost is relatively low in the quarter. And the result -- the reason for that is that we -- that is an effect of -- that we have changed the legal structure in Germany now as -- after that, we have done the Welotec acquisition, and that has then provided us to get full detectability of the interests. That meant that the net income is actually increasing compared to last year to SEK 44 million and also the EPS, the earnings per share increased compared to last year with SEK 1.37. That was Ependion. Let's look at Westermo. Here, we have then the good order intake, SEK 432 million in the quarter and sales of SEK 368 million and then EBIT of SEK 52.7 million or 14.3%. Jenny has talked about the effects of FX. So we conclude that if we adjust for the acquisition and FX, the number is 3%. Book-to-bill for Westermo 1.17, which is then a good thing going forward. Then the profitability, as Jenny pointed out, heavily impacted by the FX, a 2.7 percentage points, and also then note that the Welotec amortization is then impacting also in this quarter that we haven't seen earlier in the year, impacting them with SEK 4.9 million. So the underlying, you could say, activities in Westermo, is still on a healthy basis compared to where we were last year. And then some final words on Welotec, continued very well added to the growth and also a positive profitability contribution to Westermo in the quarter. Then we have Beijer Electronics, an order intake of SEK 208 million, sales of SEK 215 million and an EBIT of SEK 18 million or 8.6%. Also here, we have an impact of the FX and adjusted for FX at plus 3%. And then you should note that last year, we had some volume of orders also in the fourth quarter of the phased-out products that we have talked quite a lot about, SEK 13 million of that. And as Jenny stated earlier, the HMI business actually grew with 7% in the quarter. Book-to-bill, below 1, 0.97 for Beijer Electronics. Sales at minus 8. But if we compare to FX -- adjust for FX, sorry, then we are slightly above 1%. And then you should note also that in last year, we had about SEK 20 million of phased-out products in the sales volume in Q4 last year. So you should have that with you. We are not happy with the profitability, despite that we have solid cost control in Beijer Electronics, still on the 8.6% compared to the 8.3% last year. Also here, the negative impact of FX is hitting, it's 2.7%. And as we informed about last quarter also, now when the X3 family is fully implemented, we got additional amortization of the capitalized R&D on the X3 that impacts about SEK 4 million in this quarter. When it comes to R&D spend, we have talked about that we will lower the R&D spend over the year, and the R&D spend is definitely lower now compared to last year. For you who watches or look at the numbers very carefully, you might know that sequentially, we are somewhat higher in Q4 compared to Q3, but that is seasonal effect. So it is coming down in line with what we have set. With that, I've finalized the financials. So over to you, Jenny.

Yes. So to conclude this, when we sat here a year ago, looking on 2025, we were hoping for a more stable global business environment, that did not happen. We still see that '25 was a year that was affected by geopolitical tensions and tariffs and continued cautious markets. We are focusing on what we can actually affect. And we mitigate these effects as much as we can day by day by maintaining focus on our business and on building a stronger group. And we have strengthened Ependion a lot during the year through investments in new technology, new acquisitions, but also geographical expansion, like, for example, Westermo India and also the addition of Westermo office in Benelux and in Denmark. So as we have stated before, medium and long term, we are confident about our ability to continue our profitable growth journey because the global trends that our business is related to are still very much there in terms of digitalization, electrification, sustainable transportation and so on and so forth. So therefore, we remain committed to creating value regardless of market conditions, and we are, of course, focused every day on improving our businesses. And looking at our financial targets, just a reminder of that, the 10% organic growth in revenues still remain. We are not quite there yet. So we continue to have that in focus, profitability-wise, 15% operating margin level, very much achievable, as I mentioned before. The leverage is very high in our business and with some volume, we will be able to improve EBIT quite significantly. And then the dividend we just mentioned, the Board proposes an increase there to SEK 1.5 per share. And looking at the outlook then for 2026. As I mentioned, we believe that we are well positioned in attractive markets that has an underlying growth. So we believe that medium term, we should be to achieve both our growth and profitability targets. In the short term, however, we do see that the uncertainty persists. But still with the investments that we have done in product development in new geographies with India and so on, we actually are cautiously positive regarding 2026 at this point. So with that, that concludes our presentation. So we would like to open up for Q&A.

[Operator Instructions] The next question comes from Markus Almerud from DNB Carnegie.

A couple of questions from me. Maybe starting with the order intake. You talked about recovery in Westermo in particular, and particularly in the train segment? If you can give a little bit more color on that. I'll start there.

Yes, yes, that was your first question, right?

Exactly. I'll start that there then I'll continue.

Yes, yes. As we mentioned in Q3, we saw an exceptionally low order intake from the train segment in that quarter. And again, that is a natural variation, so to say, and it can have different reasons. But what we saw in Q4 was that the order intake from our key customers in the train segment were coming back, and they were coming back strongly. So it was a little bit similar pattern as we saw last year actually. So I'm not sure if that's something we're going to see going forward. But nothing has changed, so to say, when it comes to our position in the train segment, our strong position in the train segment. So it was good to see that, that order intake level came back.

And if you would have any thoughts about underlying demand and kind of what -- where the train segment is? Is it kind of steady compared to Q3? Or is it -- like, do you see any uptick in terms of conversations or how your customers are thinking about things? I mean in train segment in particular?

Yes. No, I don't think that you can say that between quarters that varies. We know that there are strong drivers for investment in rail infrastructure and trains and train upgrades and so on, and that is driven by in the EU by new legislation as well as the aim in Europe to actually have interoperability between the different countries, which requires a lot of investment in different types of system infrastructure to make that happen. So that we still see that, that is happening. And then, of course, we have the Indian market with the booming investment cycle in -- especially, I would say, metro systems in all the key cities in India, but also high-speed rail and regional rail and so on. So it hasn't changed between the Q4 and Q3, but we still see a positive development over time in that segment.

And our pipeline, we should say that, that still looks very healthy. I mean no big changes, but it's still a very healthy pipeline.

Yes, yes. Okay. And then in energy, 2 sub-questions, I guess. First, the same question, how the energy segment is developing? And then second to that, maybe a couple of words on Welotec. And if you look in Welotec isolated, how that has developed?

Yes. Well, I think that the energy segment is -- I mean, we are working to win new customers and so on. And I think that we are gaining ground and we have more and more customer conversations and so on. And the Welotec acquisition, you can look at it separately, of course, but more importantly, you need to look at it in combination with Westermo as it looked like before because there are lots of customer conversations going on jointly, so to say, with customers that Welotec used to have but not Westermo, and the other way around where we now can offer a much broader portfolio. So I see that as a catalyst really for the energy segment going forward that we now have strong customer relationships, but also a much broader portfolio to offer to these customers. So very good start of the Welotec in the Westermo family.

But in the numbers, we could see it's relatively flat compared to Q3 if we look sequentially.

Yes.

Okay. So I think last quarter we spoke about, you had been, maybe not surprised, but there had been good start of Welotec and then previous just Westermo seeing customers together and presenting the offering together. And that is still in discussion phases. We haven't really seen that materialize yet. It's still in that kind of presenting phase. Is that how you think that?

Yes, I think that we have moved forward because we do see -- we actually do have a couple of concrete orders that have been won from this joint conversation. So we're starting to materialize, I would say.

Okay. Okay. That's good to know. And then moving on to X3 maybe. There is still -- I mean, very good with 120 customers who placed orders and -- but I assume it's still on evaluation purposes, no really big orders yet. When should we expect for these evaluations to kind of start turning into bigger volumes? What is a normal time looking back into history?

I would expect that to happen gradually during 2026. It's hard to say exactly when, so to say. But gradually, definitely, we should start to see that. And a lot of the customers that are using X3 today have, of course, ordered X3 now for evaluation and testing, and we expect these customers to actually gradually move over to the new product line. And in addition to that, as I mentioned, of course, the aim is to also win new customers with this very new and modern platform. But I think we will see a very gradual, yes, shift here during 2026.

And then finally, just a housekeeping question. The SEK 4 million in depreciation increase in R&D that you see in the Beijer Electronics, so is that kind of the level where we should expect it being forward? And I mean, in coming quarters and maybe in the next couple of years. And also with the PPA, the same question basically, the SEK 5 million in PPA.

Yes. When it comes to the X3 amortization of the capitalized R&D, yes, what you see in Q4 is what you can expect in Beijer Electronics going forward for 2026. When it comes to the amortizations in Westermo, and that is then hitted by the excess value. That level that you saw in Q4, you can also expect to continue in the rest of 2026 and going forward.

The next question comes from Henrik Alveskog from Redeye AB.

Okay. You hear me? Yes. So first off, the new, well, defense area within Westermo, you shared a few comments on that. And I'm just curious regarding these products and customers, is there anything you can -- would like to tell us about this, to give us some more color on the activity and the business?

Yes, we have the same question written here actually from another participant. It's still early days. But of course, what we are selling into the defense sector today, which then represents this SEK 30 million that we mentioned before, that is actually existing normal products, so to say, that are not adopted specifically for the defense industry, but of course, Westermo's products as they are with the rugged and high-quality products are, of course, per se suited towards this segment. So -- and again, we have a couple of very good customer references that are already using our products for different applications. So of course, the aim now is to use that as a basis and start developing and meeting new customers in the segment and then understanding, of course, if there are product variances or product requirements that we need to take into consideration to grow this business going forward. So but really starting from where we are now and building on that.

And would you like to say something about the customers here? Are they predominantly European or all over?

Yes, predominantly European customers, and we will also be focusing predominantly on Europe in the first step here.

And the application is communication.

Yes. Okay. Great. And then I noticed, well, an announcement from Welotec on their homepage, where they explained that there is a shortage in the market regarding memory components and certain chips, I guess, then, which will probably or definitely lead to price increases. I guess this was to explain to their customers why they need to raise prices. Could you talk a little bit about this? Is this a big issue right now?