Earnings Call: Q2 2021

Jul 14, 2021

Hello, and welcome to the Bayer Electronics Group AB Q2 20 21 Report. For the first part of this call, all participants will be in a listen only mode and afterwards there will be a question and answer session. Today, I'm pleased to present Per Samuelsen, President and CEO and Joachim Lorenz, Executive Vice President and CFO. Peer, please begin your meeting. So thank you very much. And all of you listening in here, nice to talk to you, and Welcome to our quarter 2 report presentation in a very hot south of Sweden in Malmo. We will do as we normally do. 1st of all, I just want to look at the picture on the slide that this is our new product that goes in vestibule. That's a switch, Robust switch that is now certified and goes to the energy market. So hopefully, the next 4, 5 years, this product will sell a lot and Starting up 2022 the way we see it. But it's we think it's nice and it's positive that it's ready. We will go as we normally do, give a short business update from my side. Joakim will go through financials, and then we will have the sort of concluding notes And a short outlook going forward and open up in the end of the presentation for the question and answers. You probably you that are on the call have probably already looked into the report. And we can see, as we State in the first one here that it is a very clear sign of market recovery. And if I elaborate a little bit on this one is that, First of all, we have during the last years, even though we have had a pandemic, we have been specified in a lot of customers around the world In all 3 entities actually. And what we now see is that those specs are in where we are specified, Now customers starting to put orders in. And as you can see at the second headline here, we have an order intake That is over CHF 500,000,000 CHF 514,000,000 CHF 514,000,000. And I mean, you see that we have a run rate on sales that is Around SEK1.5 billion, SEK1.4 billion. And you can see that this indicates a much higher run rate if we can turn around. Order intake into sales. The good news with the order intake, except also the amount as such, Yes. That is it's coming from more or less all geographic markets. It's coming from the different entities in a good way. And also so if I put it this way, the quality on the order intake is more or less the way you want to have it in my position. And if we're then coming in and we will come into that a little bit more later on in the presentation. But Then of course, you want to sell this and you want to get it into deliveries and so on. And so at the same time, it's quite frustrating Then to see that we now have in a lot in our sales unit, but especially in our supply chain, we now have products More or less standing in some corridors around in the factories because we are missing 1 or 2 components. And as soon as we get the components in, we can assemble it and we can ship it out. But that gives, of course, a frustration because we wanted to have a much higher sales, and we have an order book that could give us a much higher sales. And we have tried to quantify In the report, how much we can sell. And it's roughly 11%, 12%, as we're stating. And that is close to the SEK 50,000,000 for the quarter actually. I know all of you that look into us know then that if we have a gross margin 50% in 50%, Something like 50%. Then you can calculate yourself what that will mean for the EBIT going forward. Now we also want to state that on the supply chain side, it's Very difficult for us to see exactly when these will when we will get back to normal situation. The way I see it is that, yes, there are some signs that will be improvement in quarter 3 and quarter 4, and there is a lot of good signs. But you never know what could happen. But my overall statement here is that I have a slight positive view on Quarter 3 and quarter 4, especially quarter 4, but also quarter 3 that we will improve it gradually every month, starting with July and then August and then Timber. So there is good signs of that we can turn around the order intake also going into sales and then, of course, EBIT. EBIT is a plus, and it's an improvement. But of course, everybody realizes that we should have a much higher EBIT going forward. We can see in the different entities and Joaquin will go into that a little bit more in detail, but there is a good order intake Vestamir, as I said, and there is one larger train order on the level of 36,000,000. But The good thing in quarter 2 for Vestamir is we can see that also the train sector is coming back. Train sector has been good when it comes to discussion with customers and specifications, but we have had a little bit Slow order intake on the train side before, but now we can see quarter 2 and what to expect for quarter 3, it looks quite Good, yes. We also want to mention here that the we acquired the company, Eeltic, down in Germany, 1st April, And they have actually performed very well and have performed a little bit better than expectation in quarter 2. So welcome, Aeoltek. We are happy to have you here in the family. Then if I go into Bayoulectronics, Once again, those of you that follow us, Neuestat, for us to get a good profit improvement, we need to get Bayer Electronics running With profits. And now we have had a second quarter with order intake over €200,000,000 and we can see that there is steady good demand in the Vare Electronics Or more or less in all markets. And if we now have sales levels on 160, 165 level, You can all indicate see that if we are coming up to 180,000,000,000,000,000 to 200,000,000 with the order intakes we have, we will be in a good profitable situation. And it's a little bit the same situation with the small account and small unit Carenex. Step by step, we are coming in up to the Plus side, which is good. And of course, you can realize that now we are very much focused on improving the supply situation. We have teams also even though we are coming into sort of vacation situation, but we have every second day, there are teams sitting up to see that we are handling the supply chain challenges During every week, every month now. And I must say that we have very good skillful people in all organizations who are in quite I know that they're doing a good job, and that's why I'm positive that we will have a better Q3 compared to the Q2. And by that, we can also look at some on the orders. You can see here on the slides that The order intake in SEK 540,000,000. And if you compare that with the Q2, but you can Q220, but you can also look at Q3 2020, Q4 2020 as well as Q1 2021, you can see there is a good improvement in the order intake. And also, if you look at the right side and look at the sales, what I now hope is that Sales per quarter, of course, are going to close-up to the order intake. So there is a big gap now from €514,000,000 Down to a little bit below €400,000,000 But this is the whole idea now that we should step by step increase sales going forward. And you can also realize that, that there is a backlog as at the moment is to of course, it's the all time high, it's SEK 750,000,000. We have Never been close to that before. And my final comment before leaving to Joakim is then that We are writing also in the report that there are some price challenges on the component side. We, of course, then quickly try to then, of course, ink not trying to. We are increasing prices at To the customers, and normally, they understand the situation. But there is a sort of a delayment in the figures because As you can see with the €750,000,000 backlog, a lot of those orders came in to the old prices. So of course, we need to first get some of the orders out with the old prices before we can see effects of the price increases going forward. By that, I ask Joakim to go through a little bit around the figures. Joakim? Good morning, everyone. I Start with group and the heading is in line with what Paz mentioned. So far strong demand, But the supply challenge is limiting the sales. The order intake as seen 514, sales 3.90 And EBIT of 10 for the quarter. And if you look at the graph in the left corner, Still of course profits on a low level, but we are going in the right direction. And then some of the comments. Per mentioned, sales has been hampered with about 11% to 12% due to this component shortage And Par also mentioned the amount NOK50 1,000,000 roundabout is what we are talking about in sales numbers. Par also mentioned the increased component prices that puts pressure on the gross margin. We have adjusted customer prices and it will be compensating going forward. Also want to mention that The overall cost level that we have in our group. In last year in the pandemic year we took the restructuring program. We see effects of that and we are in our entities maintaining a general cost control all across And that's important to see. And then with additional sales volume, of course, we will see an effect on the bottom line. Also worth to mention that the currency we have somewhat of a headwind on the currency. The impact on EBIT is About SEK4,400,000 in the quarter and it's mainly transactional variances. The net income level on a positive yet small level of NOK1.9 million. With the challenges in the supply chain as Per mentioned, unfortunately we have had Increases in our working capital in the quarter. That has led to that we've seen a negative cash flow In this quarter and going forward, hopefully, we will be able to deliver in a higher pace and so we can turn around the negative cash Flow into a positive one. Let's jump into the business entities. We'll start with SMU. Clearly, we see market pickup and we see some good strong order levels in the estimate. Order intake SEK277 1,000,000 sales SEK 206 1,000,000 and EBIT SEK 20 1,000,000 or 9.6%. Per mentioned, we have had one larger order in the quarter. It is from a North American train operator In line with their frame agreement that we signed with them about a year or a year and a half ago. We do have a strong pipeline in Vestimel. So the confidence level going forward and The fact that we see more traction also in the train sector that gives us confidence for sure. Per mentioned about ELTEC, Good start up in the group, happy to see. And we are very excited to see the development going forward there. And as for the group in general, of course, the shortage of components limited sales also invest in as All entities within the group. And as Per also highlighted, we have now launched New products for the power distribution segment and we are that is giving us also confidence on A good development going forward. Let's have a look at Bayer Electronics. Also here we talk about the traction in the market. But of course the profitability development in Bairo Electronics is limited by the shortage of components. Order intake, another quarter above NOK 200, actually NOK216,000,000 in the quarter, sales level of NOK 164,000,000 An EBITDA of basically 0, not negative as we've seen many quarters Lately, but now at least on a zero level. The order intake is Also when we talk about Bayer Electronics, it's driven by a very good development in the Asian region And also somewhat in the European or EMEA. U. S. Is improving, but it's still on low levels. When it comes to the component shortage, as I said, it's limiting the sales. And of course with the higher sales we all know we have said this many times there is a good leverage opportunity in Bayer Electronics. We have also in Bayer and John is launched some new products. We have now introduced a new generation of the X2 base product And we also want to state that the cooperation that we have talked about for a while now with Kuremics, we continue that one And it continues on a good level. Finally, Kurenix, positive development and the result is actually also in black, yet on small numbers. Order intake, euros 25,000,000 sales, euros 24,000,000 and result, 0.1. What we can see in Korenix is that I think everyone that's On top of the news flows, sees that in Asia, there are some recent lockdowns Due to the delta variant of the virus and we see an effect in current exactly on some On projects in Asia due to this, that in combination with longer lead times on the products and the supply That has limited somewhat the order pace growth that we've seen in Kratnix. We'll see how that will develop, but that is what we've seen during this quarter. The fact that we have had or have constantly a good control of our costs in combination with Somewhat higher sales at least give us basically zero result for the quarter. Going forward, we have good confidence of Seeing a good development for Kurenix. And as I said, the cooperation between Bayer Electronics and Kurenix, we Have that on many areas and then it continues as planned basically. That concludes My comments on the financial side for the business entities and the group. So over to you, Per, for concluding notes. Thank you very much. Just a slide on the strategy, and I will not now go through our whole strategy in a short, But I want to point at a couple of things. One is that we are now with the different products and the different entities, We are in a situation where we have high level products with so you can call it high-tech product in our industry, Both when it comes to hardware and software. And with now the latest product from Vesto Mo coming out for the energy market, We are now in a good situation like that. And also, if you come to the second point is that, as I've said many times now, when we are Specify that customers. And we now know that we have in the different segments that we are working with, we start to be have a good spec situation in the customer side. We now see that they're putting orders in. And we state also that we had not recurring business, but we call it repetitive revenues, Meaning that if you look the next 3, 4, 5 years with the where when our products are specified in the customers' products, Then as soon as our customers selling their products, we will sell our products. And I think that's quite important to note. A capital closing note comment from my side otherwise is that we have said now we are very happy on the order intake and but don't also miss that The order intake is good for the quarter. But for the first half year, actually, we have an order intake on 932. And that is also, of course, a record, and that's good. Joachim has, in a good way, explained the cash flow situation. The way I see it, As soon as we get the possibility to supply our products, then of course, the cash flow will improve because then inventories will go And we had that very much in place. Supply chain issues. Well, We have components now and then. But as I said, we have a strong organization in place. And we are working with that, I would say, every day, every second day in order to make it as good as possible. And even though here in Sweden, we are a little bit go into sort of vacation mode, a lot of in a lot of places in the world, that's not the case. I mean, they are not in vacation. And also meaning vacation is not that you're way you're going in. Our people in this Supply Chain, they go in more or less every day and look into the situation. So we are on top of it, if I put it that way. The pandemic as such, we don't foresee that we have a demand problem. Now we can see more or less on the markets In the geographic market where we are present, U. S, North America, U. S, Europe and also the Asia Pacific, you can see that With some small exceptions in Taiwan, I would argue, and that's the comment. Otherwise, customers around the world are really Up and running in all units. The only challenge we still have is that we don't Foresee that we will be able to travel as we did before coming into September, October, November time. We see that there will be some more time before can go to Asia Pacific and so on, probably within Europe and within the Nordics. But otherwise, we can see that there will a little bit be constraints on that side Going forward. By that, you can look at our voices, and you can see that And also what we are saying is that there is a good potential for us second half of twenty twenty one to have a Better result than we have been supplying the last couple of last quarters, the 2021, 2020. And we're now looking forward to start to present better and better results the next 12 to 18 months with the order intake that we had and with the backlog As such. So if there is no other big disasters coming up, we are looking positive we have a positive view on the rest of the 2021. And by that, I then open up for questions. Thank you. After you announced, please ask your question. Our first question comes from the line of Markus Elmergold from Eric Pencibank. Please go ahead. Yes. Hi. Can you hear me? Absolutely. Yes. So hi, good morning to you both. I have a number of questions. The first one a couple of housekeeping questions. Eltek, what was the contribution of that on sales in the quarter, If you could help us with that. Unfortunately, I don't think we can do that, Markus. So we haven't been writing that in the report. And Given in the as we said in the to give we can do the following. We said in when we announced the acquisition that They had sales on the level of SEK 65,000,000 SEK 70,000,000. And so and it has been a little bit and then you can divide that by 4 And then it's a little bit better in the quarter. Then I give I think I've given an indication, but we haven't given an exact figures. Okay. Okay. But that's helpful. Then on the price increases, when were they implemented? So I get the whole thing that your backlog is mostly oil prices. But when were they implemented? Was it during the quarter? Did you start implementing already in Q1? Some started already in Q1, but it was mainly during Q2 that we have gone through all the units that So that's the answer. And will there be some spillover effect also in Q3? Or are you basically done? There will be spillover effect in Q3 the way I see it, but you will probably see higher margin in Q3 because of the price increases. But still, I say all of people that has been around for a long time, when you're sitting down with customers where you have contracts, Sometimes I guess you go into sort of negotiation. But if you have customers that placed orders end of Q4 last year, And then we are coming back in Q2 this year and wants to have increases in existing orders. Of course, there is a you can call it some frustrations in that discussion. But On the other side, the good news is that this is the component shortage is a world problem. So now it's For customers, they have to get supplies. So hopefully, we get the price increases through in a good way. So yes, Q3, you will see improvement and Q4, we will be done. Okay. And on the supply chain problems and the shortages, What you said is that the main reason why we're seeing Western Move's margin being under pressure or other things as well? Okay. Yes. I mean, you know us well enough to see that this volume sensitive. So the more volume we get on the top side, then, of course, Margins improved. Slight effect also on currency actually that we have The currency is mainly hit in Western Europe when it comes to those sites. But otherwise, that's the comment I have. Okay. Okay. And then finally, and then I'll get back in queue. Could you share with us some feedback from the Products for the power distribution were just released, I assume. I mean, I guess, as specified, etcetera. Any initial feedback on those products you would like to share? Now but that's why if you now could see you can't see me, but I was smiling a little bit because We had a good now but the feedback, when it comes to, I would say, all 3 units, but if we now talk about VESTAMU, We have product in Neratech, for instance. You have product in virtual access, but also in Bay Electronics. You normally see that the customer, they like the product. And sometimes, we have internal discussions about that we should get the product out quicker. But on the other side, when they're coming out, they normally are very robust. They are good. And they're definitely meeting expectations. So yes, The customer likes the product. But then we should be aware of when it comes to the energy sector that, that is Slightly some new markets for us, a little bit different way of selling. And it's also, first, you need to get the product Specified and then you need to get them they need to order them. So I would say that you can see I hope to Able to talk about improved sales in Energy sector from 'twenty first of all, 2022 and then 'twenty three and 'twenty four and say one. And as I said before, I think that market segment will probably outperform the train side when we come into 'twenty five, 'twenty six somewhere. So that's why these products are so important by the way. And how long does a specification process take? That it's difficult. But it could sometimes it could get quick and quick here we talk 3, 4 months. But normally It's a 6 to 12 months. That's normal situation. You supply the product, They are testing them. They do protocols and so on. And so 62 months is a normal procedure. Okay, okay. Okay. Thank you. I'll get back in line. Thank you. And the next question comes from the line of Marc Joseph from Redeye. Please go ahead. Hello, can you hear me? Absolutely. Hey, Marc. Good morning, good morning. Very good questions from Markus. I have a few additional ones. How much visibility do you We have over the supply chain situation right now. That was I could answer like this. We have a very good visibilities on 90%, 95% on what we are doing here, I mean, our own capacities, most of the in assembled printed circuit boards, components and so on. But then we had bad visibility on 5%, 6%, 7% of the components. I mean and the problem is, of course, you need all product in you need all components Yes, yes, yes, on our products. So if we have 1 or 2 components where we have bad visibility on, Then of course, we have a problem. But also on the components where we have a shortage, we start now to know To have a good visibility. But so far, still, we had too long lead times on some of the components. So we are working extremely hard To improve lead times on some of the components, this is I mean, you can get lead times on 3, 4, 5 months. And we, of course, want to have 1 or 2 months. But I don't know if that answered your question, but this is a little bit the way we that This is the situation. I don't know if you have some other comments here, but I think the situation as it is and this is not only for us. I think the visibility in the industry is harder now. We are in a tougher situation. And we our organizations, they are really on top of it. They work every day almost with the main suppliers. We have management calls with suppliers to make sure that we get priorities, etcetera. So These kind of things are happening all the time. And the situation is challenging, of course. But as Paz said earlier, We believe that we in general, we believe that the situation Should be improving the coming quarters. You can also I could add one more thing. What you do when these situations Of course, also that you take some of the R and D people and we perhaps delay some projects 1 or 2 months, and then they need to Right. And redesign some of the PCBs or whatever in order to get other suppliers in. So to say that is also things that you work with in those situations. And it sounds very easy, why don't you do that? But in some cases, you have Certifications with a certain design and certain brands or variants of components. And If you for some products, for some certifications, you are not allowed basically to change your components without recertifying the product. This is something that we are working with the product management organizations. They are looking into this all the time so that we are able To come to a better situation. As you understand, it is a tough situation for our organization. And as Per said, We are really working hard and they are doing really, really well in our organization. Yeah. Okay. Understood. And you talked a bit about the power distribution. You had new switches there and that It's a slightly new market. How are you doing marketing in that segment right now? Have you started? And how is the response? I see the marketing now has been a lot on, of course, digital market in different ways. We had plans during 20 'twenty to be in several exhibitions around the world in that industry, including the speakers in different conferences and so things like that. That, of course, was more or less postponed all of them. But we have been improving our digital way of marketing. But it's also You still have good opportunities to take customer visits digital, and that has surprised me positively. So We have, of course. And we have a central group investor house that is really targeting different Customers around the world where we are in discussions and also sending products for specifications and so on. But Marketing as such is 2 things, digital marketing and it's also calling, I mean, Teams Zoom meetings with customers, I would say. That's the 2 way. The industry are aware that Westmo is entering into this segment for sure. All right. And one last question. You talked a bit about the increases of prices. And how is the general response from the customers, not only from like people that Signed an order in Q4, but in general? As a generally, as I tried to indicate, Nobody likes price increases. And we have had a, I would say, rather long period with more or less, if not deflation, so we're not too high inflation and You can call it stable price situations. Now that has changed. And but now I would say that most Customers realize that we have a situation with increased prices when it comes to components. So normally, they accept The price increase, then of course, there is always discussed how much. But the important thing now is that if we can guarantee Supply of products in the same time, then normally you get the price increases through because supply of products are now more important than the final percentage on Pricing, I'll put it that way. All right. Thank you very much. Thank you. Thank you. And we have a follow-up question from Markus Almirall from Erik Pennsen Bank. Please go ahead. Yes. Hi, again. A couple of things. Firstly, another housekeeping question. I don't know if you're able to say, but could you help us a little bit what the impact All the supply chain issues was on EBIT. You're talking about 10%, 11% lower sales. Is it mainly the sales? Or I assume there are higher costs in there as well? Any indication would be helpful. No. But the indication is on if you look at 11%, 12%, and we say that's close to SEK 50,000,000 in sales. And as seen in our annual report in Q1, we can see that have a gross margin in the area of 50%. Yes. Yes. I think we have indicated quite close what the cost may be because We don't need we don't have high on the lower levels, okay, for instance, to be able to supply these ones. So That margin goes more or less directly down from We have been I think we have been clear enough there. Okay. I think I don't know if you lost the line here, what happened here. Yes, I lost the line. I'm back, sorry. No problem. I missed you somewhere, the 50% gross margin. Yes. And that's just as I said, I mean, the 50% Gross margin. It mean if you then have €50,000,000 on sales, then you know more or less what you're going to be on the EBIT line. Yes. Okay, okay, okay. And then one final question. So talking about supply chains, supply chain risks, and I mean, These are unlikely to go down over time. Now there are problems. But can you tell us a little bit about your thinking how you're working To mitigate these risks long term if you are trying to find new suppliers on the local markets within Europe or mitigate these risks. Yes. I think that everybody that is in this business, of course, are looking into that. How could you do in order to improve the situation next time you're coming into things like this? And of course, 2nd supplier, 3rd supplier and all of these things is things that we work with. And we will probably Be better in having, how should I put it, qualified and certified suppliers already done, Even though we don't take that much, and it could probably be that instead of having 1 or 2, it would be 2 free going forward. So that's the type of things you're doing. But we have to keep in mind that when the whole market is doing, I mean, we are not Apple or Intel or whatever, we are a small company in the total world. And so when these situations We will have the problem also going forward. But of course, the way we I think my taking from this is that we could have been better in Having precertified alternative suppliers. And also, as you indicated here, perhaps I think one trend, I think, will be the next couple of years Is that you make sure for the whole industry that we are not only having the suppliers in China, Taiwan and Asia Pacific. I think that will be a trend that you a little bit go back. You have suppliers in Europe and also in the U. S. The next Couple of years. So that will also so you have a geographic spread a little bit more than because there has been also transportation problems Even though they are smaller now, but they were big before. So yes, we will have more alternatives going forward. One point to make, Markus, So no one gets the wrong impression here. The problem is not internal. Capacity wise For our factories and supply units, both in Bayer Electronics and Investo Mill, we have good capacity. That's not the limit. It is the supplier situation that is causing these problems. Our capacity Yes. They are able to handle a much higher level of volumes than we are floating through today. That is important to note. And we also highlight that in the report. So no one gets the wrong impressions here. Yes, I understand. I've heard anecdotes about ports being closed in China on the back of More COVID outbreaks. So it's not it's a global thing. So you're not the only ones. But finally, maybe one final one. You wrote in the report that you see a cautious upturn in North America and it's quite Slow and gradual, you see more upturn in Europe, for instance. And this is a little bit of a contrast To what we're seeing overall, but North America is actually quite strong. Is there any specific segment to stick out here? Or could you elaborate That is a good question. Yes, we have a little bit different situations compared to some others. Historically, we were very big into oil and gas when it comes to battery electronics. And the last years, we have been step by step moving over also More energy, meaning, so generally speaking, to solar energy, but also wind craft and things like that. And that has been taking some time, but Also, actually, some oil and gas is coming back now. I mean, with oil price coming up to $65, $7,000,000 to $65 and so on, Then there's starting to be more actions on that side. Secondly, Vestome, they are in the U. S. Mainly supplying to the train side, Train Industry. And we were we got orders coming in now. As we said, this €36,000,000 order was from the North America side, But it was not supply yet. Now we get an order. So there, the supply has been a little bit lower to the train sector for the On the Westheimer side. So that's why that's the 2 major, I would say, effects on that one. One thing To have in mind on the U. S. Side, we're still on a low level and the potential is quite good. So moving forward and with the fact as Paul pointed out many times, we have a good specification situation with many of the American customers and some segments in U. S. Is going really, really well. It's Going in the right direction, we see, but we are quite confident that going forward, we could See a better situation also in the U. S. Okay, perfect. Thank you very much. That's all for me. Thank you, Markus. And as there are no further questions, I'll hand it back to the speakers. Okay. Then thank you for that was a lot of good questions today. And then I just want to wish those of you that will have some sort of holidays Have a couple of good weeks. Stay true, and thank you very much for listening. And hopefully, we will talk to you again after Q3. And then hopefully, we have transformed some of the oil intake into sales. Thank you very much. Thank you.