Good afternoon, ladies and gentlemen, and welcome to Ependion Q2 Report 2024 conference call. At this time, all lines in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Monday, July 15th, 2024. I will now like to hand the call over to our CEO. Jenny, please go ahead.
Thank you very much. So welcome everyone to this quarter two presentation. As usual, it is myself, Jenny Sjödahl, here in Västerås, together with Joakim Laurén, our CFO, who is today in Malmö. So the agenda is the same as usual. I will start with a general business update. After that, Joakim will dig deeper into the numbers. And then finally, I will give some concluding notes and outlook, and then we will open up for Q&A. So let's dive straight into the quarter. Well, as you probably have seen, we have a quarter now that is just like we expected, affected by the weaker market demand that we have seen now for the last 12 months period. And my view is that we are keeping our market shares.
We are not losing any business in either of the business entities, but the customers are being more cautious, and it takes longer to actually close orders, and that is what we have been seeing for some time, and that situation remains also in this quarter. So what we are doing now is that we are balancing, of course, cost savings in our running costs in both business entities to offset these lower volumes. But we also have a clear strategy in place. We believe in a lot in the future, and therefore we are also continuing with selective forward-looking investments, which I will come back to later on.
So in terms of order intake, if you remember, we had a perfect storm in quarter two of 2023, where not only we had an extension of the group's largest customers or order horizon, which led to a one-off effect of more than SEK 100 million in that quarter. On top of that, which was somewhat hidden by this big effect of this customer, we also had a handful of other significant orders both from rail customers, but also from some other segments. So it was really a very, very strong quarter last year. This year, we came in at the 500 million SEK level that we have seen for some time now, and both businesses business entities actually face lower order bookings compared to the same quarter of last year.
When it comes to the sales, we see a more stable situation. Westermo came in lower than last quarter, as we had already indicated, because of a lower order stock coming into the quarter. Beijer Electronics shipped a little bit higher volumes this quarter compared to the first quarter of this year, because there are some final deliveries of this product line Display Solutions or part of that product line, which are now being shipped in this quarter. And when it comes to the profitability, Joakim will dig deeper into it later on. But of course, we know that we have a strong operational leverage on our operating margin. And of course, this works both ways.
So when we do see lower volumes like we did in this quarter, it also has an effect on our EBIT. And Westermo came in lower due to the lower volume, and Beijer Electronics, which actually had a stable volume, came in a little bit lower because of the unfavorable mix related to the Display Solutions products that I just mentioned. So for the group, at 10.2% for the quarter, not quite where we would like to be, of course, but that's the situation that we are in. The good thing is that our free cash flow actually doubled compared to last year, and not only related to lower accounts receivable, receivables, but also because we have been working really hard in reducing our inventories, which we have also succeeded to do in the quarter.
Last but not least, we did a minority investment in the quarter and also put together a strategic partnership agreement with a company called Blu Wireless. And I would like to take a few minutes now to actually explain what that deal actually means and why we did it. So, bear with me for maybe being a little technical here, but I think it's important to understand why we want to move into this this area. So as you all know, Westermo is really, really strong in the rail industry. It is our largest segment. We are the market leaders when it comes to products for onboard data communication networks, and we have very good connections in the rail industry basically all over the world.
And the previous acquisitions that we have done, Neratec in 2019, combined with ELTEC in 2021, those acquisitions gave us access to wireless technology for what we call train-to-track communication, meaning the communication between the train and the track side. And those technologies are built on Wi-Fi technology and also mobile, i.e., 4G, 5G technology. But as we all know, it's not always fantastic when it comes to internet connections on board the trains, not in Sweden nor in other countries. And the fundamental problem that maybe not everyone is aware of is that neither Wi-Fi nor the standard mobile 5G can actually provide enough bandwidth to meet the demands that both we as passengers have, but also that the operators have in order to improve their efficiency and their operations.
Wi-Fi is fine for metro applications, where the trains are moving kind of quite slowly. But when it comes to high-speed trains, it becomes really, really challenging to achieve this kind of ultra-high bandwidth connectivity that would be needed for those trains. 5G can provide high bandwidth for sure, but requires a very costly infrastructure. You can imagine building that infrastructure along the full length of all major train tracks. That's pretty much cost prohibitive. So what this company in the U.K., Blu Wireless, has done is that they have taken a new spectrum that is unlicensed, and it's called the millimeter wave, because the wavelength is very short, 1-10 millimeters. That means that those waves can transmit very, very big amounts of data.
And Blu Wireless has worked over the last 10+ years to actually productize this technology and actually build products that can provide a cost efficient and ultra-high bandwidth connectivity using this unlicensed spectrum. And the first projects using this technology are right now being deployed, one in California by Caltrain and the other one in the U.K. And it's looking quite promising so far to actually be able to contribute to better connectivity for trains. And as you probably also are aware, we aim to be the key player in this space, in the connected train space, and we believe that millimeter wave technology can potentially be a game changer in this area. However, the technology is quite new.
It's still in a scale-up phase, and, that is also why we decided to go for a minority investment at this point, to really be able to follow this technology, influence it, and also, by this strategic partnership with Blu, we will be going to market jointly, develop the market further, and also together work on the future product roadmap. So I'm quite excited about this, this opportunity and, what it's gonna bring moving forward. All right. Looking at the two business entities then, as I mentioned, Westermo, we are seeing lower order bookings in the quarter, especially compared to the extremely strong quarter of, quarter two of last year. However, I feel that the customer activity is still high. Our pipeline remains on good levels.
And we are, of course, taking cost measures now to adapt to the lower volumes that we are seeing in this quarter. But at the same time, we see that the possibilities that we have going forward, with a clear strategy and the segments that we are active in, means that it would make no sense to slash costs too much. We need to invest for future growth, which is why we are going ahead with the establishment of Westermo India, which is ongoing, and also the Blu Wireless deal that I just mentioned.
On top of that, the high activity that we have on the product development side, I also want to protect that because there's a lot of interesting things cooking connected to real business opportunities that are ongoing, and we are continuing to launch new products also in this quarter, and that will continue also going forward. When it comes to Beijer Electronics, we see that the challenging business climate continues, and we have seen that for five quarters in a row now. The manufacturing segment is the one that is mostly affected, and we can see that from our other players in the market as well. The effect has been mostly visible in Asia, while we see the marine segments and also the rugged segment that Beijer Electronics is now focusing on are more stable.
We are seeing some slight signals that may indicate that we have reached the bottom, so to say, in Asia. We do hope that those signals are correct. Let's see what's happening going forward. But at some point in time, you know, things will start to improve again. As I mentioned, we have shipped significant Display Solutions volumes in the quarter. We are putting that product line end-of-life, as you know, because of the low margins in that product, but it affects the gross margin in the quarter.
Also, in Beijer Electronics, very high activity in the product development side now, in order to release the new generation of HMIs, the X3 family, a very strategically important launch for Beijer Electronics, and the first products in that family will be launched by the end of this year, and also with a lot of focus, of course, on the software platform, WebIQ, which was acquired with Smart HMI last year. All right. So, summarizing this in a more graphical format, here are the graph showing the order intake and the sales. As you can see, another relatively weak order intake quarter, as I mentioned, 31% down compared to the boosted quarter of last year. Sales is more stable, as you can see, sequentially, at -2% and -8% compared to last year.
So, still keeping up on a pretty stable level. And our backlog overall, quite still quite strong at SEK 1.1 billion. So with that, I will hand over to you, Joakim.
Thank you, Jenny. This is Joakim, and I will take you through more of the numbers. We start with Ependion, an order intake of SEK 483 million, the sales of SEK 588 million, and an EBIT of SEK 60 million, corresponding to the 10.2% profitability. As Jenny said, the profitability compared to the first quarter of this year, we see a drop. The reason for that is then the lower sales in Westermo that we talked about, and then the unfavorable mix or the fact that we are delivering significant volumes in Display Solutions. I will touch base on that, when we go through each of the business entities. In terms of this forward-looking investments that Jenny pointed out, that we are continuing with that.
We talked about, Blu Wireless, transaction, but also, the India investment that we all-- establishment that we are doing, that we have talked about before. I just want to, give you a flavor on, on what kind of money we are talking about, impacting the cost side for those particular ones in the quarter. I mean, we are talking about, about 1% on the EBIT percentage level, then you understand the impact that we are, that we are talking about. When it comes to, the FX impact of, the, the numbers, we have had a positive total impact of about SEK 6 million compared to last year, which then mainly, consists of transactional variances.
Free cash flow, as Jenny said, has developed positively, +SEK 60 million, which is then a doubling. The main driving behind this is the reduction of working capital. The focus on reducing our inventories remains. There are still the way to go on that area. For you that look further down the P&L, the tax cost was somewhat lower, the percentage was somewhat lower in the quarter. That is due to some one-off activations of losses carried forward happening in the quarter. Net income at SEK 40 million and the earnings per share ended at 1.37 for the quarter. Some words on Westermo. Order intake SEK 294 million, sales SEK 336 million, and an EBIT of SEK 44.5, corresponding to 13.2%.
Jenny talked about that the comparison is kind of disturbed by the boost in last quarter, so that is first point. We have had no larger orders in the quarter in Westermo. And, as stated before, the saving activities, they have been in high focus, looking at the running costs, making sure that we balance what we are doing compared to the top line. But then we do have the investment going forward, as I mentioned before. We have improved our gross margins. We are at the level of 52% for Westermo, and it's price management, efficiency, and also some lower component costs that we see in the market right now.
Summarizing the drop on the profitability down to the 13.2%, the main driver is then the volume effects. As Jenny pointed out, we are continuing to have high activity level in product development with several product launches within the quarter. That is very exciting. And the Blu Wireless minority investment, we just want to highlight the number. It was GBP 3.4 million that was invested. So we come to Beijer Electronics. We had an order intake of SEK 190 million, or sales of SEK 253 million, and an EBIT of SEK 30 million, corresponding to 11.7%. As we saw earlier, I mean, the orders, they are moving sideways on a relatively low level. It's the fifth quarter now in a row.
The sales picked up as stated. It is a sequential uptick of about 7%, and it's mainly then Display Solutions volumes that we will phase out during this year. That Display Solutions volumes, they have lower margins, and if you look sequentially, comparing to first quarter this year, we are dropping the gross margin about three percentage points, and in Q2, in the electronics, we ended up at 50%. Full focus on tight cost control in Beijer Electronics as we have tight on the volumes. And then the drop in profitability from last quarter, from the 13 level to the almost 12, well, that is then driven by this unfavorable mix of Display Solutions, nothing else. And continued high focus, as Jenny pointed out, on X3, the new HMI family and WebIQ.
When it comes to X3, the first releases, they will start being released then by the end of this year. That concludes the numbers. So over to you, Jenny.
Okay, thank you very much for that, Joakim. So, to conclude, this message, then the challenging market conditions remain in the short term, and, I want to point out with it, that we also see a weaker order book, also for the coming quarter. However, it is my assessment that the weakening demand situation is temporary. We have clear strategies in place, in both business entities, and, we aim to advance our position significantly in our focus, areas in the coming years. So therefore, we are, of course, taking out significant costs to counter the lower volumes, but we are not slashing our cost base at this point because, we really see that we need to be ready for the future. When the market picks up again, we have a very strong foundation to actually continue our growth journey.
So our financial targets, we are keeping those targets clearly in sight. Looking at where we are coming from, I think we have established a new baseline in Ependion now compared to where we were a couple of years ago, but we are still not, of course, where we want to be, which is the 10% average annual organic growth and the 15% operating margin on the group level. However, we do see that a more favorable market situation needs to come back, so to say, for us to be able to reach those targets, but we are definitely still keeping them in sight, as I mentioned. So finally, the outlook remains unchanged. We know that we are operating in attractive markets.
There is a good underlying growth in our key segments, driven by some of the big mega trends in the world, such as sustainability, electrification, and so on. We believe that we have good prospects in the longer term to reach the growth and profitability targets. But at the same time, we can see that there is still a great deal of uncertainty around us. The market is not very strong at the moment, but and therefore, we see that the mixed picture that we have seen now for quite some time is expected to persist throughout 2024. With that, we conclude the presentation and should be opening up for questions then.
Thank you. Ladies and gentlemen, should you have a question, please press star one on your telephone keypad. If you'd like to withdraw your question, press star two. Again, to ask a question, press star one. One moment, please, for your first question. Your first question comes from Markus. Please go ahead.
Hi. Sorry, did you say Markus Almerud?
Yes, your line is now open.
Yeah. Okay. Hi, Jenny. Hi, Joakim. Maybe I'll start with the demand and just curious to see your thoughts about the comments in Q1 and how they tie into Q2, because you're also talking about low order book in Q1. And just curious to see if demand has actually gotten worse since that point or if it's kind of been stable at a lower level.
Yeah, I can answer that one. I think that, it's being stable. It's not, it's not worsening, but it's continuing on a relatively low level.
Mm-hmm. And then if I look into end markets a little bit, and maybe be looking at six months compared to last year, I'm seeing train is actually up, where energy and manufacturing is the main drivers of the fall. If you look at energy in particular, which parts are falling there? ... Sorry, we just talking about in energy, if you talk about end markets particularly, you look at the big ones, train is actually up a little bit, and then you have infrastructure being stable, and then the fall in sales is in energy and manufacturing. And manufacturing, you talked about, and then energy, what is coming down there, and is that temporary?
Yeah, if you look at the energy segment on the group level, it's this combination of Westermo and Beijer Electronics in those numbers. And for Westermo, we see that the energy segment is relatively stable, actually, in terms of order intake. It's kind of moving a little bit sideways at this point because of the general weaker market, and we did not receive any bigger energy orders in the quarter. And for Beijer Electronics, the energy segment is not huge, of course, but also there we do see a bit of a weakening trend.
Mm-hmm. Okay, thanks for that. And then, next question, just, just general about your comments in your opening statements as well. You're talking about the weak order book also for Q3. And just, just to be clear that you're talking about demand, because when you talk about demand will persist throughout 2024, we're talking about demand to the order intake, basically. If you could just clarify.
Yes, there we are talking about the order intake. Yes, the demand from our customers.
Oh.
Correct.
Mm-hmm. And then, and then on Beijer Electronics, the mix impact that you're seeing in the quarter, will that remain in the second part of the year as well, or is that done?
That, I can, I can respond to that one. We had somewhat higher volumes of these display solution volumes that, that would be phased out. There will still be some deliveries also in the second half of the year, not to the extent that we saw in the second quarter. But it's not finalized everything yet, if that's to be more explicit on that one, Markus. It's not finalized, but it will be less of the total going forward.
Okay, that's it for me now. Thank you.
Thank you, Markus.
Please, ladies and gentlemen, as a reminder, should you have a question, please press star one. There are no further questions at this time. I will turn the call back over to the CEO, Jenny, for closing remarks.
Yeah, I, I can just see here that Mark Siöstedt from Rede ye has posted in the chat here that he seems to have trouble dialing in, so he's placing his questions in the chat. So maybe we should attend to those, right? So the first question from Mark is, can you see those, Joakim?
I can see them, yes, I see them now. I can read the questions.
Yeah, if you read them.
Yeah, please.
Please.
Yeah. Mark's first question: Will you invest more in Blu Wireless technology as they continue developing the technology in the future? What are our competitors doing in the same field? Would you like to answer that one, Jenny?
Yeah, that is, of course, an interesting question. As I mentioned, this technology is still in a scale-up phase, which is why we chose to do a minority investment, so that we can follow this technology, learn about it, and also, of course, help to develop it further. So, I think that time will tell what the next step will be. We are very curious about that and very excited about this technology. And there are other players as well looking at this technology, but for the time being, there aren't a lot of companies that have actually managed to productize this millimeter wave technology. So, Blu seems to be in a somewhat unique position at this point.
But, yeah, we will follow it, and we will see what the next step will be.
The second question by Mark is: You mentioned a slight rebound in Asia, while Germany is a bit weaker for Beijer Electronics. Could you expand on this? What do you see?
Yeah, it's still early days, and but we have gotten some signals from information, and particularly China, that the market activity seems to be kicking up there from very low levels, we should say, because we have seen a big reduction in demand from the Chinese markets in Beijer Electronics for over a year now. But slightly positive signals from China. Let's see what happens there.
And then the German market, I think that's just due to the general industrial climate in Germany right now when it comes to manufacturing industries, basically, where there is a bit of a lower investment cycle, which varies, because in Westermo, in the segments that we are focusing on, Germany is doing really, really good. So it really depends on what type of business you are focusing on in that market.
... So the third question from Mark is related to the business activity. If he states like this: you had no larger order for Westermo in the quarter, but is the activity still on a normal level across the product portfolio? That's one question. And more specifically, how is the progress in the energy segment?
Yeah. So that's true. We didn't have any larger orders, but I forgot to mention specifically that we did have a very strategically important order in the Indian market for Siemens Mobility. They are going to build electric locomotives for Indian Railways, and they have picked Westermo to take care of the wireless communication for those locomotives. So that's very positive. But anyway, I think that the activity level is still normal. Our sales people are as active as before. I think the effect that we are seeing is that customers are taking longer to make decisions. Some projects are being postponed, and it's just overall taking longer to close deals.
And when it comes to the progress in the energy segment, I think we are progressing well there. There's a lot of activity going on. We are participating in a lot of events, exhibitions, to really make it known to the market that we are there to stay, so to say, in the energy segment. So activity level is high. We are still waiting for the, so to say, real breakthrough, so to say, when it comes to business development. But I think we are doing the right things there.
Mark's last question is like this: What kind of cost measures have you conducted in Beijer Electronics and Westermo in the quarter? Do you see the margin stabilizing on these levels? Maybe I should answer that one, Jenny. I mean, when it comes to cost measures, I think we have a general cost cautiousness all across, really challenging everything we do. We have been looking at some structural changes as well in some places, and we are actively looking at the use of external resources/consultants. When it comes to margins stabilizing on these levels, that's... it's hard. I'm not sure if he means operating margins or gross margins. I would say, gross margins wise, I think we can expect us to stabilize on the level in Westermo that we have seen.
In Beijer Electronics, I think we had a lower gross margin in Q2 than you can expect going forward. As stated before, we will have less of the total impact of display solutions going forward. That was the questions by Mark. Maybe then we should go to the closing remark, Jenny.
Yeah, I think we have. Yes, I think I've probably pretty much done the closing remarks already. So if there are no further questions, I think we, the call is finished, right? I don't know where the operator is.
I am here. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.