Earnings Call: Q3 2021

Oct 26, 2021

Hello, and welcome to the Bayer Electronics Group Q3 Report 2021. For the first part of this call, all participants will be in a listen only mode and afterwards, there will be a question and answer session. Today, I'm pleased to present Piers Samuelson, President and CEO and Joakim Loreen, Executive Vice President and CFO. Speakers, please begin your meeting. Okay. Thank you very much. And first of all, welcome to all of you listening in to our quarter 3 report 2021. And the way I see it, we have a positive report to present. And I will directly go in and Say that the most important thing for us is that we could see that there is a good and stable demand situation still In the market, and that is, of course, the most important starting point. It also means that we have a order intake For the Q2 in a row, that is passing SEK 500,000,000 And those of you that follow us north knows that we have Sales normally in a region of 400 plus. And if we then have an order intake in the level of 500, that tells Something about the future, if I put it that way. We also a couple of more words about the demand situation is that we can see That on the order intake, but also the different type of customer contacts that we have, we see Still that there is a good demand from most of the markets, if I talk about geography. I mean Asia Pacific has been strong for a while. Europe came for us last quarter, and we now also see some good signs coming up in the U. S. And also, we can see that A year ago, it was a little bit not that good when it comes to, for instance, the train segment because of there were delayment of project So one, but basically now we can see that most of the segments we're in as well is also starting to place orders as have seen the last 6 months. The overall, I would say there is a stable positive demand in most of the market. That is really the main message. And once again, I mean, we can also see on the order intake, say, that it's Equally spread in a positive way between the entities, Bayer Electronics, Vestimo and also Kredix. And that means also that we had a Sales increased in the quarter. We are stating here that it's 23%. But also, as we said last quarter, we still have a backlog Because of the component shortage situation. And we state that we roughly 10% of the sales, so we could have had 10% higher sales In a situation with no component problems, if I put it that way. We are coming in a little bit also, if I take a couple of words On I will come into the component situation a little bit later, but still that is far from solved. It also means that we after quarters in the pandemic, in 2020, we can now see EBIT It's starting to come up to more and more healthy situation. We are showing an EBITDA of SEK 32,000,000 And that is a margin of roughly 8%. And it's been and most of you know Also that our target is at least 10%. But if you now, we're starting to come very close to the target, by the way, and which It's, of course, compared to how it was 1 year ago, a very good and positive situation. A couple of words also on the different entities. Vestomu, they have also, during a long time, have had a stable situation, and they have, of course, been affected by the pandemic. But Still, they have been on a profit all the time. And this quarter, the good news on the order side was that Stadler, a German train manufacturer, placed a good order. And it's not only the order in such, but it Shows that they have been choosing us for their future trains. And that is, of course, also positive because in the next couple of years, Hopefully, we'll get some more orders from that company. We bought a company the German company called Eltek took in They are in our numbers from 1st April, and that continues to develop in a good way. And It seems to I mean, we are quite happy that we bought it, and we can see that it will be a very good fit going forward And complement the technology, especially on the train side. As you know, they are very good in onboard communication systems as well as Wi Fi onboard. Then I would say now in quarter 3, it's Vestimo that has had the toughest situation because of the component shortage. And I foresee that, that also will continue. But I also foresee that step by step, we will improve. But we don't foresee that for the estimate that this will be that it will be we will be out of the problem in the near future. One the other positive thing is that we could see Bayer Electronics. Once again, I mean, Bayer Electronics has been fighting for Several years. They were up in really good figures end of 2019. And then they had probably Came down again 2020 because of the pandemic. But now they have started to come back and show profit, which for Bayer Group is very important that both Vestome when Bayer Electronics started to perform. So personally, I'm this is probably the most important thing in the report It's that Bayer Electronics starts on money again, and we can see that, that will continue going forward. And as you can see on Bayer Electronics, both quarter 2 and quarter 3. They have a good order pace, which is good. We can also see that the Korenix, Some of you know that we more and more the electronics works together with Korenix, and we can see that the product offer It fits very well. And we can see now that more and more customers appreciate that. And so once again, I'm happy about The future for Beitronix in Kurentix going forward. A couple of words on the component situation. This, of course, creates a lot of you that is in this call. I know you follow other companies and you read quarterly reports In a lot of places here. But of course, we see that some specific components, then there is a shortage of those ones. You can then see that some actors take advantage and increase prices very heavily on those components. And you can also See that Sam is then putting some of the components end of life quicker than earlier forecasted. So it creates a lot of problems, but also a lot of work for supply chain in the different entities. Basically, in my position, I'm saying like this. We have a very professional organization, and they are handling this situation in a very good way. But still, we have situations where we have basically most of the product manufactured, but then we are missing 1 or 2 components, and then we have to wait to supply until we get that product or component. And this is, of course, a problem. Secondly, it's also there is frustrations around the transportations. And And also, I think all of you on this call is well aware of that situation. But it means also that you can't Not all the time you can trust that you get the deliveries exactly as forecasted. And that is, of course, means that we Take actions in different ways. And then what we do is that we try to increase inventories In order to be more safe going forward. And that, of course, increased inventories that affect the cash flow. And that is why we don't but we don't have a positive cash flow that we normally have. But I think it's a strategic decision for us And we have take that in for the whole group that we need to prepare ourselves for component shortage the next couple of quarters. And therefore, we buy more components and put them in the inventory side. I foresee that if you go another 2 or 3 quarters Ahead, probably the inventories will go down and then cash flow is coming back. So I see this as a sort of a short some effect. If we then continue look at the slides, you can see on the order intake. And this, I would say, if you look at the left In the order intake here, you can see where we are coming from. And that slide shows already from Q1 2018. And as you see, we had Q4 2018. We had 1 quarter with a $450,000,000 order intake, and that was actually a big order from That hit that quarter. But after that, we have not more or less been over 400, and then the PENEB came in 2020, Q2, Q3. And now you can see that end of 2020, it started to come back. In Q1, a little bit increased. But now Q2 and Q3, We are on the level of €500,000,000 order intake, which is, of course, very, very good for us. Compare that with sales level Of 412. Then everybody realizes looking into this that if we go forward, we will probably to come closer and closer going forward Not only all the way up to 500, but of course, we will be able to increase sales going along with better component supply. So basically, best figure for us this quarter is the order intake at SEK 500,000,000 2nd most important is actually Pay Electronics starting to earn money again. And then as an effect of this is, of course, that the backlog increased to the 850,000,000 And I would say a year ago, that backlog was down to 450,000,000 I think, something like that. So we have a very we have a quite good situation there. So by that, I'm handing over to Joakim to go through the group. Thank you, Par. I will then take us through the numbers For the group and our three business entities, we start with the group. And as We all understand from past statements, it's a significant profit improvement, but still the component shortage impact Our ability to deliver. Order intake of SEK502 1,000,000, sales for SEK 12,000,000 And an EBIT of EUR 32,000,000 corresponding to profitability level of 8%. As Paz said, the level of impact of the component shortage is around 10%. During the quarter also, we have seen a pressure on the margins Due to the fact that we have been forced to buy components where we Short term have higher prices. We need to go out on spot markets from case to case To secure our ability to deliver. And by doing so, we need to pay much more, In some cases, much more than we normally do for these kind of components. That puts pressure. We have in previous report also informed that we have adjusted our prices. There is a time lag Between the fact that we implement the prices and the fact that we will see effect in the book and Very much given the fact that we have already order confirmed orders, that is, of course, problematic to go back to customers and change prices, etcetera. So we have a time lag here. During the quarter as well, we have Had a wave of a COVID loan that we received in the U. S. Already Q2 2020. That one, we have been forgiven in the quarter, And that affects the result of about €9,000,000 And what we say is that The kind of impact that we had on the margin of the component cost increases, We partly offset that with the fact that we have got this waiver of the loan. Then looking at the activity level, We I think all you all know that we introduced a cost program in 2020. That in combination with a balanced Approach on activity levels, we have been able to maintain a reasonable level of the costs impacting the bottom line. We also want to highlight that we have had Relatively small but negative impact of currency on the EBIT of Just above SEK 1,000,000 negative in the quarter, then mainly transactional variances. Bottom, bottom line, we end at almost EUR 22,000,000 at the net income level. As Per said, free cash flow negative SEK 21,000,000 in the quarter due to the fact that we have been forced to Increase our inventories as Per laid out earlier. Desdemel, Here we state a positive market development and strong order intake. The order intake of NOK 2.90 in the quarter, Sales of $203,000,000 and an EBIT of $26,000,000 corresponding to 12.7%. We did earlier in the quarter send out the press release on the STAADLOR order of about SEK 50,000,000. And of course, that one is a good one to note in the quarter. But also underneath On other markets, there is a general market pickup. And so it's not only Stadler order in the quarter. We see it In other customers and wider, not only in the rail side, but also track side, We see a positive development in the market. As said, sales has been hampered by the component shortage situation, And we do have some tough challenges in Western, as Pa pointed out before. Still, the profitability came in on a decent level, the 12.7%, Given the fact that we have a good cost control in Westomu. Eltek acquisition has continued to develop well, and we have also in the quarter continued To launch new products in the for the Energy segment. Final comment here on Westemu. We are also now in the quarter opening up a new sales entity in Spain actually, Where we see good opportunities in the markets of train, trackside and energy, and this Entity will focus then on the Iberia region. Bayer Electronics, As Per said, it's good to see a profit on the bottom line for Bayer Electronics. It's a good profitability improvement And it's driven by the added volume, as we have been stated many times during the last years, I would say. Order intake of SEK 192 in the quarter, the sales of SEK186 and then an EBIT of SEK15 or 8.3%. If we look at the regions for Veyo Electronics, we saw already in last quarter that APAC The Asian region is we've seen a good traction and it continues. And we are happy now to say that the EMEA region is also Showing a good development, while U. S. Still it is on a lower level, but it's still improving, but still low compared to what we've Seen before. So there's more to come in Bayer Electronics. The component shortage has limited sales also in Bayer Electronics. But here we see some signs of improvements for Bayer Electronics In the quarter, the cost increases that I talked about earlier on the Group level is as well valid for Bayer Electronics, where the Waived COVID loan is basically compensating for the time lag that we have in the price increases. And as we have stated before, we have continued with the cooperation between Korenix and Bayer Electronics and that develops in a good way. Then finally, we have Krennix. We do see a growth in Krennix And a result improvement, but still we are just below 0 in this quarter. We had an order intake of 25,000,000, Sales of $28,000,000 and an EBIT of minus $0.7 If we comment on the order side, Compared to last year, it is in the growth. But if we look sequentially, it's kind of moving sideways Compared to Q2 on the order side. And that is mainly because of the fact that Taiwan had another Impact of the COVID, which led to that they had to introduce COVID restrictions during the summer, quite rough ones. That led to some postponement of projects that we otherwise would have expected to get. But still, we want to state that the pipeline is promising in Korenix. So there's no general Concerns, you could say, from the market perspective in Korenix. Also in Korenix, the component shortage has limited the sales. And by that also, of course, the profit generation. So last quarter, we were just above 0 in Kuremex. Now we came in just below 0. You could say that we are hovering around breakeven in Krennix at the moment. And also here, of course, Needs to be stated that the cooperation between Bayer and Krennic is working well. That kind of concludes The numbers, it's then it's over to you, Paolo. Thank you very much, Joakim. A couple of comments Quickly, that I want to state is that we have discussed I mean, when you have the component situation as we have And you get heavily price increases on the supply side. It's, of course, important for us to pass those Cost increases over to our customers. And we have already talked about time lag when you increase prices. But we can now foresee that Q4, but I would say mainly Q1. The next two quarters, you could see you will see pricing is the price increase Effect on the top line as such. So I think it's important it will come step by step the next 6 months, and you can see it. And the way we see it, we will also continue to increase price. So probably and not probably, it will come new price increases end of this year, beginning of next In the different entities. And that's it's never fun to do that, but you need to do it and then we are on to it. And I would say that The salespeople are handling that in a good way. During Q4, I will not go in to put the forecast on Q4, but we are in the situation. You can if you look at the order intake and the backlog, I mean the level we can perform in Q4 is more or less depending on how much we can deliver. And we don't have any Big restrictions when they come to total capacity. I mean, we have installed capacity in all entities to deliver at least On the 500 level on a quarterly basis as such. So it's very much now depending on how much the component shortage will affect The quarter. However, I'd state that I think we have a better situation for you Q4 compared to Q3. That's so much I'd like to say going forward. But as you also know is that we are quite volume sensitive. And you can see now that When Bayronik started to come up to a little bit another level on sales, they directly start to earn money. And we cannot foresee and it's the same, by the way, with VESTOMO, but they are on a high level, and it's a little bit the same on Korenix. So for us, of course, now the big drive is to continue to increase sales every month and every quarter, and we have now Order intake and backlog in order to do that. And then there will be quicker effects on the EBIT. And those should be once again that followers knows exactly what I'm talking about. And then a quick word on Kuremex also. There is a very good Pipeline when it comes to projects on but all both in Taiwan, but also some other places. So I foresee also Now when it starts to open up a little bit again, hopefully, we will see some good orders coming in on Kratnix as well In the near future. When it comes to outlook, I mean, the only slightly change have done is that we're now we the group view, I mean, you can you have seen it before, full year 2021, we said it should be better than 2020, Should be. But now we say it should be significantly cantileverters. So that is what we have stated in this situation. And that gives us sort of perhaps a small hint on what we believe going forward. So Summary, order intake on a good level, demand is there. Bayer Electronics start to earn money and complement the estimate in a good way. Cash flow negative because of inventory buildup, but that is to ensure that we can start to deliver even in the components shortage situation. We will still have component problems in Q4, but probably not that much as Q3, if I put it that way. And that concludes our presentation, and then I open up for questions. Thank you. After you announced, please ask your question. Our first question comes from the line of Markus Elmore from Pennsylvan. Please go ahead. Hi. Can you hear me? Very well. Hi, Markus. Okay. Very good. Very good. Nice numbers, I'm going to say. If we start by the profitability and the EBIT, so I mean, we talked before The order intake is significantly higher than sales. And then once you get the orders coming and converted into sales, then you would see EBIT Sort of lift up, which is what we're seeing now. And we're also seeing order intake is still significantly Higher than EBIT. So or than sales. So is there any reason to assume that we wouldn't see the same kind of effect as that That is compared as well. That is, this should continue, right? Yes. I mean, yes, a short answer, yes, it will continue. I mean, we It's a little bit like you call it the old no zero based budgeting is that we have a cost level that will probably Slightly increased Q4 because now we start to travel and go to exhibitions and things like that again, especially in Europe. But we are as soon as we can get more sales as we take from the order intake into sales, Then and you can we have also say that we have normally gross margins on the level of 50% something. Then you can calculate yourself that a lot of that come down to the EBIT line as long as we so that is you're correct, and I'll just confirm what you're saying, Markus. And I mean simply all else Paul, so well, I mean, you've already answered that, I guess. I mean, 10% of 10% higher sales if components would be there and then a gross margin of 50 On that is basically what the effect in EBIT that we're missing on that. Yes. So my second question is On Bayer Electronics, where sales is coming up and order intake is continuously strong. Any specific areas which are sticking No, not really. It's more overall. I mean, we I think that in the beginning of the Yeah, Asia Pacific was there quicker. But and during the quarter 2 and 3 and mainly 3, we can see now that EMEA Europe is back A little bit to start to close-up to the 2019 levels. And I think that is probably the most important thing for the quarter is that The European business is performing in a good way. But otherwise, I would say it's generally speaking, in most Markets that have increased. It's not one specific market, the 2 markets. It's more or less generally speaking. And We also could see now that there's thought to be good signs. Also, there is some increases in the U. S. Already, but we now foresee the next 6 months or the U. S. To come up a little bit better level. And they normally in the U. S. Sell more of the X2 Extreme products that we have higher margins as well. So Therefore, I hope I'm looking forward to that actually. Okay. Okay. And in terms of end markets, it's the same thing. It's a broad recovery. So no Specific end market, which is very strong. I mean, I assume that shipping, for instance, should be very strong. We saw the 4 gs intake numbers keep coming up in the ship Yes. But generally speaking, it goes all along the 4 major segments in the Bayer Electronics. I would say all of the segments Quite okay. Okay. Okay. And then my next question is about the Energy segment. So you said you released some new products in that segment. Anything else you can share with us in terms of momentum and interest, etcetera? Yes. So what we can see is that now you're specifically coming in, I think, the Westmer business as such. And we can see now that they have done a very good well done well in Introducing the new products. Probably a little bit slow into sales because of it's difficult to sell to new markets you can't meet customers. And but I have done a very well good job in with the product, but also Digital selling, if I put it that way. But I would foresee that during second half of twenty twenty two, we can talk about more substantial Changes, so sales into the energy segments with new products. But I think most of you that follow us, If we have new product coming in coming out that has been coming out the last 6 months, for instance, then to get those specified at customers and get them in, it takes 6 months, 12 months, 18 months and so on. So it will take some time. But I have said Several times that wait another 3 to 5 years, then I think the Energy segment will be passing the Train segment, by the way. There is very good prospect into that segment. Okay. Okay. Excellent. And then one final question about the components. You said that a little bit, but you are in Electronics, you said See signs of some easing of the difficulties. Is that a general comment that you also see investor moves? Or is it I mean, are there any signs that this is kind of starting to resolve itself or work Through or however you want to put it? I'd say the short answer would be no. We don't see that it we see still a lot of And then we said mainly in the vesting segment. Then, of course, you try to work it through. You're trying to find alternative suppliers. You do some Change of specification into the product. So you need to do you do all these things. And you buy very expensive some of the Key components have put them in inventory. So that's why you can see in the sales numbers, for instance, by electronics that they have been Passing most of it. But we have still a situation. When I were younger, we talked about just in time deliveries and things like that. And that, we can't talk Not at all at the moment. So it's a little bit to grab the components you can get. So and I can't see That in the next 6 months have a normal stable situation. But we have been better and better to handle This rough situation. That's why I think we could we can handle it in a step by step better way. So as you can see, we are selling For over SEK 400,000,000, I think we will sell more in quarter 4, but we could have sold even more. So that is so but Once again, I mean, you can read all different reports, and you can see that there is a long way to go before we are there. Then, of course, on top of that, you have these transportation Problems as well that also affect the supply chain. But it will take a long Before we're coming back to sort of just in time deliveries, that's the way I see it. Okay. Perfect. Well, thank you very much. Thank you. And we have one more question from the line of Mark Sheusat from Redeye. Please go ahead. Hello, pardon, Joakim. Hi, Mark. Hello. I hope everything is well with you. You have already touched upon some of my Question. But the first one, you have now 2 quarters in a row Of an order value exceeding $500,000,000 Could you elaborate a little bit how much is the order Take boosted by the fact that your customers might place orders for delivery longer time ahead than usual because of the longer lead times. That is, of course, a good question. And it's not easy to I said it's not easy to have a good easy answer on it. But I would say this. There is an overall good activity by the customers. We were more afraid of inventory buildups, I would say beginning of the year, if you look at the big customers that we are supplying to. And now when we try To get them, talk to our customers. Do they really use our products and so on? We can see that the products that we are supplying are not ending up in their inventories. So but I'm sure that there are some effects somewhere of this. But generally speaking, I would argue and stress point, I think that most of our customers are really having a good demand situation themselves. And we can see also that there is a push from or pressure from our customers that they want to have more supply than we Good supply. So that also tells and they don't want that because they put it on the inventories. So I would Definitely to state that the way I see it is that there is an overall demand on that level from the majority of our customers. All right. All right. And a question also on the order intake for Bayer Electronics You said that it was general demand, European order intake had increased, but Asia Pacific Has been a strong area during 2021. So I've read in some Q3 That the Chinese demand is very strong, especially in the industrial market. Do you see the same thing for Bayer Electronics right now? Yes. I said we see that. We see that. And but now we as I mean, We are not that big compared to other people over there or other companies over there. But yes, we definitely see there has been for At least from Q beginning of the year, there has been a good demand situation in China, that's for sure. And obviously, When it comes to infrastructural things, they are building a lot over there, and we can see that there is a demand. And we can see we are landing orders. And by the way, More and more also from our good product in the X2 areas, that is also important to note. So earlier, a couple of years ago, it It's more of our low margin products over there, but it's thought to be good, better and better mix there as well. That's also good news. All right. And one last question. You talked a little bit about it that you see the Power Distribution segment be perhaps the largest sales segment in a few years. Now when you are out Meeting customers again at trade fairs. How is the response on the new product line such as Merlin? I said so far, I mean, it has been very well received. And the important thing now is to get those products into tests So we can see that when they're checking up the product, technically, that they're meeting the demands. But I'm quite sure that they will do that. And so we are quite that will be very interesting to follow that side. And I think that the more you read about the energy sector And whatever goes on politically, I mean renewable energy in different ways, wind, solar energy and so on, It's coming more and more. And then they need equipment like this in, for instance, the substations around the world. So that's why I'm so optimistic Of this segment, if you take for another 3 to 5 year perspective, because a lot of countries need to change this type of equipment and So that's and that's why, of course, it starts with good products. So yes, I'm quite happy about that. Okay. Thank you very much for taking my questions. Thank you. Thank you, Mark. And we just have a Quick follow-up from Markus Alcorn from Pensacola Bank. Please go ahead. Yes. Hi, Markus again. Just wanted to follow-up on that last On the energy sector substations. So just on the ground, when you discuss these with your customers, I mean, is this Based on you said that this needs to happen. Everybody knows that this needs to happen at some point. But where are we in that journey? So How are your customers discussing this right now? Because we read in the papers about difficulties with energy and we have A lot of energy up north in Sweden and not too much in the south, etcetera, etcetera. So everybody knows that this needs to happen. But where are your customers in this? So is it at this are we at the point where this is rationale, so this needs to happen? Or are we approaching a point where this has It would be interesting to hear some color around that. I'm sure that there are other people that are more expert Sami, by the way, I see it and also from where we are sitting in Bayer Group, I think it hasn't really started to happen in BIG yet. You can see still that Yes, the Swedish discussion, but also in other countries where the energy prices are very high. And one of the reason is that they haven't really the capacity To distribute energy within countries and between countries in a good way. So there, they need to do more. And for instance, Down here in South Sweden, if I buy a car and load as a Tesla, for instance, and then I load it with it should load up the battery, It will be coal kraft from Germany that will be that will be used on the electricity. So There is a big step to go. And that's why I'm always saying 3 to 5 years ahead because before they have specified exactly what to do, Then to get projects to do it and then really do it, it takes some time. So I would say that it sequentially, it will increase step by step, Hopefully, starting second half of twenty twenty two. And I'm not only talking for our products. But once it starts, then I think It's not a never ending story, but then it will be 5, 6, 7, 8 years to go because there is a lot of demand To change a lot of things in the world. But I would state on your question, Marc, that's a good one. It hasn't really started yet. That's the way I see it. And how long does it take? If we stand here today and then you're launching new products and they've started to do And they started to do specifications, etcetera. How long does it take to build a substation? So when should we realistically see orders from this? But I think it's Two things, Markus. First of all, I don't think you need to build completely new substations. You normally need to upgrade some part of it and some sort of equipment, for instance, the switch Yes, and things like that. So therefore, it could go rather quick once you start because normally that tries to utilize the Existing energy transportation places or whatever we call it. And so But then, of course, that will be completely new one as well. But generally speaking, it's more also to have the technical Solution. And as such, there are normally system integrators into this as well. But short answer there, Marc, First of all, you need to decide now we do it. And secondly, exactly what type of technical solution. And then once you are specified, And I'm sure that in a lot of the big companies, they will utilize the same solutions in a lot of substations. So once again, it's not that you need new substations. You need to upgrade a lot of the existing substations. I think that's important. Okay. So basically, once we're there, once it's specified, it's we can see quite, I mean, Quite lumpy, quite fast rapid uptake of bills. Okay. Most of the business we have, Markus, on the Total Bay Group is that once you are specifying with the right type of product, then normally, they will continue to order from us. So that's what see, no. I've seen the last couple of years actually. Yes, perfect. Well, thank you very much. Thank you. And as there are no further audio questions, I'll hand it back to the speakers for closing remarks. Yes. First of all, thank you very much All of you and also for good questions and a good discussion. And now we will continue to try to work with supply issues in order to get All the projects out from the group. And otherwise, we are looking forward to the next couple of quarters and wish you all a very good day. Thank you very much. Thank you. This concludes the conference call. Thank you all for attending. You may now disconnect your lines.