Ependion AB (EPEN) Earnings Call Transcript

Thank you very much, and welcome, everyone, to this quarter call. So as mentioned, we are at the call, I have myself, Jenikadal; and Joakim Lauren, CFO. We are both in Malmo today. The agenda is as follows. I will start by giving a general business update from the quarter then Joakim will dive deeper into our financials. And finally, I will give some concluding notes and also our outlook. And after that, we will open up for Q&A. So let's get into the report then. So the heading of this quarter three and significantly improved profitability. And I'm actually quite pleased over the quarter and especially the sales increase, which is now completely organic because the acquisition that we made of the Eltek last year they were added in June. So this is a completely organic growth now from this quarter and onwards. Sales increased by 22% to SEK 664 million, and the shipments were broad-based across both our focus segments but also across Japie and of course, it is the strong order intake from the last months that -- or months that now is being converted into sales. Order intake up 12% organically. As we have seen now for years in a row, we did see a drop in our train bookings in the quarter, and that is due to a seasonal pattern that we have seen now for quite some time. A lot of our train customers are based in Europe, and they are selling, of course, to the whole world, but the orders are coming primarily from Europe, and we see a vacation effect on the order bookings in the quarter. Book-to-bill of 0.85 in the third quarter. Thanks to the good sales numbers, our EBITDA increased significantly by 43% to SEK 95 million, and that is actually a record high EBITDA level with a margin then of 14.3%, so 2 percentage points up from same quarter last year. And this really confirms the operating leverage that we have in the business from higher volumes. When it comes to free cash flow, it actually doubled to SEK 60 million in this quarter despite, of course, the elevated inventory levels that we are seeing due to the electronic component situation. Of course, also with the high sales, we have high accounts receivables levels. And as you might have seen, we also did an investment in our production capacity in Vestima. So saying a few words about the component market situation. It is actually increasingly strained. We are seeing longer lead times, increased prices, some allocations, situations and so on. And we continue to have a lot of focus in our business entities on securing supply and of course, also to the extent possible, offset the cost increases through price adjustments. Due to the nature of the products, the Vestima business entity is a little bit more complex when it comes to component supply than bar electronics, but we are working very focused on this in both business entities. Looking at the external environment, the geopolitical uncertainty, of course, persists. But I feel that the organization is focused on what we can affect, so to say, our own profitable growth, building on the significant investments that we have done in recent years. All right. So let's deep dive a little bit into the 2 business entities then starting with Westermo, where we saw a sales increase of 30%, again, organically. Orders up 12%. We saw a very strong demand in the energy sector, and that demand is broad across both geographies and customers and applications. And I also already mentioned the train orders following the same pattern that we have seen now for quite some time, book-to-bill of 0.79 in the quarter. EBITDA increased to a record level of SEK 81 million with a margin of 18% EBITDA margin, I should say, of 18.7%. And that is, of course, thanks to the high volumes, but also our stable gross margins and the balanced cost spending throughout the business entity. And Veltec that was acquired last year as of June continues to develop very well. And we feel that we are strengthening our position in the energy sector with Valtech and the former Vista organization, so to say, working very closely together towards customers. As part of our operational excellence program in Westermo, we have, during the quarter, relocated our production from mines. That production came with the acquisition of Tech back in 2021. And now we are closing down the production part of that site and moving the production to Dublin to optimize our production footprint in Europe. And also as part of both our efficiency work, but also to secure capacity for future growth, we have invested in a new circuit board assembly line in the Swedish stores facility, increasing efficiency and capacity with that investment of SEK 13.1 million. Okay. And looking at Bayer Electronics, I'm pleased to see that the improved performance that we have seen now for some time is actually continuing. We saw a sales increase of 10% in the quarter and an order intake increase of 11%, driven primarily by the Marine and Manufacturing segments and a book-to-bill of 0.97. And if we look at the year-to-date order intake, we are at plus 18%. EBITDA increased as well to SEK 31 million with a margin increase also up to 13.3%. And if we look at the consecutive quarters, this is the third quarter in a row where we do see a margin improvement in this business. Good to see that the data center market showed strong growth. That's a key growth area within the Energy segment for Bayer Electronics, where we are exposed through several customers supplying into application. And when it comes to the new X3 platform, the transition from X2 to X3 is going according to plan. And of course, migration of existing customers is extremely important to us. But what is also encouraging is to see that we also create new business opportunities and new customers with this new platform. So that's also very positive. So with that, I'll hand over to you, Jorgen.

Thank you very much. And I will start with volumes, orders and sales quarter-by-quarter since early 2025. And as Jenny pointed out, the orders were up 12% and the FX effects of -- in the quarter is relatively small, adding about 1% in the quarter. And if we go to the sales good development, 22% in total. And also here, the FX effect is about 1 percentage point. Looking at the sequential development. Clearly, the orders are somewhat down. But as Jenny pointed out, we do have some seasonal effect and it's especially within the train segment. Looking at the sales just below what we accomplished in sales volumes in Q3 despite the fact that it's vacation period. So that is then positive development. And I do want to point out the year-to-date numbers. So after 9 months this year, we do have an order situation of plus 26%, of which then 19 is organic. And the sales part is plus 18% and 11% organic growth. So good numbers when it comes to volumes. Looking at profitability. I mean, the development of the profitability, we see a favorable development, I would say, in the last 2 years. The graph is pointing in the right direction. And if we look this quarter compared to last year, we are up 2.1 percentage points, and we are now in this quarter, showing a profitability above the 14% mark, which is very encouraging. And then looking at the EBITDA generation in money, you could say, also a good development. The graph is what we finance people really would like to see a growing trend. And if we compare year-over-year plus 43% big numbers. In terms of then the total income statement, the SEK 95 million on EBITDA is worth pointing out, which is a record level. Then EBIT is on the SEK 86 million or and we have a good flow down to net profit, where we see an increase compared to last year of 41%. Year-to-date, we are at SEK 143 million, very close to what we did in the full year last year. So this year is a good year compared to where we were last year. The earnings per share, SEK 444 compared to SEK 335 million last year. So good development there also. And we do want to point out that in the result of the quarter 3 this year, we have about SEK 3 million positive currency impact on the EBITDA. Cash flow, as Gene pointed out, we do see a quite good cash flow in the quarter, SEK 60 million compared to SEK 30 million last year. And if we look at where we are year-to-date, we are at SEK 91 million by end of September compared to last year, that was SEK 80 million plus. So positive development so far when it comes to cash flow. And finally, the net debt EBITDA ratio. Here, we continue to improve. We do see reductions of our debt due to our cash flow, and we have increased earnings. So now we're just below one in the ratio. So in conclusion, we do have a strong balance sheet. That concludes the financials. So over to you, Jenny.

Okay. Very good, Joakim. So finally then to summarize all this -- the strong sales growth translated into higher profitability and both business entities contributed to this financial performance. We also see that the investments that we have done in recent years, for example, in Valtech and in the X3 platform are supporting our growth now and also going forward. We have a lot of focus in the organization on securing components, electronic components and mitigating the cost increases that we see. And over the medium and long term, we are confident in continuing our profitable growth path towards our financial targets. And talking about our financial targets, then once again, as you probably are well aware by now, we have a growth target of 10% organic growth. And year-to-date, we are slightly above that at 11%. And Profitability-wise, EBITDA margin of at least 15%. There, we have taken some significant steps in 2026 towards that target. Year-to-date, we are at 13.1% in the quarter at 14.3%. So we continue to focus on reaching that target as well. And then finally, the outlook. Well, we believe that the Pennon is well positioned in attractive markets that have a solid underlying growth and we believe that we have good medium-term prospects for achieving both the growth and profitability targets. And given -- but of course, in the short term, as we mentioned before, it's clear that the geopolitical and economic uncertainty is still there. But given the 3 strong quarters that we already have in the bag now, we are confident in our ability to deliver profitable growth for the full year 2026. So with that, we would like to open up for Q&A.

[Operator Instructions] The next question comes from Jonathan Schubergfrom Danske Bank Equity Research.

Can you hear me?

Yes, we can.

Congrats on the stronger quarter. Some questions here, and I think I'll start with vegetable. So I think electricity was strong in this quarter, both order intake and net sales. Is this mostly Veltec, which to show? Or could -- or does Vestima electricity also having strong order in Secure?

Yes. So the Energy segment -- as we said, yes, we do see a strong growth there, both on orders and sales. It's -- I would say that it's primarily still driven by Veeloteco has a very nice position in the substation automation market, where there is a lot of change happening with automation and virtualization of substations. So that business continues to show very, very good performance. On the other hand, we are seeing more and more that the 2 businesses, so to say, work together, we can find joint business opportunities. And so that's a very positive development. And Valtech is actually acting as a door opener, you can say, to the electricity companies where we can then also offer the switches and routers from the vegetable portfolio. So I think the combination is actually a very good one.

Okay. And that sounds encouraging. Is that, I guess, I suppose just thinking on the gross margin, is Baltic affecting that in that case as they have lower margins, right?

We have talked about that earlier that Valtech's gross margins are somewhat lower than the average Vestima before. But -- so somewhat of margin pressure downwards is there or dilution, you could say, but it's not affecting the overall. And we talked about earlier about that we do see stable gross margins. So in general, we are not so concerned about that because they are contributing positively to the profitability of Estima as a whole.

Okay. Yes. I think helping to defense, I think you said that a doubling of sales if it is within reach during 2026. And I think that's naturally exciting. On expectations, is there anything internally, do you have to do or to see a material pickup, sort of like a certification or a pilot test? Or is it still very, very early days to say anything here on demand and outlook.

Yes. It's relatively early days to try and forecast how fast volumes are going to ramp up because we know that in all our industries, it takes time to from when you start talking to customers to when you actually start seeing orders and then sales. And I think this is particularly true also in the defense sector. On the other hand, we are seeing a changing behavior in the defense sector, where they realize they need to be faster in their procurement processes and time is really our essence to them. So we have a lot of interesting dialogues going on, not only with existing customers but also a lot of inbound interest from new customers. So very interesting customer dialogues, but very hard to say when is that going to turn into real business, but a good start, I would say.

Adding on to that, I mean we are building up capabilities. So we are adding resources step-by-step. And we are then providing also specific products for the segments, both in Western and also in Bar Electronics actually. So we are taking steps forward, I would say, every quarter.

Okay. That sounds encouraging. I mean, hoping to the electronics. I think you rolled about data center support, and he broke that SEK 80 million you've had in orders for data centers. Is that mainly the Q1 order that you talked about? Or is there any momentum in Q2, Q3?

That is part of that volume, but we do see order intakes during the year when it comes to the data centers.

Okay. encouraging. And just a couple more questions, remind and then I'll get someone else in. On working capital, you're pointing out that you're tying up a bit here, and I think most companies are affected by the composite.

We feel comfortable.

Yes, in getting the right components of supplies? Or should deliveries be affected here in any way, you think?

Yes. I mean this is 1 of the big issues that we have right now that that we are working hard on because the supply situation is tightening further. And so far, we have not seen any short shortages or production stops due to this. We cannot say that it's not going to happen. We don't see it coming near term. But given the situation, things can deteriorate. So we are keeping a very close eye on it and when we have to choose between building somewhat more inventory and our delivery capability towards our customers. We need to, as far as possible, make sure that we can ship products to our customers. So it is a delicate balancing act, and we are following it and working with it very, very closely.

Okay. Good. Just last 1 from my end, and I guess it's a follow-up on that. Your gross margins, it's stable right now, but as I've understood, the prices are going up a lot and at least now in the end as well. Do you think this might have a bit of an impact on your growth going forward? Or do you think you will need to get that?

I mean, so far, we have been able to push the cost increases through relatively well to our customers. It's impossible to do it 100% because there are long-term customer contracts and so on. But in general, customers see this. They understand it, they want supply. So we are working a lot with that. It's impossible to guarantee, of course, that we can push -- if the price increases on especially memory side continues to increase. There could be a limit, so to say, as to how much we can actually push towards our customers. But our intention is definitely to move all this cost increase over to our customers.

And that is general for both business entities, both Western and Bayer Electronics. They are fully on this matter.

The next question comes from Markus Almerud from DNB Carnegie.

Kinks here from Dan. I'd like to maybe start with the train segment. We know that order intake is lumpy here. Can you talk -- can you give us a little bit more color on kind of what your customers are talking about and what demands like because it's difficult from just the old trend because it's up and down so much.

Yes. And sometimes, I feel that you shouldn't even look at order intake so much when it comes to the train segment because we have seen this pattern for many years now that it can vary tremendously in between quarters. And that the variation has actually nothing to do with the overall demand, so to say, from the sector, which is actually quite stable and slightly increasing year-over-year as well. So if you look at the sales numbers, for example, in the train segment, they are a lot more stable, meaning that we are shipping out relatively stable volume quarter-by-quarter to our train customers. So again, it's just a pattern that we are seeing on the order intake side, it's the order behavior of our customers that we cannot really influence. And so I wouldn't I'm not worried about the quarter looking like this because we have seen it before and it doesn't reflect the demand side, I would say.

We talked about in Q1 when it was very strong from inside and from the OEMs that the financing for their projects seem to have been opening up a bit and that they were starting to kind of execute on the project that they have had for some time. Is this still the picture field?

Yes, we don't see that picture changing. These customers have healthy or even very healthy order backlogs that span over several years. Sometimes, they are struggling a little bit with their operations and really getting shipments out to customers. But in general, it's a stable business and we don't see a change there.