Earnings Call: Q3 2020

Oct 27, 2020

Ladies and gentlemen, welcome to the presentation of the Razer Electronics Group AB Q3 2020 Report. Today, I'm pleased to present Peer Samuelson, President and CEO. 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. Peer, please begin your meeting. Okay. Thank you very much. And first of all, welcome to all of you listening to this presentation of Bayer Group's quarter 3 report 2020. This is Per Samuelson talking. If we start to go to the next slide, we can see that there is and you can see that we have the normal again that as we normally have and business update where it's sort of a summary on the statements on the report. Joakim will come into the financial performance, and we will come into sort of a concluding notes in the end of it. And after that, we will have, if you want, Q and A like that. If we start with a summary of the reports, I think everybody realizes that and that's the same, I guess, for all companies presenting and reports Q2 and Q3, there are we have impact that comes from the COVID-nineteen like that. And of course, for us, it has been that we had a drop in volumes during mainly Q2 and also now Q3. We indicated in the last quarter and we saw then that Q3 probably will be in line with Q2, and that's more or less what happened. Very important statement for us in this is, of course, that we haven't seen any loss of the customers. So we can see that the volumes decreases that we have had, it's more or less related to that customers that we have not ordered as they normally do, if without the pandemic. We think that some of the customers had a little bit lower capacity because of they can't really run the factories with 100 percent that perhaps run them with 90%. And we also saw that we know that some of the customers have been taking down inventories and things like that. But the important thing for us going forward is that we know that if we go around the world and all seeing the different entities, we haven't seen any loss customers, which also means that when the customers start to order a little bit more and also increase their volumes, we will get the orders again, if I put it that way. We took very early on in March, we started we took a cost reduction program, and that has definitely been had the effect that we wanted to have. We also have seen that we have a the stronger Swedish krona mainly in both in Q2, but now also Q3 has affected the result with roughly minus SEK 8,000,000. But nevertheless, we have going out of the quarter still, even if it's low figures, we have a profit going out of the quarter. When this COVID-nineteen situation started in March, if I put it that way, in February, March, we directly decided that, first of all, of course, the cost thing, but then also we decided to make sure that we, of course, keep have a good cash flow as possible and also have a good financial position, so we can really handle the company during this period. And we also realized, I would say, March, April time that the product development and also to do everything we can to get out of this situation in a good situation was important. And that's also what we have done. We have after now the 1st 3 quarters, we can see that we had a small positive free cash flow during the quarter as well, but also accumulated for the 9 months. And we as I said before, we have come down on the cost side, but we have done it the way we see it in a smart way, meaning that we still have an organization in place that is good and motivated. We have products that is, I would say, better than ever. And we also are organized and prepared to take care of volumes going up the next hopefully, the next half year. If I go into the next slide, we can see that all three entities, Vesto Mobile Electronics and Kurentics, they have had impact from the COVID-nineteen. But Vestimer came in a little bit later. And now we start to see in Bayer Electronics and Kurenix mainly that we have seen during the quarter 3 end of the quarter 3, small but significant increases in the order intake. And we also say are saying that we can see that signs that the bottom has passed. We believe now when we have gone out of Q2 and Q3 that as we say it now, we see clear signs that the bottom has passed. And we can see that already in the Q3 when it comes to Bayer Electronics and Krennic. And we can also see some signs, but also beginning of Q4 when it comes to Vestamoo. We have all the time been saying that the whole strategy is to make sure that when we're coming out of this crisis, when it starts to fade off, we will be in an even better shape and ready for growth. And with the aim as quick as possible to come back to the financial targets that we have, meaning the 7% organic growth, but also the EBIT level of 10%. When it comes to the COVID-nineteen measures, I will not go through this slide in detail. But I mean, we have we were sitting actually an hour ago here discussing about this thing. I think we have found out that we have one person in the whole organization that has got COVID-nineteen, which is, of course, very positive. That is only one, and it was not a serious one. And of course, we continue with the different things where people work from home, but we also now are back into where more or less in the all offices around the world, definitely in Sweden, that people are now also in the office. So we I would say 50%, 60% working from home and the rest in the office. Otherwise, in Q3, we don't have major effects on result or the financial positions that has to do with things we have got from governments and things like that. So I would say that it's a sort of a clean result. It's clean from COVID-nineteen supports. We got an agreement of an additional credit facility if we would need that. But we as we see it today, we are far from to take that facility in place. With that, I go into order intake. And of course, you can see on the volumes, the last couple of quarters that the volumes have gone down both when it comes to sales and the order intake. But the way I see it is that this is very much, as I said in the beginning here, related to that the customers that we have has, of course, then ordered lower volumes, but we haven't lost any customers. And when we now talk and listen to what customers are saying, I mean, they are now starting to be they have inventory on the right levels. I would say, and the majority of the customers that we have, with some few exceptions in the U. S. By the way, Otherwise, I would say that most of those customers are now starting to go back into order as to put normal volumes into our order books. And that's once again why we state that we have passed the bottom. With that, I'm passing on to Joakim, and we're coming into the financial performance. Hello, everyone. This is Joakim. I will then now on a couple of slides forward give you the financials and comment somewhat on those. And I will start with the group perspective. In the heading, we state that, as Pat said, COVID-nineteen has for sure impacted our earnings and so has the currency effects. So if we look at the numbers, the order intake was €310,000,000 the sales was €335,000,000 and the EBIT was €5,000,000 Clearly, as stated before, the currency impact that we have on the EBIT of a bit above SEK 8,000,000 is mainly transactional variances. And the major part of that has actually hit Bayer Electronics, even though it has impacted Westemu and Krennix as well. But the major part is actually hitting Bayer Electronics. As Pat said, we have launched the restructuring program in early part of the year. We see clearly that the effects of that has paid off, you could say, and we see reductions. And if we look on a sequential basis on the overhead costs, we reduce the overhead costs further 7% from Q2. So yes, we lose on the top line, but we also handle our cost positions all across our organizations in a good way. Bottom line, net income also positive or an EPS of NOK 5 per share, of course, low levels, but this is how it looks. Per said also that we have had a positive cash flow, and it's actually the Q3 of this year. Every quarter up to now, we have had positive cash flow, even though it's small numbers, but still on the right side. So that concludes the group. Now we talk Westemu. In Westemu, we have for sure also here seen impacts in the COVID of COVID, but we want to state that the strategic focus that we have had in Westomel is still there and it's still the main target that we have for the organization. The orders they were hit for sure. We had an order intake of SEK 164,000,000 in the quarter. The sales was SEK 182,000,000 and the EBIT was SEK 15,600,000,000 When it comes to the order situation, as Per said earlier, we have had negative impact in the quarter as our customers are deferring the investments and reducing stocks, etcetera. However, what we see in the pipeline and going forward, we do see good potentials. And this then is also part of the qualification of our statement that we believe what we see today that the bottom has passed. The EBIT was then the SEK 15,600,000 in the quarter, of course, a relatively low level compared to where we come from. But again, it is an impact of the lower volumes of COVID, of course. We want to highlight for you that are following us that the 2 acquisitions that we did last year, NERATEK and Virtual Access, When it comes to Neratek, we are basically done. It's fully integrated. We have changed the name of the entity, etcetera. And that is something that we put behind us and look forward. So that's all done in a good way. Virtual access is ongoing, basically on plan. And we want to state that both these entities, they contribute well in the quarter. You also you who follow us, you know that we have lower activity levels in general. We have maintained the focus on these segments because we believe in these. There will be good growth there. And this is, of course, something that we have continued to do in this quarter as well. And another point that we want to also emphasize that we continue to invest in the longer future. We did inaugurate an extension of the production facility that we have in Stora Sundby, Sweden, the production plant for our supply chain setup going forward. That was SML. Bayer Electronics, here we see that we see a further impact of the COVID, but also we want to state that there are clearly signs of bottom out. Order intake SEK 128,000,000 sales SEK 136,000,000 and unfortunately a loss of SEK 4,500,000 for the quarter as such. The drop of the sales is an effect of the pandemic. And if we look on the regional side, it is mainly in the U. S. That we see the high impact. And I think we all know and we all follow the uncertainties that we have in that part of the world. And obviously, it has impacted us in bare electronics in the Q3. When it comes to orders, if we look at on a sequential basis, we do see an increase in Q3 compared to Q2, driven very much by good development in Asia, where we see good traction in many markets and that is, of course, comforting. The restructuring program that was put in place, it is also, of course, impacting or helping to mitigate the loss of volume in Bayer Electronics. And if you look on a sequential basis here as well, we lowered the overhead cost in Bayer Electronics in Q3 compared to Q2 with another 10%. So we try to mitigate as much as we can to lower the impact on the result line. We have had some kind of redistribution of the restructuring costs. For you who read the report here clearly, you can see that the excluding restructuring is lower than the EBIT on the bottom line. And that's redistribution within the group. We want to highlight that the agreement that we did with Otis by end of last year, We are into regular shipments now as planned and in this quarter, and that is expected then to gradually increase going forward. That cooperation works well. And there we have seen less impact of the pandemic actually. And finally, the cooperation with Korenix that we have talked about earlier in the reports and presentations, that one continues. And we believe that there will be good effects out of this kind of cooperation between Bayer Electronics and Korenix. Kurenix, yes, Kurenix, they were hit hard in Q1 already. Q2 wasn't too good. Q3 is actually somewhat better, but we state continued impacts. But also here we want to state that we see signs of bottom out. Order intake was SEK 22,000,000. The sales was SEK 20,000,000 and the loss was just above SEK 1,000,000 on the EBIT line. As stated, the Q3 orders were actually better than Q2. So the science of bottom out is actually qualified by that. Still, of course, on very low levels, but we are not thinking we are heading upwards when it comes to the order side. It is the if we look regional wise for Kremmex, it is Asia where we see the positive development, while in U. S. And in Europe, we still see relatively low traction for Koremex. So that's how it looks in the Q3. As on we stated on Bayer Electronics, the restructuring programs that has given the intended effect. And we continuously also in Kureniks lowered the overhead cost, trying to mitigate the loss of sales. And the EBIT was around SEK 1,400,000 for the quarter. We have talked before about that we despite the tough situation, we have maintained the longer perspective in Korenix. We have invested, you could say, in rearranging this the product offering, both the hardware side and the software side with the modular approach. And that is continuing. And now as we come to the end of the year and going forward, we will see gradual launches of new products in the market based on the new design. And of course, this will help us going forward, and it will help us also when it comes to the cost side on the products. And the cooperation here between Bayer and Krennic, it is continuing, as I said before. And the focus is the sales channels, mainly in Europe and U. S. And then also coordinating supply chains, making use of each other so that we can increase efficiency and also maintain or even create a better customer experience in the way we supply our goods. This basically concludes the financial part. Per, I'll hand it over to you now. Thank you very much, Joakim. A couple of words then. Before I'm coming into the points that I have on the slide here. A couple of words on the COVID-nineteen situation. As everybody understands, I'm far from an expert on what will happen and what's going on and things like that. But one thing we can see now is that perhaps in March, I believe that this would be start of a pandemic and then it will be an ending. And perhaps I was too naive. I thought it will end, let's say, September, October, November time. But we now know that, that will not happen. And it goes in several areas the wrong direction. And we can also so we what we are saying now is that the organization in Bayer Group, we need now to learn how to live with this situation. And coming into 2021, we will count, as we do now, refer too much to the COVID-nineteen. We need to make sure that we going forward that we will have an increase in sales, that we will be reach the targets of the 10% EBIT also with still some sort of pandemic going on, because we know now that the travel will not be back as normal during next year and so on and so on. So once again, what we are now doing, we are preparing our organization for a sort of a new normal. And if then this will end quicker than we now believe, then that should be sort of a bonus, if you understand what I'm saying. What we now have said and what we have said all the time the last 6, 8 months is that we should go out of this with a stable financial position, And that we definitely have. We have more or less the same financial position now as we had when we started this year. We have now started to be I mean, some of you that have listened to me before knows that 3, 4 years ago, we had a sort of a product situation where we had a lot of products that were close to end of life situation in more or less all entities. Bayer Electronics now are now definitely ready with the X2 transition, and we now have product lines in Bay Area's Tronic study is very that is working in a good situation and it's one system, if I put it that way. Vestomo has a strong offering in train, as you know, but also now in the track side. And we are very close to also to finalize very good product development into the energy sector, which means that we have an alternate traditional networks product is quite in a good situation. And as Joakim referred to before, Korenix is also now have done their job, which means that all 3 entities will have a very, very good product portfolio going into 2021, which is very, very good. We said before that we haven't lost any customers. And for me, in my position, that's extremely important because when the customer started to go up again, and we see now signs that, that is happening, then we know that we will get the orders, and that is, of course, extremely important. And on top of that, we can see in our pipeline that there are also good possibilities to actually to catch some new customers, which means that with a lowered cost base, we will come it will be a little bit, if you understand my point, easier to get up to the 10% EBIT target because we have lowered the cost base. And now coming into 2021, then as we said, financial targets, they are in focus. It means that if I come back to what I started this with, that the whole organization should now realize that even if we still have pandemic situations going on next year, we should still be able to reach our financial targets. That will be the most important thing for us going forward. But of course, it starts with to get the volumes up. And as we said, we have said now it's bottom the bottom we can see that the bottom we have reached the bottom. And now we hopefully will see better orders and after orders normally come sales, and then we will have easier to reach the financial targets. So that a little bit concludes our presentation. So you can see that we have the uncertainty, of course, continues. But as I've said, we don't dare to have to precise forecast on the next near future. But once again, we think that we have reached the bottom. Thank you very much. Then we're handing over to questions. Thank you. And the first question comes from the line of Mark Schuster from Redeye. Please go ahead. Hello and thank you for taking my questions. I have a few questions about the product portfolio going forward. You said that the 1 box solution was very important in order to secure the North American trained customer. How much are your bolt on acquisitions like Neurotech and Virtual Access adding to these one box solutions? If you could brief a bit about it. That's I understand the question. When it comes to one system or whatever, that's referred to Bayer Electronics when we call have the X2 2 series. Then when it comes to the acquisitions, Neurotech and Virtual Access that is related to Vistomero's offering, they are complementing both to the train segment as well as especially virtual access into the energy segment. So it's a little bit different, the 2 different entities. And perhaps I was a little bit unclear when I told that talked about that. Okay. If I may ask a few more questions. Do you see a ray of light with the Koramic new products, the modular approach and the combined cooperation with Bayer Electronics. Do you think this will help the company to breakeven? Yes, definitely. I mean this is what we could I tried to indicate there, so that's a good question, is that we have lowered the cost base a lot both in KureneX and Bayer. And what we can see is that both Bayer and KureneX is more and more now targeting the same customer segments. And the last question. Mark, just one more comment on Korenix. We have lowered the cost base with the cooperation between Korenix and Bayer Electronics, we have higher ambitions than breakeven. Absolutely, some Yes, I understand. Yes, yes. They should be on at least the level of the financial targets in the near future, not meaning a quarter, but within a foreseeable future, you could say, put it like that. Yes. Okay. Yes. I understand. And the last question. With a new extension at Stora Sundi production plant, Have you seen traction in the Energy segment and the track side? And could you brief us a bit about the possible future here? I mean, first of all, I mean, the extension gives us opportunities to, of course, increase volumes going forward. And when you look at, 1st of all, track, we can see increases in orders going forward when it comes to the track side. They are closer to the train. And it was a little bit yes, understand me right, easier to get orders into the track sites because it was a little bit similar type of selling as it was on the train side. The energy side, as we have said, takes a little bit longer time because of two reasons. One reason was that we needed to upgrade and do development on products and also get certifications that we now start to get. So the product starts to be ready. Secondly, it's a little bit different ways of selling. So it has been a high effort the last year to educate the sales teams in different types in different parts of the world, how to sell and to which when it comes to the energy segments. And that's why I mean that we can see we will see even more traction when it comes to the track side during 2021. We can see that already end of 2020, by the way. But I think we will see some improvement when it comes to Energy segment 2022 and 2023, Probably with some orders during next year, but we will see some more significant increases 2022, 2023 when it comes to the Energy segment. And that is what we have said more or less all the time here. All right. Yes, thank you. Thank you. And as there are no further questions, I'll hand it back to the speakers. Okay. Then thank you very much all of you for listening, and I wish you a nice day. Thank you very much. Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.