Good afternoon, ladies and gentlemen, and welcome to the Ependion Q3 2023 report conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, October the 24, 2023. I would now like to turn the call over to Jenny Sjödahl, President and CEO. Please go ahead.
Thank you very much for that, and welcome everyone to this quarter three report session for Ependion. I am here today with Joakim Laurén, CFO of Ependion, and we are actually in Germany today at our Westermo subsidiary, Westermo Eltec in Mainz. So let's get started. The agenda looks like usual. I will start with the business update, and then Joakim will dig a little bit deeper into the financial performance, and then finally, some concluding notes.
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Thank you very much. We will pause this call for one moment. Please do remain on the line. Speakers, I will transfer you to sub-conference for one moment. Thank you very much. Ladies and gentlemen, thank you for your patience. We will now resume today's session, and I'll hand back to our speaker, Jenny Sjödahl. Please go ahead.
Thank you for that, and, sorry to keep you waiting, but, now we have the right presentation, and let's move ahead, Joakim. So let's go to the business update for the quarter. So as you probably have seen, we have kind of a mixed picture, for this quarter. On one hand, we have a record high result for the group, and a record high operating margin. So that is, very positive. But we also do see a weaker order intake, and we'll come back a little bit, to that in just a minute. After seven quarters on, 600+ level in order intake, we now see a pattern where Beijer Electronics is continuing on the somewhat weaker, level that we have seen now for a few quarters. And that was quite expected.
On the other hand, we also see in this quarter, in Westermo, a normalization in the order intake. What we see there is that the train segment, which is Westermo's largest segment in this quarter, came in at unusually low level, you can say. One of the reasons for that being that we had very, very high levels of order intake from our train networks customers both in the first and the second quarter of this year. It was somewhat not surprising that the level was a lot lower this quarter. However, we are seeing a very strong activity level in Westermo in all our key segments, the train segment included. I see this as an abnormally low level in the quarter itself. Very good sales levels.
We had another record quarter for Westermo, and I'm pleased to see that we can now ship out large quantities of products. We are no longer restricted by component issues and so on. So we have a much more favorable situation now when it comes to our invoicing. Results-wise, you could see that we came out in the group at a record high 14.4% EBIT. So we are approaching our financial targets, which we will come back to later. In Westermo, thanks to the strong sales numbers, we came in at a record high 17.6% EBIT level, but also in Beijer Electronics, despite the lower volumes, the EBIT level kept at a good level of 12.7%. Working capital still is a headache for us.
Still very high levels, which limits the free cash flow, which came out at SEK 18 million in the quarter. So if we look a little bit more on the business entities, I already mentioned the result, and the record quarter for Westermo. And I think I mentioned actually everything that is already written there, as you can see here, a strong situation in Westermo, and we are looking at also a stable situation going forward. Beijer Electronics, I mentioned the normalization on the order intake. There are two things affecting that. As we said already and saw already last quarter, customers are going back to a more normal order pattern.
So they are ordering products 1-4 months ahead, like they did before the pandemic, as opposed to 12+ months ahead during the component crisis. However, we do see some signs that customers are starting to place orders again, and that they are depleting their inventories. Sales lowered somewhat compared to the previous quarter, but the EBIT percentage, as mentioned, came in at a stable level. We have also implemented or are in the process of implementing a cost reduction program in Beijer Electronics to actually compensate for the lower order intake that we have seen for some time now. That cost reduction program is focusing on the Asia region, which is where we are seeing the weakening order intake the most.
We also mentioned previously that there is a strategy review going on in Beijer Electronics, and that work is proceeding as planned. If we then look at the orders and sales in a more graphical format here, you can see the effects on the order intake, -17% compared to the same quarter last year, -19% if you take into account the FX effect as well. Sales, however, on a reasonably strong level, 9% versus last year, so that is keeping up quite well, and we still have a very high backlog at SEK 1.4 billion. Somewhat lower than before, which I think is a good thing because we needed to reduce the large backlog, especially in Westermo, but still we have a healthy backlog in the group. So with that, I'd like to hand over to you, Joakim, to dig a little bit deeper into this.
Thank you very much. So I will go through the financials, and then I will start with the Ependion. And as Jenny said, the order intake was SEK 514 million for the quarter, sales at SEK 619 million, and the EBIT at SEK 89 million or 14.4%. And we can conclude that the level of SEK 89 million as an EBIT, that is a record for us in the Ependion, and also the profitability of 14.4% is also a record for us, which is, of course, nice to conclude. Second point, we do have a tailwind when it comes to FX. With a weaker krona, we have a positive impact on the EBIT of, in total, SEK 11 million in the quarter, predominantly transactional variances.
Looking at the cash flow, as Jenny said, SEK 18 million, but working capital is still on high levels or too high levels, I would say. And it is because of the remains of the component crisis period that we are still seeing impacts of when it comes to deliveries from our suppliers. I want to highlight the fact that the financial net is actually there's a high increase on the financial net cost up to SEK 14 million in the quarter, compared to just 1.4 the previous year. And the main reason behind this is that, like we all know now, that we have a general higher interest level in the market, and then, of course, that impacts us.
Net income then, because of this, just, increased to SEK 52 million compared to the SEK 51 million last year, and also the EPS increased to SEK 1.81 for the quarter. Let's move to Westermo. The order intake in Westermo for the quarter, SEK 292 million, and sales, SEK 380 million, and an EBIT of SEK 67 million or 17.6%. Order intake, Jenny has already commented that one, and, and, when it comes to deliveries, obviously our supply chains have been able to pace up and, and, reduce the delays on them that we had in the backlog, and, and that is giving them the all-time high sales levels in the quarter.
Further, within Westermo, we are continuing our work that we talked about before, that we are looking into our supply chains and with the target of expanding the capacity for being able to accommodate future growth. The R&D activities continues on the planned level, full focus for the future offer for going forward and to support our growth.
Another thing that we would like to highlight is that we, in Westermo, we inaugurated a new site in Dublin, and the reason for that is that we plan for expansion further in the wireless data communication area, and we're happy to open up a new facility in Dublin, and that is also something that happened during the quarter. Let's move to Beijer Electronics. Here, we had an order intake of SEK 223 million in the quarter, the sales of SEK 241 million, and an EBIT of almost SEK 31 million or 17.7%.
12.7%.
12.7%. If you look at the order intake of 223, if we look sequentially, that is an increase of 10% compared to Q2. Still, it is on lower levels as we kind of saw already in Q2. We want also to highlight that we have gone through our order backlog and we have adjusted the backlog for Beijer Electronics with SEK 34 million. And the reason are that we have some uncertain orders that was booked in China during 2022. So that one has then affected the backlog numbers in the quarter for Beijer Electronics. The sales levels is lower than compared to last year and also sequentially. And that is then basically expected, given the order pace that we have seen in previous quarters.
However, due to good price management, being able to generate good gross margins and cautious on the spending, we have been able to make sure that we can deliver an EBIT of 12.7% in the quarter. We do want to highlight that the activities within R&D that continues according to plan, and we are working towards new generation of products for the future. And then, as Jenny pointed out, we have introduced a cost reduction package with focus on Asia, meaning that we will reduce our cost base with about SEK 20 million as from beginning of 2024.
And the cost for the package, that has been then taken in the third quarter already. And the last point, as you might remember, last quarter, we acquired a company, Smart HMI. That integration activities is ongoing, and it develops in a good way, and our customers are really welcoming this, this technology that we can now offer. That kind of conclude the financial part. So back to you, Jenny.
Yeah. So to summarize what we have just said, demand-wise, we do see a mixed picture, good customer activity and opportunity pipeline in Westermo in our focus segments. But while we still see this same uncertainty in the market that we have seen for some time now for Beijer Electronics. But a good and stable development in our supply chains, meaning that we can actually ship good volumes and also, which also then leads to a stable profitability situation. And full focus on execution, of course, of our strategy, and we are keeping a close eye on what's going on in the market as usual. Just a reminder of our financial targets.
I think most of you have seen them, but just to remind ourselves of that, financial targets revenue increased 10% average organically, and then acquired growth in addition to that. Profitability, 15% operating margin on the EBIT level. As you see, we are approaching that level now in this quarter, but there is, of course, more work to be done to end up on a stable level at 15% or above. And then the dividends, we should be a dividend-paying company, is what we are saying here as our financial targets. The outlook, we repeat the same message as last quarter. We have a very positive situation overall.
If you look at it, from an overall perspective, we operate in attractive markets that are being driven by very strong mega trends. So we do see in the medium and long term, good growth in our key markets. However, the inflation situation and the high interest rates continue to weigh on the global economy, and this has a negative impact on some of our segments, and we see it especially in the manufacturing industry. So therefore, what we have seen for some time, this mixed picture, we expect that to persist.
However, we can also see that after three quarters now in 2023, as Joakim mentioned, the EBIT level that we have year to date exceeds the full year level of 2022, meaning that we are heading for a new record relating to the full year. So with that, we are through with the presentation, so we would like to open up for questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch tone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order that they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Our first question comes from the line of Mark Siöstedt of Redeye. Please go ahead.
Thank you, operator, and good afternoon, Jenny and Joakim, thank you for taking my question.
Hey, Mark.
So the first question, besides the weakening industrial economy, and obviously in China, I'm wondering whether you are experiencing increased trade nationalism as well? Some have talked about, for example, Buy American or Chinese companies preferring Chinese vendors, etc . Do you feel any such pressure?
I can answer that one. No, the answer is no, not really. We haven't seen any clear indications that we are losing market shares in China to domestic competitors. In general, we don't see that. There are some issues related to the trade war between the U.S. and China relating to specific companies, electronic components manufacturers, for example, which we are monitoring closely. But for the time being, the reason for the decline that we are seeing in China has more to do with the general market situation in China than anything else.
All right, I understand. And how does the component situation look like for Westermo now? And should we anticipate a normalization of the order intake here as well in the coming quarters, or that could potentially be sizable?
Well, regarding the component situation, it has greatly improved compared to especially last year, but also compared to the beginning of this year. The issues are not completely gone. We still see very long lead times, still on several components, still up to a year or even more. But the availability of components has greatly improved. So we are not being affected. We are not being stopped, so to say, in our production overall by lack of electronic components. So that's very positive. Then your second question, as I understood it, was regarding the order intake for Westermo, and it's of course very hard to make predictions about future order intake.
And we know that the order intake in Westermo can vary quite significantly quarter from quarter, depending on larger orders and so on. And as I mentioned, we do see a stable and high activity in all our key segments. So I guess we are expecting a more normalized level of order intake going forward after some really, really high quarters beginning of this year, which were, you know, affected by special effects as we have explained before.
Yeah. And on the energy side, you signed with a major European electricity operator. Could you talk a bit about the approval process, why you were selected, and in general, about finding reference customers in different markets?
Yeah. Yeah, that was really a true lighthouse order for us in the energy sector. And as always, these big companies, they are very picky when it comes to selecting suppliers because it's a massive investment that they are doing into their infrastructure. So we have been through, and this is our Irish entity that won this order in the quarter. So we have been supporting this customer with the technical, you know, proof of concept. They have been testing.
The customer has been testing our equipment for, I would say, more than a year, so it's a long process, as usual. And finally, they have selected us, and I think the key reasons why they selected Westermo in this case was, number one, cybersecurity. We have very good cybersecurity functionality in our products. And then number two, the fact that we, our products are robust, and they are made and designed for these types of applications.
And, a follow-up on the energy side. So I saw a few days ago that one of the customers you highlighted on your Capital Markets Day last year, American Electric Grid, had been selected for a $28 million federal grant under the U.S. Department of Energy. So, as a counterweight to higher interest rates, inflation, and cyclicality in the economy, could you talk a bit about federal money, or in general, public money flowing into your markets? How do you see it impacting current demand, for 2024 and beyond?
Yeah, I guess I hadn't heard about that, but it's of course positive news. And it is something that we have seen actually throughout the pandemic, that government money is being spent into various types of infrastructure projects, be it rail or modernization of the power grid. So I guess that is continuing now, and it always takes time, of course, you know, from the point where the federal government announces that they will spend X amount of money until it actually becomes real projects and real business for us.
So that's quite a long process. So I think we are starting to see now that money actually drilling down to the real projects, and then we see that continuing. It's not only the U.S., it's happening actually in a lot of countries. Then the electrification is, of course, driving very clearly the need to invest in the power grid. So we look very positively on the opportunities ahead in the energy sector.
Yeah, and one last question. So you talked about cyber security being a major reason why you were selected by this European electricity operator. So you talked about Eviden in the report about the collaboration about cybersecurity. Could you talk a bit about it?
Yeah, that is a very interesting strategic partnership that Westermo has signed in the period with Eviden. Eviden is a company that is part of the huge Atos group, and Eviden are specializing on cybersecurity, and the part of Eviden that we are working together with are specialized in cryptography. So the collaboration is all about creating a solution together. So you take a Westermo switch, and then you take the software and knowledge from Eviden, and you combine those two into a solution where you can use encrypted communication. For example, for track side communication, which is a very hot topic right now. So we believe a lot in this partnership with Eviden. We are very happy about it, and it will create business opportunities, especially on the, in the track side area, going forward.
All right. Thank you very much.
Thank you, Mark.
Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one.
We are also, we are also seeing some questions in the chat here.
Yes, we have. But let's see if there's more on the phone, and then we will reply on the two questions that we got on the Q&A, written here by two listeners.
There are no further questions on the telephone lines at this time. Please proceed.
Maybe we should then respond to the questions that have been asked. David Holmer has asked the question: Does the strategic evaluation of Beijer Electronics also include the alternative of divesting the whole company? We have not said that we are doing a strategic evaluation of Beijer Electronics. We stated last report that there is a strategic work being initiated by the new leadership in the Beijer Electronics organization, and that is continuing. That is what we are stating in the report and also here earlier in the call. Then the next question from Karl Norén .
The lower order intake, and how it will impact the growth in sales for 2024. Yeah, I think that's for—this is related to Westermo, yeah. Overall, as I said before, we see a very strong market activity for Westermo. We are present in very good segments of the market, and we also have a very strong order backlog still in Westermo going forward. So it's, of course, impossible to predict what's gonna happen in 2024, but overall, we are quite optimistic, I would say, about the development in Westermo. It can, of course, vary a little bit quarter by quarter, but overall, we are in a good situation. And then the other question is about the sales growth of 44% year-over-year, gross margin, operational expenses.
I'm not sure about the question, Carl, but our gross margins, in general, I would say they are stable between the years. Then, of course, from quarter to quarter, it can depend on the mix of customers and products that's being shipped in a specific quarter. I would say that is our reply on your questions regarding the gross margins. Another question on the cash flow, when should we see that coming through? We are aware, and we have also stated that we are not happy with the development when it comes to working capital, especially then the inventories. As we stated in the report, it is because of the state remains of the component shortage situation.
You should be aware that many of the suppliers, we had a challenging situation about a year ago, and as being a buyer, you needed to place long time orders, and of course, we take discussions with the suppliers to adjust for that, but that has been somewhat challenging, and that is the reason why it takes some time to actually adjust. I'm talking of specifically on Beijer Electronics. So that is then impacting. We believe, going forward, that we will see a better cash flow going forward, but we won't give you a certain quarter or a certain time duration on it, but you should be aware that it's a high focus within the whole of our organization. So I don't think there's any more questions.
No, I don't think either.
Maybe it's time to conclude, Jenny?
Yes. Yes, with that, we will conclude the call. Thank you very much for listening in, and have a good day.
Thank you.
Thanks.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.