Ependion (Stockholm:EPEN) Q3 2026 Earnings Call

0:00 Welcome to Appendion Q3 Report 2026 presentation. During the Q&A session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now I will hand the conference over to the speakers, President and CEO Jenny Shaddal and EVP and CFO Joachim Laurien. Please go ahead.

0:23 Thank you very much and welcome everyone to this quarter three call. So, as mentioned, we are at the call. I have myself, Jenny Sjödahl and Joakim Loren, CFO. We are both in Malmö 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's report is strong organic growth and significantly improved profitability.

1:14 And I'm actually quite pleased overall with the quarter and especially the sales increase, which is now completely organic because the acquisition that we made of Velotech 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 664 million Swedish kronor. And the shipments were broad based across both our focus segments, but also across geographies. And of course, it is the strong order intake from the last six months or nine months that now is being converted into sales. Order intake up 12% organically as we have seen now for three years in a row.

2:05 We did see a drop in our train bookings in the quarter and that is due to the 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. Booked a bill of 0.85 in third quarter. thanks to the good sales numbers our EBITDA increased significantly by 43% to 95 million Swedish kronor and that is actually a record high EBITDA level with a margin then of 14.3% so two percentage points up from same quarter last year And this really confirms the operating leverage that we have in the business from higher volumes.

3:06 When it comes to free cash flow, it actually doubled to 60 million SEK 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 Investimo. So saying a few words about the component market situation, it is actually increasingly strained. We are seeing longer lead times, increased prices, some allocation situations and so on.

3:54 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 Vestamo business entity is a little bit more complex when it comes to component supply than Bayer 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.

4:48 All right, so let's deep dive a little bit into the two business entities, then starting with Vestromo, 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 81 million Swedish kronor with a margin 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.

5:50 And Velotech 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 Velotech and the former Vestamo organization, so to say, working very closely together towards customers. As part of our operational excellence program in Vestamo, we have during the quarter relocated our production from Mainz. That production came with the acquisition of Eltec 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.

6:38 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 Stora Sundby facility, increasing efficiency and capacity with that investment of 13.1 million Swedish kronor. 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.

7:30 And if we look at the year-to-date order intake, we are at plus 18%. EBITDA increased as well to 31 million Swedish kronor with a margin increase also of up to 13.3 percent 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 this application. And when it comes to the new X3 platform, the transition from X2 to X3 is going according to plan.

8:24 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 Joakim.

8:45 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 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 seasonals effect and especially within the train segment.

9:36 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 a positive development and I do want to point out the year-to-date numbers so after nine months this year we do have an order situation of plus 26 percent 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, the last two years.

10:27 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 graphs 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 95 million on EBITDA is worth pointing out, which is a record level. Then EBIT is on the 86 million or the 13%. And we have a good flow down to net profit where we see an increase compared to last year of 41%.

11:42 Year to date, we are at 143 million, very close to what we did the full year last year. So this year is a good year compared to where we were last year. The earnings per share, 4 kronor and 44 över compared to 3.35 last year. So good development there also. And we do want to point out that in the result of the quarter three this year, we have about three million positive currency impact on the beta line. Cash flow, as Jenny pointed out, we do see a quite good cash flow in the quarter, 60 million compared to 30 last year.

12:32 and if we look at where we are year to date we are at 91 million by end of September compared to last year that was 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, over to you Jenny.

13:18 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 Velotech and in the X3 platform, are supporting our growth now and also going forward. We have a lot of focus in the organizations on securing 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.

14:14 And year to date, we are slightly above that at 11%. Profitability wise, a beta 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 depend on 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 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 three 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.

15:29 So with that, we would like to open up for Q&A. If you wish to ask a question, please dial pound key 5 on your telephone keypad. To enter the queue, if you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Jonathan Schuberg from Danske Bank Equity Research. Please go ahead.

15:53 Hi, it's Jonathan here at Danske. Can you hear me?

15:55 Yes. Yes, we can.

15:56 Hi, Jonathan.

15:57 Perfect. Hi. Congrats on a strong quarter. Some questions here, and I think I'll start with Vestimo. So I think electricity was strong in this quarter, both ordering to GAM, that says. Is this mostly VLTEC, which, you know, again, steals the show, or does Vestimo electricity also have a strong order intake here?

16:22 Yeah, so the energy segment is, as we said, yeah, we do see a strong growth there, both on orders and sales. I would say that it's primarily still driven by Vialotech, who 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 two businesses, so to say, work together. We can find joint business opportunities. And so that's a very positive development.

17:08 And VLOTech 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 Vestibor portfolio. So I think the combination is actually a very good one. Okay.

17:27 Yeah, that sounds encouraging. Is that, I guess, suppose... Just thinking on the gross margin, is VLOTIC affecting that in that case as they have lower margins, right?

17:41 We have talked about that earlier, that Velotec's gross margins are somewhat lower than the average Vestimo before. So somewhat of margin pressure downwards is there, or dilution you could say, but it's not affecting the overall. And we talked 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 Vestma as a whole.

18:18 Okay, yeah. I think, hopping to defense, I think you said that a doubling of sales is within reach during 2026, and I think that's naturally exciting. On expectations here, is there anything internally you have to do 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?

18:47 yeah it's relatively early days to try and forecast you know 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 of 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, you know, when is that going to turn into real business, but a good start, I would say.

19:42 Adding on to that, I mean, we are building up capabilities. We are adding resources step by step, and we are then providing also specific products for the segments, both in Vestamo and also in Bayer Electronics, actually. So we are taking steps forward, I would say, every quarter.

20:05 Okay. That sounds encouraging. Hopping to Bay Electronics, I think you wrote about data centers report and you wrote that 80 million SEC 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?

20:28 That is part of that volume, but we do see order intakes during the year when it comes to the data centers.

20:39 Okay. Encouraging. And just a couple more questions from my end, and then I'll let 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 components, right? Yes. Do you feel comfortable in getting the right components and supplies, or could deliveries be affected here in any way, you think?

21:07 Yeah, I mean, this is one of the big issues that we have right now that we are working hard on because the supply situation is tightening further. And so far, we have not seen any 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 change. 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.

22:03 Okay, good. Just the last one 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 gross margins going forward, or do you think you will mitigate that situation?

22:26 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.

23:10 And that is general for both business entities, both Vestamu and Bayer Electronics. They are fully on this matter.

23:20 Perfect. That's all for me. Thank you. Okay, thank you. The next question comes from Marcus Almarid from DNB Carnegie. Please go ahead.

23:33 Yeah, hi, Jenny. Hi, Joachim. Marcus here from DNB. Hi, Marcus. Hi, Marcus. I'd like to maybe start with the train segment. And we know that order intake is lumpy here. Can you give us a little bit more color on on kind of what your customers are talking about and what demands like. Because it's difficult to say from just the old trend because it's up and down so much.

24:01 Yeah, and sometimes I feel that you shouldn't maybe 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 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. Again, it's just a pattern that we are seeing on the order intake side.

24:47 It's the order behavior of our customers that we cannot really influence. And so 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.

25:05 We talked about in Q1 when it was very strong from their side and from the OEMs that the financing for their project seemed 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 you feel?

25:27 yeah we don't see that picture changing these customers have healthy or even very healthy order backlogs that you know span over several years and sometimes they are struggling a little bit with their operations and really getting you know shipments out to customers but in general it's a stable business and and we don't see a change there okay moving on to to ng can you

25:57 Talk a little bit about them. Very strong. What is it just like geographically, North America in particular? And then I have a follow-up question on that.

26:09 Yeah, so as we said, the uptick in energy is actually quite broad. It's both Europe and North America. And when it comes to Velotech, they are working with some of the big system integrators on the primary energy side, such as Siemens, Hitachi, GE, and so on. And in particular, Siemens have... designed in VLOTech solution in their substation automation and virtualization portfolio. So there we have seen a stable demand and that is also in countries like Egypt for example that we are seeing orders coming into VLOTech. So it's pretty broad but I also see that things are starting to move in North America.

27:02 where we are participating and seeing a lot of opportunities there, although it's still early days, there's much more to do. But no, I think overall it's looking good.

27:17 I mean, reading about the utilities and their statements, we know that the transmission is a bottleneck. So digitalization is really a key for these guys. Is it maybe the market driving here or do you feel like you're also gaining market share and then getting a bigger share of the wallet?

27:46 That is hard to tell. We don't have really the granular business intelligence data to support that. We know of course that the sector as such is is growing quite significantly. But I also feel that VLOTech, thanks to the good work that they have done for several years in positioning themselves with these big players and in different types of industry organizations, so to say, that actually set the standards in this industry, they have been there early on and they have been influencing specifications and so on. So they are in a good position, definitely.

28:26 And then maybe a quick one on X3. So there are many new customers which are coming here, but there are also some older, so X2 customers which are converting. Is any of these two going better than you expected or are both in line with what you had planned?

28:49 I think the transition is going according to plan. Of course, we want to gently push customers to move on from X2 to X3, but we also want to be careful to do it in a way that they feel confident and choose to stay with us, so to say. When it comes to new customers, of course, we thought that we would see, of course, customer interest and new customers coming with the X3 line, but it's, of course, difficult to say beforehand. So there I think we have seen a good development, maybe even a little bit better than expected in terms of how much interest it has drawn from new customers. Okay.

29:33 And then finally, maybe if you can just, if there's anything you can say about the M&A pipeline that you're having. The balance sheet is becoming quite stronger and stronger. uh and there is room but can you talk a bit about the pipeline that you're having

29:51 Yeah, all I can say is that we are working intensively with our pipeline. And as you know, there is, of course, only a small percentage of all the companies that you're looking at that actually eventually come through as a real acquisition. And we are continuously focusing on it. We have a healthy pipeline and we are working on it.

30:17 Yeah, I mean, there's a lot of things happening underneath the hood. But you looking at us from the outside, you don't see anything. But we can assure you that we are active. We are stating that in the report. And when things happen, then you will know.

30:35 Perfect. That sounds good.

30:36 Thank you. That's all for me. Thank you, Marcus. As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Henrik Alveskog from Red Eye AB. Please go ahead.

30:52 Okay. Hello. Hi, Henrik. Hi, Henrik. Hi. Hey. So, yeah, you saw some recovery in the manufacturing segment. And I'm just curious, do you think it's like a general recovery or is it more that you are winning more deals?

31:20 Yeah, that's a tough one to answer. I would guess that it's more of a general recovery at this point because this sector has been very weak now for quite some time across all geographies. And now we are seeing slightly more activity there, which is, of course, good because investments need to happen also in production sites all over the world. Hopefully we are, of course, we hope that we are taking market shares thanks to X3, but I think it's a little bit too early to say.

31:52 It's one quarter, so you can't make a trend out of one quarter, but it's encouraging, of course, to note it.

32:02 And did you see an improvement across the regions in manufacturing?

32:11 I would say that it's... predominantly EMEA and also in Asia, I think. That's what I have in mind.

32:28 And then just if you could give us like a ballpark number of the mix between X3 and X2 sales at the moment. Not just for manufacturing, but overall?

32:45 Yeah, you mean, you mean the phase in phase out?

32:49 Yeah, yeah, I think the portion of x3, roughly 10%, I would say, to date of comparable products, so to say, we don't have x3 offering to cover 100% of the x2 offering. But when you look at like for like, so to say, where we have a comparable offering, it's roughly 10%.

33:08 And it's basically according to our plan.

33:20 I noticed on Velotech's homepage that they are well they're marketing the some of the best products there and I also noticed that they I think they have added the industry segment track side I don't think it was there before but you talk about how Velotech and Vestimo will cooperate here?

33:44 Yeah, I think you have a better view on Velotech's homepage, a more updated view than I have. Well, the truth is that Velotech have had customers in the trackside segment even previously, even when we acquired them. So they have a small portion of business there. But obviously now, as we are one family, we are looking into further opportunities with that portfolio. And strategically, of course, we are also looking at how VLOTech should develop in the future, supporting the Vestimo segment, so to say. So yeah, it is a small segment. There is opportunity there, but the big focus of VLOTech is and will be the energy sector because there's so much potential in that one.

34:36 And then just briefly on the defense area, could you say something about your customer base there? Is it several small accounts or are you also working with larger clients and projects?

34:56 It's a mix. We have, let's say, one very significant customer, which is forming kind of the basis for this business at the moment. But we have seen a lot of inbound interest and we have actually received a couple of orders almost out of the blue in both in the US and in India, for example, for the defense sector, just because we have communicated that we are active in that sector. So as I mentioned before, overall, I think it's going to take some time for us to really see volumes from the work that is ongoing right now. But there are also more opportunistic short term businesses available in different parts. So it's going to be a combination.

35:45 All right. Well, thank you very much. That was all for me.

35:48 Okay.

35:49 Thank you, Henrik. There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions or closing comments.

36:00 Yeah. So we're moving over to written questions. And we have one here from Josef at Grenspecialisten. Could you give some guidance on the train and trackside segments? Seasonality is obvious, but what is driving the segment in coming years? New products or simply delivery on strong order backlog from larger customers? It's definitely both. We continuously need of course to book new orders with existing and new customers. The train segment as I mentioned before is a relatively stable one and we have a strong position. There is of course much more to do there but and that of course we are working on. Trackside is a segment where there is a lot of investment bound to happen, especially in Europe in the next years. That is driven by cybersecurity demands and by the fact that the European rail system is very old when it comes to communication backbone.

37:10 signaling systems and so on. And there is a clear intent from the European Union to achieve much higher interoperability between the European countries, which means that investment needs to happen in signaling systems and trackside communication. The other thing that is driving that is the digitalization of the whole rail system. This whole industry has been quite slow when it comes to achieving digitalization because it's a very complex system with a lot of legacy products and old infrastructure. but step by step that is improving now and it is happening and we are seeing that moving now a little bit faster than it has in the past.

37:59 So I think it's a combination of us having a strong position with a strong offering but also the market in pockets needing to do investments in modernizing and digitalizing this whole rail system. so we don't have any more written questions so with that thank you all for attending and have a great weekend