Earnings Call: Q4 2019

Jan 30, 2020

Hello, and welcome to the presentation for Bayer Electronics Group AB's Fourth Quarter twenty nineteen Report. Today, I am pleased to present Per Samuels, President and CEO and Joachim Laurien, Executive Vice President and CFO. The first part of this, all participants will be in listen only mode and after this will be a question and answer session. Pur, please begin. Thank you very much. So first of all, welcome to all of you. And that is we will present Bay Group's me and Joakim will present Bay Group's last report for 2019 and coming into the new decade. And we will go through it as we normally do. I will start up, and then Joakim will come in and talk about the group and the different entities. And then I will come back in the end of the presentation for some final comment and a little bit outlook on coming into 2020. First of all, before we're coming into the quarter, what I think is good when you're looking into the total 2019 is that when you compare 2019 with 2018, with 2017 and with 2016, we can see that the strategy we were laying out during end of twenty sixteen, it's working to begin with, which means also means that we have every year since then, we have been improving both sales and the results. And also that is also important is that we are now coming into a situation where we have been taking a lot of cost during this year, especially in the development side, but also on the sales and marketing side, which means that when we now enter this new decade, we have a product portfolio that we think is quite good. We have a customer pipeline and also existing and new potentials that I, as a CEO, are quite happy with. And we also have an organization that works. But totally, if we take a little bit longer perspective and look at the last couple of years coming into this new decade, we have a good possibility to continue a good growth and profit improvement for the next three, four years. Having said that, then of course, I mean that, that big business economic downturns, of course, that could affect us. But with the present situation, we are going into the new year with a lot of opportunities. Coming into the quarter and the last quarter, we have here if I pass on the slide here, I will just here. We are starting to we see a vestumo. And this quarter, vestumo is, of course, yes, that's the best unit at the moment. And they are proving that both in growth and they have a good profitability improvements. And also, we can see that the inroad to the new segments that we call Power Distribution as well as Rail Trackside looks quite promising. And also, together with that we then during 2019 have done two acquisitions to complement the product portfolio on the wireless side. One Irish company called Virtual Access as well as the Swiss company called Neratec. They had a good Western results going into 2020 with a good situation. And we also see that with those two units, we can see that after the acquisitions, we can see that from 2020 and onwards, we expect them to definitely add also to the profit. We haven't had them for so many months last year. But from 2020 and onwards, they should and they will contribute also on the profit side. It's also nice to see that Bayer Electronics entered a landed a five year contract agreement with a value of over €150,000,000 I mean, that is, of course, an estimated value, but that's what we believe coming into this. And also, we have had some weak points in the history when it comes to free actually cash flow, but we're also happy to see that now and you saw a little bit quarter three, but also quarter four, we can see that we start to have a cash flow that starts to be okay. And that's also good to say. We can see on the order side, and I will comment that a little bit later a little bit more, but you can see that order levels, if I look at the group level, you can see that they are all more or less on the same level during 2019. And we can see that if you compare with 2018 and also a little bit 2017, there we had some single big order intakes, especially on the train side that we haven't had in the same way during 2019. But it's still we are in a decent level when it comes to order intake. And that also means that we are going into 2020 with a backlog at least on the same level as we came into 2019. So we haven't been eating on the backlog during 2019. And on top of that, of course, the acquired companies will contribute in that as well. So therefore, there is an increase totally. When we're coming into Bayer Electronics and their result and their development, we have a couple of quarters been focused and we're telling you about the situation where we had four different product groups going back in the history that we call old product group that we needed to transfer. And those of you that have been following us the last couple of years knows that we call the new product group X2 Series. And what happens in this industry is that then you go out to customers as we did end of twenty eighteen, 2019 and tell them that that and that product will now go end of life. And if you want to do some lost standby, you have to do it now. And what happened end of twenty eighteen, beginning of twenty nineteen, several of our big customers bought a lot. So you and you saw that in the development in Bayer here as well. And that was, of course, good. The downside is a little bit that some of these big customers still have old products in their inventory, which in turn means that then they haven't really started to put orders on the new Ektos series. The good thing is that we have a good feeling and we also know that we haven't found major customers that have left us. So what we now is waiting for is their inventories of our own product to go down, so for them to start to order more on the X2 series. When we do the internal analysis on this side, we believe that during quarter one, especially quarter two, we will see changes when it comes to the order intake on X2 products. So coming into second half of twenty twenty, we believe that Beilelectronic should be or should have been normalized and then we have done this transition. And then hopefully, we have three, four years going forward with a more normal growing situation. But that of course affects Bayer's situation quarterly. But if I look at year over year, I still quote, I'm not worried on this. They're doing the right things, and I believe this will be okay. Corenics, a little bit on that, the smallest unit. I mean, they had a situation where they had several of their big orders that actually were in our books that they were sending them out of 2019 and they pulled them to, I would say, first half twenty twenty. And one other thing that is important here is that we have also seen that the Corenics product mix together with Bayer's mix when it goes to the IoT market, can see more and more that Bayer Electronics existing customers want to buy also some of the products coming from Coreonics. And that means that we in combination with that, we need to expand Corenics sales channels. This is a good fit. So during beginning now this year, Corenics is then partnering up with the Electronics sales organization. And that means that and the Bayoelectronics sales organization in Europe will then sell also Correnox products. We can also see some other possibilities to save some cost by working a little bit more together, especially on the supply chain. When we're coming into a little bit outlooks on the business environment, I mean, we have all these old things with Brexit and trade war China, U. S. And so on and so on, we could see we had no change in our view compared to three months ago, which means that there is still uncertain, but we still have good activity from the customer levels. And we there are some customers that, as I said, as an example, Kurenix are postponing a little bit their orders, but they're not canceling. And then we have other customers saying that, okay, we don't give you the big orders in one step, we give you orders every month. And that so the uncertainty is still there, but we don't see a big downturn as such. We have had the same thing with all of you that reads newspapers and so on. You have seen the heard about the coronavirus in China. And then, of course, that we also are following carefully. We have a Chinese organization. And at the moment, they are forbidden to go to work. And there are some a lot of restrictions on traveling and things like that. Now this is in the middle of the Chinese New Year, so it was expected for them to be off anyway. But of course, it is continuous. And we still if we don't see an improvement, it could affect the Chinese sales. Luckily, in this case, it's not a major part of our business, but I just want to mention it. And of course, there could be some areas on the supply chain that we are now looking into if we will be affected on our supply chain, I think. But we as we can see today, we see minor problems here. But of course, if this continues for and if it expands, need to come back on that issue and see what happens. Before coming into next slide, I want again, want to mention that if you look at the group strategy that we have then coming in that we laid out end of twenty sixteen, we can see that it has very it has proven to be quite successful. And for me being the CEO, we can see that now we are not discussing at all what to do. Now we do the different things, and now we are really try to how do you say it make the strategy happen, if I put it that way. And and I think that so from that perspective, it's quite good. If you then go into the orders and the sales side, And you see here very clearly that if you look at the order intake on the left side, you saw that Q4 twenty eighteen, we had a very high order intake and that was you can see it was SEK $450,000,000. But there we had some projects, big projects on Vestomu and train side, but we also had a lot of lost time buy as I have already mentioned from Bay Electronics. But if you look at otherwise the order intake, you can say the last two years, mean 2018 and 2019, they are on a rather okay level. But also I want to be clear, we expect and we expect to see step by step increases in order intake compared to the sales level during 2020 in order to continue growth path. Also on the sales, we steadily have an organic growth on the sales, but also now added on the last quarter, we have acquisitions that came in for a couple of months. And as also already mentioned, we have a good backlog the way we see it. We have over $05,000,000,000 and the 10% increased compared to last year. That is actually the acquired entities that adds for them. Basically, we have a good level coming into 2020. And by that, Joakim will comment on the each unit and also the group. Hello, everyone. It's Joakim here. So this slide shows the overall group. And the heading says, as Parag have laid out, it's a mixed picture in the quarter. But if we look at the full year, we have a good improvement. Looking at the order intake, it was $4.00 7,000,000 We had a sales of $415,000,000 and an EBIT of €22,000,000 And you see in the graph below that we have somewhat bumpy on the EBIT side, but the longer trend, clearly, there's a good development pointing in the right direction. Some comments then. IFRS 16 that I think most of you know about, we have a limited impact on EBIT. So it's less than SEK 1,000,000 that is affecting the quarter positively for these rules and implementation. EBIT, I just mentioned, 22,000,000 in the quarter and we end up the year well above the €100,000,000 which is of course a step forward compared to last year. WesternO, good progress. Verint and Kronix, as Per laid out, irregularities continue. And Kerenix did not really achieve. And I will touch base on all these three going forward in the coming slides. And as Paar said earlier, we are happy to see that the organization is able to create a positive cash flow. We had €70,000,000 in the quarter, ending up with €56,000,000 actually for the full year. So we're getting there and that's a strong thing to note. The EPS ended at SEK0.44. In that, we should be clear that we have an impact on the tax line. We had a stamp duty related to the acquisition of Arcel Access in the quarter of €2,900,000 impacting the EPS. Okay. So let's move on to business entity, Bayer Electronics. And as the heading says, it is bumpy. We have talked about these end of life processes that create irregularities between the quarters, and it continues also in this quarter. But we also highlight that we have signed an agreement with Otis. In the quarter, we had SEK 198,000,000 in order intake. We had a sales of SEK 194,000,000 and a profit of almost SEK 11,000,000 in the quarter. As I said and as Parel laid out before, it is these irregularities caused by the phasing out of the four older generation that is continued to impact also this quarter. And but once we are through with this process, we expect a stabilization and that we will see starting up in Q2, but then more thoroughly in the second half of this year. We want to highlight that despite this bumpy development during the year, we do see a profit improvement if we look year over year, and that's, of course, good to see. And finally, we did in the quarter sign a supply agreement with Otis Elevator Company. And that is then for Display Solution products to their Compass product line that we are very happy to note. That concludes Bayer. Then let's move on to Vesdemir. Vesdemir heading, solid development. And in the solid development delivering these numbers, we do a lot of activities and initiatives that is forward looking as well. So looking at the orders, 184,000,000, sales of $199,000,000 and an EBIT of $22,000,000 for Vesemu in the quarter. It is a good development. There is organic growth and a profit improvement. If we conclude the full year 2019, it is a record year for WESTERMIL, both on orders, on sales and on profit. And then of course, during the quarter, it was October, we acquired Virtual Access. And with the addition of also Enertech that was done in the summer, we do have a good portfolio. And that is, of course, something that we will expecting to see generating also profit in the year. This quarter, the profit contribution of the acquired entities is marginal. We only have some costs related to the acquisition as such in the quarter. We continue with the activities that we talked about before where we are investing in products and organization for the new segments Power Distribution and Rail Trackside. That is of course then included in these numbers. Last but not least, we have during some other quarters earlier talked about our challenges in the supply chain of SNO. Now we can say that it works well. It's much more stable. They are performing in a good way. And also, we see a positive cash usage in the organization contributing to the total of the group, of course. And that is also something that's very nice to see. Let's move to Torenix, our small entity. Here, we have talked about that the target was to come to breakeven. We had a sales shortage and it created a loss and as Paar pointed out, the reason for it. The orders as such, 30,000,000 in the quarter. The sales was SEK 26,000,000, unfortunately a loss of SEK 2,800,000.0 in the quarter. It was a handful of projects as we write here that was moving to 2020. And we are somewhat too depending on some larger projects for Kurenik's sake. It's not in the perspective of the group, but for their side and their size, they are somewhat too dependent on projects. And if we have movements on those, you will have hits like this happening. And that is, of course, not ideal. And as Paz said, we do partner up with Beritronics in Europe for adding on another sales channel to add on to the existing network that we have there. And we do some coordination activities where we look at supply chain, as mentioned here, with the ambition to benefit the cost base for us. We should note that we have been and we have continued to have a high activity in the Krennic side where we have now a new model design or platform for both hardware and software implemented that will be implemented for basically the whole product range going forward the coming year. That kind of concludes the go through of the business entities. And Parf, take it further. Okay. Thank you very much. If I then take and I will combine the targets as well as the outlook here on this slide. You can see now and we have gone through the different units, and we can see that Vestomont now is contributing on 11%, 12% EBIT level and Bayer is around under 5% and there is a small loss in Corenics. We have a target so far to go to an EBIT level for the group up to 10%. And we have said that, that and I still will state that during next year, there will be possibilities to reach that at least for quarters. We could see now going into the year that the product portfolio, I would say, I can say, in all three units, But now we will also start with VescoMel to come out with new products on the power for the power distribution segment. And we still have a very good portfolio for Trane, but also traditional networks product is also now start to be quite good. Bayer Electronics, their main task for 2020 is to make sure that we get good order intake on now the product Series X2 as well as the newly introduced, call it, Zero plus that is, I mean, the cloud solutions, etcetera, but also another product we call Box2 in relation to that. But there, it is if you understand what I'm saying, it's only now to sell. It's not to do more development on this side. And we see good signs on that side. Another comment is that the acquired companies, it's always everybody knows that it's not that easy all the time to acquire companies. But the small Neratec acquisition that it looks quite good. They start to get into the culture, Vesta Mubair Group very well. And they will also during next year during 2020 change name into this, but there is very smooth transition. Secondly, Virtual Access that we only have had for a couple of months, but we can also see here and when we look at the backlog and also comments from customers in both these cases, the customers of Virtual Access and Narex that they are quite happy that they now belong to the Bay Group. You can always be uncertain of those things, but that also looks quite okay. We have the backlog, as I mentioned. So coming into 2020, we see and that's why we say that we will continue the way we see it today to increase sales and earnings for the full year 2020 compared to 2019. Then of course, to continue on this growth, we can also see that during the first half of twenty twenty, we need to step up one level on order intake compared to coming out of 2019. And you can be sure that everybody is aware of that here and everywhere in the organization. But once again, those I mean, if you have been around for a long time, it starts with a very good pipeline and it starts with good communication with customers and that product that the customers really want to buy. So we will do what we can to do that change. And I would can just end up with so for the next coming years, 2020, 2021 and 2022, that's in my view the foreseeable future, we are going into the new decade with good hopes. So by that, I want to thank everybody and then open up for questions. Thank on your phone keypad now in order to enter the queue? And then after I announce you, just ask that question. And if you find that question has been answered before it's your turn to speak, just press 0 and then 2 to cancel. So any questions, please press 0 and then 1 on your phone keypad now. And there'll be a brief pause while any questions are being registered. We now go to the line of Havan Hanna at Redeye. Please go ahead. Your line is open. Hi, guys. Thank you for the presentation. I'm happy to participate in my first call with you. If we start with the order intake, I know that it can vary between quarters, and Q4 twenty nineteen was very strong. But given that, was this quarter's numbers in line with expectations? Or would you say that you had higher targets internally? That's a difficult question to answer direct directly because but I put it this way. This is in line with expectation totally. But I mean, being a CEO, we always wanted to be higher, if I put it that way. And of course, if you have pipelines and things like that, you can that you always want some of them to come earlier. But I mean, the base order intake, I would say, it's okay. We knew already coming into the quarter that quarter four, as you said last year, was extremely high. But there is not no, so my quick answer is no, it's close to expectations, I would only say, on the order intake. Okay. Thank you. Just to remind I'm sorry, please carry on. Sorry. Okay. And when you look at the pipeline, is it the same as it has been the last quarter? Or do you see any bigger differences in terms of size or type of customers, geographies? And would you describe it as a healthy one in lack of better words? Yes. But this that's a good question. I mean, when we define pipeline, I mean, I have been in business to business since, what is it, 1985, I think I've been working with this. And you need to be very clear how you define the pipeline and you need to be clear that what is a potential customer. And we have, I would say, quite a good process on that side when we evaluate pipeline, because it starts with pipeline and it goes into orders and so on. And I would say that pipeline is strong. And both the investor move Bayor and it starts to improve also in Corenics. And then you can see that what you can see then also is that, yes, somewhat more customers, interesting customer has come in during quarter four. But and the same having said that, can also see that the business climate as such, if this would have been two years ago, I would say that we probably would have landed a couple of more bigger projects quicker because now there are some hesitations, meaning that you can see from the customer side, they don't really get the orders as quick as they did before. And since we are in most of the customers are specified, so if they get an order, we get an order. That's one thing. So I would say that, yes, the pipeline is good and I think it's fresh that you can probably find a singular market where we can do better and so on. But then now it's up to get it signed because what happens here is that we know that we will get it sooner or later, but we haven't been signed and then you get it in. And that is of course a sign from the market that there are some uncertainties that they really dare to push the bottom here in some cases. But if you look at overall this could be valid for 5% or 10% of the cases. But that's the 5%, 10 if the percentage we want to have on top of the normal order intake, if I put it that way. I don't know if you get wiser after that, but I think you know how we when we talk about pipeline and we think it's healthy, there is a process behind that, if I put it that way. Okay. Thank you, Paret. It clarifies it. And just the last question, and I get back in the queue. I'm curious about the agreement with Altice. And just on a high level, what would you say were the main contributing factors in winning this order over competitors? A couple of ones. I mean, here, it's a combination of that the organization, I would say in Taiwan to begin with, when Otis evaluated us, they worked also to the Taiwan organization, I mean, the factory as well as the people on the technology side. And they found out that, that was yes, they were quite impressed with what was going on over there. Secondly, there were some good ideas on the product side. But also here it's relations. We have a couple of persons in The U. S. Organization that have old relations with Otis going back ten, fifteen years and where they trust each other that if there is anything happen, we will sort it out. And then we have during the year step by step in building up relations on several levels. So it's a combination of, I would say, organization supply chain in Taiwan, relations from The U. S. Organization starting to start it up. And then especially in the Bayer organization, they have step by step I mean, been meeting more and more people because this is a long term agreement. So it means that they need to rely on each other a lot. But that's a combination of those things. And we will that agreement now it means that we I would say for April, May time, it will start to be more and more regular deliveries from this agreement. And second half, we will be full up to speed and then going into 2021. So that's the way it looks like. And just to raise one clarity, so we don't you don't sign deals like that with volume guarantees and things like that. But what you do is that we know that every time I sell this product around the world, it will be our we will do it, so to say. So it's, of course, based on you can call it forecasts, careful forecasts on what's going on in going on in the future. Okay. Thank you, Per. And that was the last question. And thank you for the presentation and your time for answering the questions. Okay. Thank you. Okay. As we see no further questions at this stage, may I please pass it back to you for any closing comments and to close the call? Yes. Then I just want to thank everybody for listening in. I appreciate that. And now we will go back in to do whatever we can to make 2020 a success. So thank you very much. Thank you very much. This now concludes today's call. So thank you all very much for attending, and you can now disconnect.