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Welcome to the HANZA Audio Cast and Teleconference Q1 2022. [Operator Instructions]
Today, I am pleased to present CEO, Erik Stenfors; and CFO, Lars Åkerblom. Speakers, please go ahead with your meeting.
Thank you. Good morning. And I wish you a warm welcome to this Q1 earnings call. I am Erik Stenfors, the CEO of HANZA, and I will together with my colleague, Lars Åkerblom, our CFO, present the first quarter 2022, a quarter which was stressful, no doubt, but also quite successful, as we will see. So we turn to Page #2 and the agenda. So we will start with a short introduction to HANZA. Then we will walk through with the highlights of this extraordinary quarter. Next, Lars will give the financial development. Then we have an outlook, look at the future. And it's an outlook that looks quite good. And then, if you have any questions, please save them and use our Q&A session at the end. So we turn to Page #3, a short introduction. We are a contract manufacturer, but with a special concept. If you look at the traditional contract manufacturers, they will provide one technology and one part to a product, whereas we brought together several manufacturing technologies. We have built small industrial parks. You see illustration to the right, and in such a park, we call it manufacturing clusters. We can produce both parts and do parts assembly. And this gives a number of advantages for our customers. And if we study the bar graph down to the left, this shows the annual sales since the start of the company. Here also we are different. Traditional contract manufacturers are closely connected to the general economy. That means that, for instance, last decade after the financial crisis and the Euro crisis, sales went down. And now in this decade when there is a strong demand, sales goes up. But we have been able to show steady growth during the 13 years we've been active. Margin, since we lower the cost for our customers, the product-owning companies, we can also keep a decent margin, and we have presented that our mature clusters, they have a margin well above 10% which is quite good in our industry. And if you look at the customers to the right, just see some examples. We are proud to have some well-known companies in our customer portfolio. But we don't aim at a specific sector, rather we have customers from different industries. And I think this is HANZA in essence. We have a solid concept, and that gives us this strong customer portfolio which in turn then gives the steady growth. So let's start with the quarter after this short introduction and Page #4. Of course, the main event this quarter was the horrendous attack on Ukraine. And we are all devastated by the humanitarian catastrophe that has followed. We are supporting refugees in the areas where we have operations, so we have also made donations. But from a business perspective, there's not been such a big impact. We need to have operations [indiscernible] customers in Russia or Ukraine. But there are of course, indirect consequences. We see that the material situation will be worse due to this invasion. And also there are new disruptions on the supply chain. This also gives us new opportunities. We have helped some customers who ended up with a broken supply chain, but we are glad to help of course, but above all we would like this war to end, but no major impact on our business. So we turn to Page 5 and look at the market the first quarter and the sales development. We have continued to bring in new customers. We have a customer from Norway, named AUK, and they have made a fully automatic plant grower, so you can in your house to grow plants or vegetables or herbs, quite interesting product. We also got new product from our existing customer, Swisslog. We are producing 86,000 storage boxes for an automated warehouse. And you see some other examples on this slide. So continued good new sales. If we look at the existing customers and products, we see an increase of demand in all areas, and especially glad to see that we are back in track in Germany. If you have been following us, we had a downturn during the lockdown, and now we have an all-time high order book. And we are also glad that we have a balanced customer portfolio. We have a principle that no customers should come up to 10%, so our sales, and if you add the 10 largest customer, they must be well below 50%. And this is really important because it's very easy to go from profit to loss if you have a few dominating customers. So let me turn to Page 6. So stressful quarter. We are finalizing our expansion program. In the midst of the pandemic, by the end of 2020 we decided to make an expansion program to be ready post-pandemic. We realized that there will be a new demand for our services and manufacturing after the pandemic. And we started in our segment main markets because this program road map 2021, we did a lot of work last year, invested over SEK 100 million in machinery. And now this year we are into the other markets. So we have a huge expansion program that we are finalizing. In Estonia, we opened a new factory, in March, state-of-the-art building, 12,000 square meters for complex assembly, next to our sheet metal factory, really good. And we also bought in Poland land and building that is adjacent to our existing factory. In Czech Republic, we are expanding our building. And we also have new premises in China. So lot of activities going on internally. At the same time, externally, we have had some challenges. Of course, the material situation, I think we've been quite good in this. Overall, we had even helped some colleagues. We had a large electronics company in -- contract manufacturer in Germany that we helped with some material. But having said that, of course the material puts a lid on our expansion. And then COVID continues to play tricks. We were down 20% to 30% in some of our factories due to staff shortage, in capacity, due to staff shortages connected to COVID-19. So in the light of this, we are really pleased that we were able to do all-time high deliveries this quarter. That was really, really good. And we kept the high quality, which is the trademark of HANZA. Also on a good note, we finalized integration of the 2 acquisitions we did last year. It was a smooth process, and it should be. We spent a lot of time -- and this is through excellent recommendation, if you buy a company you normally do legal due diligence, you do financial due diligence, but we also do an extensive HR due diligence. And this really helps because if you do that, if you see that the company cultures are similar, then you will have a smooth ride in the lease integration. And then there was a study from Royal Institute of Technology, they were describing how local manufacturing is helping the environment, lowering the CO2 emissions and it used HANZA and our cluster strategy as an example. It's available on our homepage, really good study. And our business model helps the environment then to reduce number of transports. But of course, in addition to that, we also work with the traditional activities, lowering emissions, lowering consumption. For instance, the new building in Estonia, we have solar panels that gives us 25% of the energy. But now we are really looking forward to hear about the financial development. And therefore, we turn to Page #7, and I leave the floor over to Lars.
Thank you, Erik. And I will present very solid and good development of HANZA in quarter 1. As Erik has mentioned, we have strong sales and good order intake, a high order backlog. The material shortage and the absence due to COVID has limited sales. So the sales could have been even higher without those 2 components. We also see that what we call the road map 2021 with the investment, as Erik said, of SEK 100 million in machinery but also in factories has an impact on the other market. I will come back to that. I will also present solid and good balance sheet that are improving according to net debt, et cetera. Let me start with the sales, and they are up with 45% year-to-year. And if we adjust for acquisitions and currency, it's a growth of 26%. And that is due to good new sales, both from new customers and also from existing customers. And we also have a part where the material prices have increased. That of course helps the sales a little bit as well. And we are now on a rolling 12 months of SEK 2.8 billion. But if you take just the quarter 1, we are well above SEK 3 billion in net sales. The earnings are up. We reached a little bit over SEK 40 million in EBITA, and that is 5% in margin. And also rolling 12 months, we can see that we have continued to increase the profitability. A year ago we were below SEK 30 million in the rolling 12 months, and now we are on SEK 162 million, corresponding to 5.8%, very close to the financial target of 6% that we have within HANZA. Move to Page 8 and look into the different segments. And what we can see, and Erik already mentioned that, is that the segment's main markets where we are more mature and earlier in finalizing the road map 2021, we have a very good both growth and profitability. We have adjusted the currency, 27% increase of sales with a 7.8% margin. Looking at other markets. In this quarter we have done a lot of things connected with the Roadmap 2021. The biggest part of that is of course to move the opening of a new factory and move all production from one factory facility, impart it to another. Also in the other markets we have solid growth of 24% adjusted for currency, better lower margin of 1.3%. And we said in last quarter after the full year report that this is temporary, and we still believe and we are confident is that when we are now finalizing road map 2021, we will see an increase of the margin in other markets and coming closer to what we have in the main market. By that, we move to Page 8. Looking into the cash flow and the balance sheet. And we have a positive cash flow from operation in this quarter. It is not as strong as we want it to be, but it's heavily dependent on both the growth and also the fact that we need to have and continue to have quite big stock, safety stock in order to be able to deliver. And as Erik also mentioned, we have been able to deliver with high delivery accuracy in quarter 1, which is also, of course, a big reason for the good result. We can see that the working capital needed to be increased by SEK 38 million compared to quarter 1 2021, where we had a positive cash flow on working capital of similar amount. The net bearing interest debt has increased since 2020, end of 2021. But if you compare it to the EBITDA and also compare it to the sales, it's actually decreased. So we are now running at 2.7x EBITDA and net debt. And in the end of 2021, we were around 2.9. And logically, when you have increased the result, EPS is also growing. So we have an EPS in quarter 1 of SEK 0.54 per share. And the rolling 12 month EPS is 2.53. And next year, we have the AGM and the Board has proposed the dividend of SEK 0.50 per share in -- to be decided on the AGM. And by that, Erik, I leave back to you and the outlook.
Thank you, Lars. Let me move to Page #10 and a look at the future. So as reported, we see strong order intake from all our customer markets. And therefore, we forecast continued strong growth and strong sales. Earnings already now in Q2, the new factory in Estonia is up and running. And in Q3, we will have the new expansion areas in Poland, Czech Republic and China up and running. So that's also why Lars indicated that we will see an upturn in the margin of the other markets. And in addition, as you recall, we bought the company by the end of last year in order to get some new competence and capacity. It was company buyers running on zero margin. We are working this year to load it, meaning that we expect it to turn into profit by the end of the year that will support in the main markets. Long term, we have built HANZA phases. We have now launched phase #4. It was supposed to be launched this year. Due to the pandemic, it's delayed 1 year. And we're also revising it a bit because of the war. That's what we can see, and that's really clear, that the trend towards regional complete manufacturing is increasing. And in conclusion, we will continue to see profitable growth. And the outlook is positive, both if you look at the short-term or the long-term perspective. And by that, we turn to Page 11 and open up for any questions.
[Operator Instructions] First question is from Mr. Adrian Gilani from ABG.
Just a few questions on my end. I'd like to start off in other markets regarding the expansion program. And just asking when you write in the report that earnings are expected to normalize in other markets during the year, just to clarify, does that mean we're going back normalized to 2021 levels? Or is it perhaps reaching the group target of 6% margin?
I don't know, Lars, if you like to comment first on that.
Yes, I can comment on that. I will not give you any specific figures. But what we said during 2021 was also that other markets were -- had an impact due to the fact that they are not as mature as the main markets, but also that we had expansion program also in 2021. So when we say that we will increase the margins, we really don't see any reason for other markets to differ from the main market, but that is not the promise, that the other markets will reach the double-digit profitability. But in the long term, we see really no reason for other markets to differ from the main market.
Okay. And what is the new premise…
Adrian, I think you got the lead that it will be probably better.
Yes. I got it. And once the premises are open in other markets and they're up and running, will it also require sometimes sort of ramp up capacity utilization? Or is the order book now strong enough that you can sort of open them with a fairly high utilization rate immediately?
So the second alternative apply, we are ahead with sales now, it's booming. So we need the capacity, will be utilized in Italy.
Okay. And also, is it possible to sort of quantify the added cost from the expansion program in other markets and sort of roughly where the margin would be if we exclude it for these costs?
I would say no. What would you say, Lars?
No, we haven't disclosed that, and it's actually not easy to measure as well. So, no, we cannot answer that one. And we had an old building, existing building in Poland, in Estonia, for instance, that we emptied and then moved to this new building. And there are a number of things which has improved there. We see that it's close to the sheet metal. Mechanically there are a number of things which improve the margin. And on the other hand, we have some extra cost. We don't quantify it in OTCs, but it's a combination of removing extra cost from this quarter and having a higher efficiency moving on.
Okay. And just a final question from my side on the cash flow. Obviously you had some buildup in working capital here. And you say that this is to an extent a strategic choice to hold more inventory, which we understand. But should we assume a reversal effect sometime later in the year? Or are you planning on sort of holding these types of inventory levels for the entire year here?
I can go first and I can say that…
Yes.
Sorry, Lars. So I was thinking that we had a forecast the beginning of the year, but then came this horrible invasion, and that put some new strains on other materials. So I think that it is really difficult to say right now. When you look at the electronics components side, they are talking about that it will be lasting for 2 years with the special situation. And then we have some specific materials. So I would expect, but my guess is as good as anyone's, I would expect it to remain at least 1 year more.
Next question is from Mr. Fredrik Nilsson from Redeye.
I want to ask regarding the strong organic growth in the quarter. Was it mainly due to strong market conditions? Or do you also see positive effects from increased back-sourcing following the pandemic already?
I'd say it's a combination of all. And Fredrik, we see that existing customers are increasing the volume. We see that we have good new sales. And on top of that, there's this trend of relocating manufacturing, which adds to the new sales. So I would say that it has to be a combination and deal with this quickly also.
Okay. Regarding other markets, should we expect you to turn focus to profitability in next year? However, considering the strong demand, I mean, I could also assume that you are going to expand further in capacity. Could you elaborate a bit on that? How much capacity do you have right now compare what's reasonable to assume for next year? I mean it's a tough question, of course, but if you can give us some discussion about that.
Yes. We try to -- of course, we do this, what we call phases, we try to plan for 3, 4 years in a row. This phase was very strange because of, first, the pandemic and then the war. And we built this company on the assumption of logic, that it's logical to have your manufacturing complete and close to the market, it's lower cost and it's high flexibility and it's less impact on the environment. But then you have also now the political dimension where we see that, for instance, China is a bit affected by Russia, and people from strategic reason and political reason would like to transfer manufacturing.
So to answer your question, it's -- what we have done now with this Roadmap 2021 was to make sure that we would have capacity for the remainder of this phase, phase #3. We should be at least one more year then. But having said that, we do see that the influx is so big now, it could be that we need some new capacity activities already this year.
But then again, it's a question whether the war will end tomorrow or it will stay for 2 years. So it's hard to give an answer. Then you asked about the profitability, if we will be focused on that. And I think that what we have stated also very clearly is that we would like to have a solid margin stating that we will keep 6% in upturns and downturns, which we can do in our concept, it's harder for traditional contract manufacturers. And then we have reached that point, then we are also ready for the next phase and for new financial goals.
Okay. You mentioned that you need additional capacity in Germany in the report. What kind of customers are driving the demand? And should we expect possibly a slight negative impact on margins during the investment phase?
Germany is a huge market. It's the largest economy in Europe, and I cannot give you specifics, but it's like we wrote, we have an all-time high in the order intake. And what is the limiting factor right now is the components, but we are also solving that. And then the next thing is the capacity. And yes, we bought the company Beyers in order to get more capacity, fantastic company that has a challenge and that has no free capacity. And these -- we expect to load this company this year and they will turn profitable.
Okay. But my interpretation of what you wrote in the report was that you might need even more capacities in Germany, is that right? Or was you talking about the capacity in Beyers?
Not for our original plan for Phase 3. But then again, things can change. So sorry to give you this politician answer, but the reality is turning quickly now and it is turning in our favor. So we need to see what kind of measures we need to do now in order to stay on top. But we do have capacity for substantial growth. And you see now from this quarter that even though we were standing on one leg, we were able to have sales well above SEK 800 million. So it means that there is still some free capacity.
[Operator Instructions] So we have no other questions.
Okay, then. I thank you so much for joining this audio cast, and I hope there will be a possibility to see you next week when we have the AGM. Thank you so much, and bye for now.
Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.