Earnings Call: Q2 2021

Jul 14, 2021

Hello, and welcome to Beijer Electronics Group AB Q2 2021 report. For the first part of this call, all participants will be in a listen-only mode, afterwards there will be a question and answer session. Today, I'm pleased to present Per Samuelsson, President and CEO, and Joakim Laurén, Executive Vice President and CFO. Per, please begin your meeting. Thank you very much. All of you listening in here, nice to talk to you, and welcome to our quarter two report presentation in a very hot south of Sweden in Malmö. We will do as we normally do. First of all, I just want to look at the picture on the slide that this is our new product that goes in Vestas. That's a switch, robust switch that is now certified and goes to the energy market. Hopefully the next four or five years, this product will sell a lot, and starting up 2022 the way we see it. 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 concluding notes and a short outlook going forward and open up in the end of the presentation for the question and answers. 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's a very clear sign of market recovery. If I elaborate a little bit on this one, is that first of all, we have during a lot of years, even though we have had a pandemic, we have been specified in a lot of customers around the world, in all three entities actually. What we now see is that those specs or where we are specified, now customers starting to put orders in. As you can see, the second headline here, we have an order intake that is over SEK 500 million, SEK 514. You see that we have a run rate on sales that is around SEK 1.5 billion, SEK 1.4 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, is that it's coming from more or less all geographic markets. It's coming from the different entities in a good way. 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. If we 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 forth. 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. As soon as we get the components in, we can assemble it, and we can ship it out. That gives, of course, a frustration because we wanted to have a much higher sales, and we had an order book that could give us a much higher sales. We had 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 SEK 50 million for the quarter actually. I know all of you that look into us knows then that if we have a gross margin 50%, something like 50%, then you can calculate yourself what that will mean for the EBIT going forward. We also want to state that on the supply chain side, it's very difficult for us to see exactly when we will get back to normal situation. The way I see it is that 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. 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 September. 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 Joakim will go into that a little bit more in detail, but there is a good order intake in Westermo, as I said, and there is one larger train order on the level of SEK 36 million. The good thing in quarter two for Westermo 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. Now we can see quarter two and what to expect for quarter three, it looks quite good again. We also want to mention here that we acquired the company ELTEC down in Germany the 1st of April. They have actually performed very well and have performed a little bit better than expectation in quarter two. Welcome, ELTEC. We are happy to have you in the family. If I go into Beijer Electronics, once again, those of you that follow us knows that for us to get a good profit improvement, we need to get Beijer Electronics running with profits. Now we have had a second quarter with order intake over SEK 200 million, and we can see that there is steady good demand in the Beijer Electronics, or more or less in all markets. If we now have sales levels on SEK 160, SEK 165 level, you can all see that if we are coming up to SEK 180, SEK 190, SEK 200 with the order takes we have, we will be in a good profitable situation. It's a little bit the same situation with the smaller unit, Korenix. Step by step we are coming in up to the plus side, which is good. 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 so we are handling the supply chain challenges, during every week, every month now. I must say that we have a very good skillful people in all organizations who are 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. By that, we can also look at some on the orders. You can see here on the slides that the order intake is SEK 514 million. If you compare that with the Q2 2020, 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. Also if you look at the right side, you look at the sales, what I now hope is that the sales per quarter, of course, are going to close up to the order intake. There is a big gap now from SEK 514 million now down to a little bit below SEK 400 million. This is the whole idea now that we should step by step increase sales going forward. You can also realize that there is a backlog as at the moment is to, of course, it is the all-time high. It is SEK 750 million. We have never been close to that before. My final comment before leaving to Joakim is then that we are writing also in report that there are some price challenges on the component side. We, of course then quickly try to then, of course, we are increasing prices to the customers and normally they understand the situation. There is a sort of delayment in the figures because as you can see with the SEK 750 million backlog, a lot of those orders came in to the old prices. Of course we need to first get some of the orders out with the old prices before we can see effects on the price increases going forward. By that, I ask Joakim to go through a little bit around the figures. Please, Joakim. Good morning everyone. I start with group and the heading is in line with what Per has mentioned so far. Strong demand, but the supply challenge is limiting the sales. The order intake as seen SEK 514, sales SEK 390, and EBIT of SEK 10 for the quarter. 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. Some of the comments. Per mentioned sales has been hampered with about 11%-12% due to this component shortage situation, and Per also mentioned the amount SEK 50 million roundabout is what we are talking about in sales numbers. Per 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. Want to mention that the overall cost level that we have in our group, in last year, in the pandemic year, we took a restructuring program. We see effects of that. We are in our entities maintaining a general cost control all across. That's important to see. With additional sales volume, of course we will see an effect on the bottom line. Worth to mention that the currency, we have somewhat of a headwind on the currency. The impact on EBIT is about SEK 4.4 million in the quarter, and it's mainly transactional variances. The net income level on a positive yet small level of SEK 1.9 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 start with Westermo. Clearly we see market pick up and we see some good strong order levels in Westermo. Order intake SEK 277 million, sales SEK 206 million, and EBIT SEK 20 million or 9.6%. Per Samuelsson mentioned we have had one larger order in the quarter. It is from a North American train operator in line with a frame agreement that we signed with them about a year or a year and a half ago. We do have a strong pipeline in Westermo, 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 startup in the group, happy to see, and we are very excited to see the development going forward there. As for the group in general, of course, the shortage of components limit the sales also in Westermo as all entities within the group. As Per also highlighted, we have now launched new products for the Power Distribution segment, and that is giving us also confidence on a good development going forward. Let's have a look at Beijer Electronics. Also here we talk about the traction in the market, but of course, the profitability development in Beijer Electronics is limited by the shortage of components. Order intake, another quarter, about SEK 200 million, actually SEK 216 million in the quarter. Sales level of SEK 164 million, EBIT of basically zero. Not negative, as we have seen many quarters lately, but now at least on a zero level. The order intake is also when we talk about Beijer 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, it's still on low levels. When it comes to the component shortage, as I said, it's limiting the sales. Of course, with the higher sales, we all know, we have said this many times, there is a good leverage opportunity in Beijer Electronics. We have also in Beijer Electronics launched some new products. We have now introduced a new generation of the X2 base product line. We also want to state that the cooperation that we have talked about for a while now with Korenix, we continue that one, and it continues on a good level. Finally, Korenix, positive development, and the result is actually also in black, yet on small numbers. Order intake, SEK 25 million, sales, SEK 24 million, and result, SEK 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. We see an effect in Korenix actually on some postponement on projects in Asia due to this. That in combination with the longer lead times on the production, the supply situation, that has limited somewhat the order pace growth that we see in Korenix. 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 cost in combination with somewhat higher sales at least give us a basically zero result for the quarter. Going forward, we have good confidence of seeing a good development for Korenix. As I said, the cooperation between Beijer Electronics and Korenix, we have had that on many areas, and it continues as planned, basically. That concludes my comments on the financial side for the business entities and the group. 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 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, so you can call it high-tech product in our industry, both when it comes to hardware and software. With now the latest product from Westermo coming out for the energy market, we are now in a good situation like that. Also, if you come to the second point is that, as I've said many times now, when we are specified at customers, and we now know that we have in the different segments that we are working with, we start to have a good spec situation in the customer side, and we now see that they're putting orders in. We state also that we have not recurring business, but we call it repetitive revenues, meaning that if you look the next 3, 4, 5 years, when our products are specified in the customer's products, then as soon as our customers are selling their products, we will sell our products. I think that is quite important to note. A couple of closing comments from my side, otherwise, is that we have said now we are very happy on the order intake. Don't also miss that the order intake is good for the quarter. For the first half of the year, actually, we have an order intake on SEK 932. That is also, of course, a record, and that's good. Joakim 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 product, then, of course, the cash flow will improve because then inventories will go down. We have that very much in place. Supply chain issues. We have components now and then. As I said, we have a strong organization in place. We are working with that, I would say every day, every second day, in order to make it as good as possible. Even though here in Sweden, we are a little bit going into sort of vacation mode. In a lot of places in the world, that's not the case. They're not on vacation. Also, meaning vacation is not that you're away. Our people in this supply chain, they go in more or less every day and look into the situations. 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 and geographic market where we are present, North America, U.S., Europe, and also 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 the 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 we can go to Asia Pacific and so on, probably within Europe and within the Nordics. Otherwise, we can see that there will be constraints on that side going forward. By that, you can look at our voices, and you can see that. Also what we are saying is that there is a good potential for us second half of 2021 to have a better result than we have been supplying the last quarters of 2021, 2020. We 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. If there's no other big disasters coming up, we have a positive view on the rest of the 2021. By that, I then open up for questions. Thank you. If you have a question for the speakers, please press zero one on your telephone keypad and you'll enter a queue. After you're announced, please ask your question. Our first question comes from the line of Michael Sandmund from Erik Penser Bank. Please go ahead. Yeah. Hi, can you hear me? Absolutely. Yeah. Yeah. Hi. Good morning to you both. A number of questions. The first one, a couple of housekeeping questions. ELTEC, 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, Michael. We haven't been writing that in the report. Okay. We can do the following. We said it when we announced it for acquisition, that they had a sales on the level of SEK 65 million-SEK 70 million. You can divide that by 4. It's a little bit better in the quarter. I think I've given an indication. Okay. We haven't given any exact figures. Okay. That's helpful. On the price increases, when were they implemented? I get that whole thing that your backlog is mostly old prices, 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 in all the units. That's the short answer. 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. Still, all of people that have been around for a long time, and when you're sitting down with customers where you have contracts, sometimes you go into sort of negotiation. If you have customers that placed orders end of quarter four last year, and then we are coming back in Q2 this year and want to have increases in existing orders, of course, you can call it some frustrations in that discussion. On the other side, the good news is that the component shortage is a world problem. Now it's more for customers, they have to get supplies. Hopefully we get the price increases through in a good way. Yes, Q3 you will see improvement, and Q4 we will be done. Okay. On the supply chain problems and the shortages, is that the main reason why we're seeing Westermo's margin being under pressure? Are there other things as well? Okay. Yeah. That is correct. Yes. You know us well enough to say that it is volume sensitive, so the more volume we get on the top side, then of course margins improves. Slight effect also on currency actually, that we have the currencies mainly hit investment when it comes to those sites. Otherwise, that's the comment I have. Okay. 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 guess as specified, et cetera. Any initial feedback on those products you would like to share? If you now could see, you can't see me, but I was smiling a little bit. No, but the feedback when it comes to, I would say all three units, but if we now talk about Westermo, we have product in Neratec, for instance, you have products in Virtual Access, but also in Beijer Electronics. You normally see that the customer, they like the products. Sometimes, we have internal discussions about that. We should get the product out quicker. On the other side, when they're coming out, they normally are very robust, they are good and they're definitely meeting expectations. Yes, the customer likes the product. Then we should be aware of when it comes to the energy sector, that is slightly some new markets for us, little bit different way of selling. It's also first you need to get the product specified, and then they need to order them. I would say that you can see, I hope to be able to talk about improved sales in energy sector from first of all 2022 and then 2023 and 2024 and so on. As I said before, I think that market segment will probably outperform the train side when we come into 2025, 2026 somewhere. That's why these products are so important, by the way. Mm-hmm. How long does a specification process take? It's difficult, but sometimes it could get quick, and quick here we talk three, four months, but normally. I would argue that it's a six to 12 months. Okay. That's normal situation. You supply the product, they are testing them, they do protocols, and so on. Six-12 months is a normal procedure. Okay. Thank you. I'll get back in line. Thank you. The next question comes from the line of Mark Siöstedt from Redeye. Please go ahead. Hello, can you hear me? Absolutely. Yes. Hey, Mark. Hi, Mark. Good morning. Very good questions from Marcus. I have a few additional ones. How much visibility do you actually have over the supply chain situation right now? I could answer like this, we have a very good visibility on 90%-95% on what we are doing here. Our own capacities, most of the assembled printed circuit boards, components, and so on. We have bad visibility on 5%-7% of the components. The problem is, of course, you need all components on our product. See, if we have one or two components where we have bad visibility on, of course we have a problem. Also on the components where we have a shortage, we start now to have a good visibility. So far, still, we have too long lead times on some of the components, we are working extremely hard to improve lead times on some of the components. You can get lead times on 3-5 months, we of course want to have one or two months. I don't know if that answered your question, but this is the situation. I don't know, Rickard, if you have some other comments here. I think the situation as it is, and this is not only for us, I think the visibility in the industry it's harder now. We are in a tougher situation, and 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, et cetera. These kind of things are happening all the time. The situation is challenging, of course. As Per said earlier, in general, we believe that the situation should be improving the coming quarters. I could add one more thing. What you do when these situations occur is to also that you take some of the R&D people, and we perhaps delay some project 1 or 2 months, and then they need to concentrate and redesign some of the PCBs, whatever, in order to get the other suppliers in, so to say. That is also things that you work with in those situations. It sounds very easy, why don't you do that? In some cases. Certifications You have certifications with a certain design and certain brands or variants of components. If you, for some products, for some certifications, you are not allowed, basically, to change a component 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 well in our organization. Yeah, okay. Understood. You talked a bit about the Power Distribution. You have new switches there, and that it is a slightly new market. How are you doing marketing in that segment right now? Have you started, and how is the response? The marketing now has been a lot on, of course, digital market in different ways. We had plans during 2020 to be in several exhibitions around the world in that industry, including the speakers in different conferences and things like that. That, of course, was more or less postponed, all of them. We have been improving our digital way of marketing. It's also, you still have good opportunities to take customer visits digital, and that has surprised me positively. We have, of course, a central group in Västerås that is really targeting different customers around the world, where we are in discussions and also sending product for specifications and so on. Marketing as such is two things, digital marketing, and it's also calling, Teams, Zoom meetings with customers, I would say that's the way doing it. The industry are aware that Västerås entering into this segment, for sure. Yeah. All right. One last question. You talked a bit about the increases of prices, and how is the general response from the customers, not only from people that signed an order in Q4, but in general? Generally, as I try to indicate, nobody likes price increases, and we have had a, I would say, rather long period with more or less, it's not deflation, so we're not too high inflation, and you can call it stable price situations. Now that has changed. 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. Of course, there is always discussion how much. 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 % on the price, if I put it that way. All right. Thank you very much. Thank you. We have a follow-up question from Michael Chen from Erik Penser Bank. Please go ahead. Yeah. 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 impacts of all the supply chain issues was on EBIT? You're talking about 10%, 11% lower sales. Is it mainly sales, or I assume there are higher costs in there as well. Any indication would be helpful. No, the indication is on, if you look at 11, 12%, then we say that's close to SEK 50 million in sales. As we've seen in our annual report and so on, we can see that we have a gross margin in the area of 50%. Yeah. I think we have indicated quite close what it needed, because we don't have from the lower levels, for instance, to be able to supply these ones. That margin goes more or less directly down to the bottom line. I think we have been clear enough there. Okay. I think, I don't know if you lost the line here. What happened here? Yeah, I lost the line. I'm back, sorry. No problem. I missed you somewhere at the 50% gross margin. Yeah. As I said, the 50% gross margin, it mean if we then have SEK 50 million on sales, you know more or less what it'll be on EBIT line. Yeah. Okay. One final question. Talking about supply chain risks, and these are unlikely to go down over time. Now there are problems. 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 to mitigate these risks? 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? Of course, second supplier, third supplier, and all of these things is things that we work with. 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. It could probably be that instead of having one or two, it will be two or three going forward. That's the type of things you do. We have to keep in mind that. When the whole market is doing that, we are not Apple or Intel or whatever. We are a small company in the total world. When these situations occur, we will have a problem also going forward. I think my taking from this is that we could have been better in having pre-certified alternative suppliers. As you indicated here, perhaps 1 trend I think will be in 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. You have a geographic spread a little bit more then, because there has been also transportation problems, even though they are small now, but they were bigger before. 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 Beijer Electronics and in Westermo, we have good capacity. That's not the limit. It is the supplier situation that is causing these problems. Our capacity, 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. Yeah, I understand. I've heard anecdotes about ports being closed in China on the back of more COVID outbreaks. It's a global thing, so we're not the only ones. 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, and you see more upturns in Europe, for instance. This is a little bit of a contrast to what we're seeing overall, where North America is actually quite strong. Is there any specific segment that sticks out here, or could you elaborate a little bit on that? That is a good question. Yeah, we have a little bit different situations compared to some others. Historically, we were very big into oil and gas when it comes to Beijer Electronics. The last years, we have been step by step moving over also to more energy, meaning, generally speaking, to solar energy, but also wind and craft and things like that. That has been taking some time, but also actually some oil and gas is coming back now. With oil price coming up to $65, $70, $65 and so on, then there's starting to be more actions on that side. Secondly, Westermo, they are in the U.S. mainly supplying to the train side, train industry. We got orders coming in now. As we said, this SEK 36 million order was from the North America side, but it was not supplied yet. Now we get an order. The supply has been a little bit lower to the train sector from the Westermo side. That's the two 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. That is true. Moving forward, and with the fact that Per pointed out many times, we have a good specification situation with many of the U.S. customers. Yeah, some segment in the U.S. is going 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. As there are no further questions, I'll hand it back to the speakers. Okay, thank you. That was a lot of good questions today. I just want to wish those of you that will have some sort of holidays, have a couple of good weeks. Stay tuned. Thank you very much for listening, and hopefully we will talk to you again after Q3. Hopefully we have transformed some of the order intake into sales. Thank you very much. Thank you.