Earnings Call: Q2 2020

Jul 14, 2020

Ladies and gentlemen, welcome to the presentation of Bayer Electronics Group AB Q2 twenty twenty Reports. Today, I am pleased to present Peir Samarson, President and CEO Joachim Laurin, Executive Vice President and CFO. Speakers, please begin. So thank you very much. This is Per Sammelson, and welcome all of you to this Q2 report from Bayer Electronics Group in the middle of the summer. And I can tell you some sun is coming up now in at least in the South part of Sweden, so that's good. First of all, we will go through this as we normally do. And the headline for this report, we say it's, Fast actions mitigate the effects of COVID-nineteen while maintaining a focus on future growth. That covers the presentation, more or less, what we will go through. Everybody realize that the COVID-nineteen situation has been hitting us. And we I would say that Q2 is probably the quarter where you can see it as most. And therefore, we can see that, that there are impacts and there is drops in the sales in the different units in different ways, and we will go through that. But I also already now will say that we have taken a lot of very quick actions during, I would say, from February and onwards, which means that taking down cost and cash flow and so on, not taking down cash flow, increased cash flow, which means that we are in a very good situation when this, so to say, crisis over. If you look here, I mean, as I said, we expected this situation for Q2, which means that there are lower activities in sales and order intakes in this quarter. But fast actions, including then the restructuring program that we announced first quarter last quarter have then been well received and well acted as I there has been good actions in the organization, which means that we have taken down the cost significantly during this quarter. And we can also see that the organization have adapted very good into the digital interaction. And even though as everybody realized, there is no travels, we don't meet customers physically, it has been a lot of digital meetings the last three, four months. And I personally, I didn't believe that was possible, but that's very, very good. And it also tells us that the activities at the customer side hasn't gone down. And it also means that when we're coming into the end of the year, we can see that we haven't lost that much when it comes to sales time. So we still believe that when we're coming to the end of the year and hopefully, at least the economic effects of the crisis has started to get over, we are in a very good position going forward. Objective for Q2 was have at least a small positive EBIT and we came in with that. And also, as everybody understands, we have been focusing a lot on the cash flow situation because we need to have a good financial stable situation when you are in these type of situations. And here I must say that the whole organization has acted very, very good. So we are in a very good financial situation as of today. And then we also very clear, very early and also those of you that listened to us last quarter after quarter one, we said very, very directly that we want to make sure that we are when this crisis is over, that we are in a very, very good situation coming out of it. So we have also been spending a lot of time with customers. That's also we have been continuing on the development side. And we have made sure that also the supply chain is in good shape. So it means that we haven't lost time from those perspectives. This means that we are in a very good shape when this is over. If we then go into next slide, a couple of words on each entity. We have, during the last years, in our reports, been stating that if there is coming low economy going further, we normally can see it quicker in Bay Electronics and Kurenix and a little bit slower down in the Vestomou, and that's exactly what we see here in especially in Q2. Vestomou has gone down a little bit, but not that much. And they have then also by good cost control been able to protect EBIT margin around a little bit more than 10% in this quarter 11.4%. Then you saw a further drop in Bayer Electronics and Carenix, but you can see in both those units that those two units has also been taking down cost a lot, which means that they have done the best of the situation, if I put it that way. Also going forward, when we look into the future, we foresee that if you take the end of the year, if you look at customer activities and where we start to see where we start to be specified by customers, And we expect orders to come back and increase, you can say, I would say, after summertime, then we can define summer, but let's say, after August somewhere. And that's all the indications we get at this moment. And but of course, if there this pandemic that is going on in the world will get a sort of a second hit, then we have then, of course, then we have a different situation. But at the moment, you can see that in Asia Pacific areas, we are at the moment okay. And we have seen the last part of Q2 that Europe starts to pick up country after country. So that looks okay given the situation. And then we have U. S. That is the problem at the moment that we still see low activities because of the situation in The United States at the moment. Once and we have said once the crisis starts to fade off, we will be in an even better shape than when we went into it. We have been, of course, then taking down some cost a little bit we are more effective. So we don't need that high increase in sales before we are in a good shape again. A comment I could also say is that in a normal situation, we would, of course, not be happy with this quarter result. But given situation, I must say, from my perspective, it's okay. When we look into this in March, April, it could have been much worse, to be very frank. A couple of things when it comes to the COVID-nineteen. I think everybody realizes that, that as everybody is doing, people's health and safety is first. And then we have been, during this quarter, having a lot of people been working from home. And you can see, all of you, that, that works. You can do it. But of course, a long term scenario, that's not good because at least in our company, people want to meet each other. So we start to be in a situation where we more and more people will come back after summertime if no dramatic thing happens on the other way around. Workplaces and of course, distance, safe. We wash their hands and all of that. That is, of course, obvious. We have also, when it comes to the different type packages around in the world, I mean, many countries have different support packages for companies. And we have been using those when we think it's valid, so to say. We don't we see that we have been able to, for instance, in Sweden to cope a lot. So we haven't gone down so much in time, and we haven't been asking the government to pay us because we think that if it really will be bad end of the year, then we will really use it. But we want to use it when we need it, if I put it that way. But totally, can see in this slide and we see in report, we have gotten some sort of cost support from the different countries with a number of roughly $5,000,000 And we also have got a liquidity support on roughly $25,000,000 And as I said here, no court dates are made applied for in Sweden yet. And as we see it today, we don't see that we will go into it if it will continue as we believe. Then we have also had a very good and early discussion with the bank, we have an additional credit facility in place if we need it. But at the moment, we don't see that we need it. But it's there if we need it, and that's, of course, very, very good. Yes. And last point, Berggrupe will always adapt its cost levels. So what we say is that if we see any more negative things coming in the future, then of course, we will adjust costs and do other actions. And we have, you can call it, a plan B and plan C if that will come up. But once again, at the moment, we don't see that coming. Joachim will later on go into each unit, but you can see that this quarter, if you look at the order intake as well as the sales, you can say that they're all they are both order intake and sales are lower than you can call it lower than compared to the Q1 and also lower to the corresponding quarter last year. But once again, that was expected coming into the Q2. And then we can always discuss if it's higher or lower than expected, but this is roughly what we expected going into this. And I would say that the backlog, if you look at the overall backlog is roughly on the same level. I mean, it's at 107% versus last year, 95% of that if you look at organically. But overall, we haven't seen a dramatic drop in the backlog. So we are still in a healthy situation going into second half of the year. By that, I'm handing over to Joakim, and I will come back end of to do some conclusions going forward. So please, Joakim. Hello, everyone. This is Joakim. I start with going through the overall group. The headline is similar to what Per said earlier. I mean, we have an impact of COVID-nineteen as expected going into the quarter, but we have taken down costs and done actions to dampen the FX. The order intake SEK335 million in the quarter, the sales, $358,000,000, giving us a small EBIT of SEK 7,900,000.0 for the quarter. As I said, we have taken down the cost. We use the term significantly. Part of that is, of course, coming from the restructuring program that we launched in the previous quarter. If we compare our overhead cost math, Q2 compared to Q1, we have taken down 13%. So it's relatively high numbers here, but that then gives us the EBIT that we talk about. We should also notice that we have had the currencies against us. We have a negative total currency impact on the EBIT level of SEK 7,500,000.0. So we have an uphill also when it comes to currencies in the quarter. If we look at the financial net, that is also relatively negative for you that look a bit lower down the profit and loss sheet. That has also been impacted by the FX. And unfortunately, we come out with a very small negative net income of SEK 800,000.0. As Per mentioned earlier, cash flow has been positive in the quarter. I think as stated, the organization has taken on the tough situation, and we have managed our cash in a good way. And despite the relatively low profit, we still have a positive cash flow in the quarter. Where InvestoMo organization actually has been the biggest contributor to the total. But again, all across the organization, we handle our cash in a good way, and that's something that we are quite happy with. And with this positive cash flow, we have managed to, in the quarter, actually lower our net debt during the quarter. So let's slide into the three business entities, and we start with Vesemil. The heading is well performing. We state that, I think, given the situation with the COVID-nineteen and deliver an EBIT of 11%, I think that's well done for the organization. Order intake SEK 199,000,000, sales SEK 189,000,000 and an EBIT of SEK 21,600,000.0. If we look at a comparison to last quarter sorry, Q2 last year, we have increased orders, we have increased sales. But of course, we have then contribution from the two entities that we acquired last year. So organically, there are some drops on the orders and also on the sales. We should also note that in the quarter, we have not booked any larger orders in Vester Mill. We have some mid orders that we normally have, but no larger orders in the quarter. When it comes to the entities, Meratec and Virtual Access, we have had or we have ongoing activities, integration activities, where we now state that Meratec is fully integrated. We have even also changed the corporate name from the company to Vestamund Neratec AG. And we're ongoing when it comes to virtual access, the Irish company. Both entities contribute to the bottom line. And we even state here that Neratec, they shine somewhat. And that's nice to see. It's a good organization, and they have performed very well in the quarter, which we are very happy to notice. Then finally, you that follow us, you know that we have been focusing, InvestoMo, on the new segments, Power Distribution and Trackside. We are continuously working with that. And there are products and solutions coming continuously and more will come later on in the year. Let's go into Bayer Electronics. Here, we state significantly affected by COVID-nineteen. Bayer Electronics, they had an impact already in the first quarter. We see a further impact also now in Q2. If you look at the order intake, 121,000,000, the sales SEK 153,000,000 and an EBIT of minus SEK 2,000,000 for the quarter. For you that remember, you might remember that in Q1, we have relatively high order intake in Beyer Electronics. And there we should be aware that some customers placed some orders in the end of Q1 to secure deliveries in Q2. So we need to look at orders combined Q1 and Q2 for Beira Electronics. Looking at the on the regions, as Pat stated earlier, it is U. S. Or Americas that we see the highest drop, while EMEA is still down, but not in the level of The Americas. And Asia is basically almost flat. So there are big variances in the regions. We have, for quite a long time, talked about the phase out of the old product families. That has continued during the quarter, but we are getting close and soon we are finalizing that process. When it comes to costs, a big chunk of the restructuring program was implemented in Bayer Electronics. That has been implemented, and we see the effects. And with the cost reductions, it's still negative, but it's not dramatic. I think we were able to adjust in a good way, I would say, in the business entity. Finally, as you might remember, end of last year, we announced the agreement with Otis, the American company, the Elevator company. And that is ongoing according to plan. And we will start doing regular shipments now as we speak basically in the month of July. And that will then contribute for the second half of year. Kerenics, the small entity, continued impact of COVID-nineteen also in the quarter, 20,000,000 of order intake, 19,000,000 in sales and an EBIT of minus SEK 3,000,000. Kurenax experienced a really tough drop already in Q1. And basically, Q2 has remained on the similar level. We do see a higher activity on the customer side in China and Taiwan, but that is not compensating as we have quite some volume from Kerenics also going to the Europe market and Americas. We did do also cost reductions here, and we have dampened the loss. Later in the quarter, we have more balance between the sales and the cost situation. So we're going in the right direction, but still there is this loss of SEK3 million. We should be clear that we have maintained a relatively high activity level on the development side, where we have redesigned basically the hardware and the software into a modular approach. And there we have started to release some products, and there will be more coming during the rest of 2020. And finally, the cooperation between Bayer Electronics on the sales side with Kerenics in the European European market. That is continued, and hopefully, we will see good effects of that going forward. That concludes the total and the business entities and hand over to you, Palf. So thank you very much. Quick summary. First of all, as we said, COVID-nineteen impact in the quarter has been, you can call it, significantly. And we estimate a drop on roughly 20% on sales on in the quarter. And that is, of course, a big number. Having said that, you can see that Vestomu is still on a very okay level. And we can also see that the actions that has been taken in Bayer and Krenics also make it possible to come back to profitable situation quicker than we would have been doing in the situation earlier because of the cost cut downs and also higher efficiency. But it's also there that for Bayer, for instance, we have now, as Jawakki mentioned, step by step, we are ready with this change from old products to the new ones. And when it comes to Kurenix, when we go out of this year, they also have a very good product portfolio going forward. So when and I'm not saying if, I say when we have a quarter that is with good normal financial situation, I could yes, I dare to say that then we will have a good profitability also in those units. And we don't see this year as a lost year. Perhaps you can see it's a lost year when it comes to growth and profitability, but there has been a lot of other things going on this year and also this last quarter. And I would say that the customer activities, as I said before, is one of the most important things that once again, I didn't believe that was possible to have those high customer activity in a situation like this, but that's well done by the organization. If you look a little bit going forward, we state in the report that we don't see short term, and by that we mean the next couple of months, the dramatic changes. I mean, now we have still COVID-nineteen. Perhaps I should also mention that the oil price situation when it comes to U. S. Have had some effect. But we also see when we get different messages from customers that we foresee that when we're coming out of the summertime, as I said, they have started to say that I will place orders in a better level again. So at the moment, I'm quite optimistic when it comes to the end of the year coming into Q4. So once again, we should try to have this level for a couple of months and then start to speed up again at the end of the year. And I hope that will be the situation going forward. But as we say on the outlook side, we don't want to give more precise statements because of the situation and I think you can understand why. By that, I then want to open up for questions. So once again, that's zero one to ask a question or zero two if you need to cancel. There'll be a brief pause now whilst we register any questions. Okay. We've just got one question in the queue so far. That's from the line of Harvand Hana of Redeye. Please go ahead. Your line is open. Hi, guys. Thank you for the presentation. I was if you start with the customer activity, you mentioned that it hasn't changed that much. So the lower sales numbers and order intake numbers a result of longer sales cycle or more hesitant customers? How should one think about that? I think you should do it like this, Harman, is that what has happened during the quarter, as everybody knows, there has been a lot of countries that have been closed down. A lot of people in our customer side haven't been at work. And even though people have been working from home in a lot of places, there has been lower activities at the customer side, if I generalize over there. And which means that if you're not at work, you don't place orders. And also that a lot of the customers have had lower activities when it comes to manufacturing and things like that. Over I mean, it's if they take down one third of an activity, let's say as if you take it let's say that one month has been closed and two months has been open, then you more or less lose one third of the business, if you see what I'm after. But once they are coming back, then of course, they start to order again. And then you can call it part of our business is project based. And of course, what you do then, then you postpone some of the project, you delay some of the decision points because you a lot of people are uncertain. But that's what we mean. That's why you see the sales going down in the quarter as such. But when you then talk to the different customers and ask them, should you close the projects? No, we will continue the projects. Once they are back in the offices and in the factories full time, so to say, then you can see that they start to discuss ordering and things like that. So I mean, once again, if you close down things, then business goes down. That's what happens. I can add also that in for instance, in Bayer Electronics, we have customers that we know have specified us in their designs, but they have not then placed orders yet giving the situation, but we know that we're in. So once the wheels start to turn again, we will be there and we will get orders. But right now, we don't see that. So what Paar was saying, I mean, there's still activities. We still work together with the customers, and our engineers are working with our customers' engineers to do the specification. But orders is to come once the wheels start to go again. And I think, Havana, this is the central question. So that's also if I could elaborate one minute more here because I was quite I mean, when we're sitting in March, April, I was quite worried that we should be more silent with discussions with customers because and customers then saying, I will wait for the customer with a discussion. Let's postpone the meetings until after this COVID-nineteen is more in a better situation. But that didn't happen. So in reality, a lot of in a lot of the regions, the number of customer discussions increased, by the way. And of course, you did they didn't travel, so salespeople could take more calls. And the customer side, they really wanted the calls in different ways. So that's why I'm a little bit optimistic when it comes to the speed of coming back. Okay. Got it. That's clarified a lot. Thank you. Yes. And as usual, a question on the pipeline, I guess you answered it somewhat. But do you still find it healthy? Or are you seeing any, let's call it, worrying trends? No. I mean, very I'm very as I try to be transparent in these situations. And no, we go through every month with every unit. We look at the total pipeline in the different units. And the pipeline is in a very healthy situation. You can put it this way. We really want the pipeline to go down a little bit because we want the pipeline to be transferred into orders, if you see my point. But and we have a very good definition. It's only pipeline if it's quite a possible order. It's not just wish list. It's so now the pipeline is still on a quite healthy situation, yes. Thank you. And I guess one last question about cost reductions. If the situation would get even worse, do you feel you have enough room of further cost reductions to mitigate such a scenario? And have you planned for that already? Yes. No, but I shouldn't say of course. But yes, as I said, we have a plan B, plan C, you can call it. And what you do is that we have a lot of people from ourselves and downwards that has been into these situations before. And what you look into now, we have been taken down. I mean, you realize that travel costs and some people we have taken away on the administrative side and some yes, like a consultant variable cost and so on. But if this will be worse, then the next step will be to go on. Of course, if we have lower volumes, then we will hit it will hit the supply chain, then we will take down on that side. Then if it could be if it would get worse, perhaps we then need to take down the ambitions on the development side. So then we have to take it step by step. But so far, with positive cash flow, with the pipeline as we see, we don't want to do that because we see a lot of opportunities going forward. But yes, if this will be in very nasty and bad, we have more things to do on the cost side, yes. Okay. Got it. I guess I have one last one. I'm curious if how to which extent profitability has been affected by delayed deliveries from subcontractors or any other supply chain issues? Have you seen anything Some of that during Q1, not so much during Q2. So that's not a major issue for us at the moment. Okay. Okay. That's it guys. Thank you very much and good luck. Thank you. Thank you. Okay. As there are no further questions coming through at this time, I'll hand back to our speakers for the closing comments. Okay. Thank you very much. Then I want to thank everybody for calling in. And from us, we really wish you a good summer. A lot of people need a couple of weeks, I think, including us. But we will be sure to come back in a very good shape, and we are very how should I, focused and make sure that we come back to a good situation. So once again, you very much, and enjoy summer. Thank you. Thank you.