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Hello, and welcome to HANZA Q3 report for 2021. [Operator Instructions] Today, I am pleased to present CEO, Erik Stenfors; and CFO, Lars Akerblom. Please begin your meeting.
Thank you, operator, and thank you all for joining this audio cast. I'm Erik Stenfors, the CEO of HANZA, and we have several interesting things to review today. So let's go directly to Page #2. Here is the presentation of today. I will start with a short strategic recap to put the latest development in context. Then we will walk through the highlights of the third quarter. Next, we will look at the acquisition we did just a couple of weeks ago, a company named Beyers. Then I'll leave the floor to Lars Akerblom, our CFO, who will talk about the financial development and also the financial impact of this acquisition. Then we'll have a look at the future and we end with a Q&A session. We move to Page #3. We started the company in August '08, and then we focused on Nordic customers and we grew rather rapidly. We see the graph to the right. After 10 years, we were almost up SEK 2 billion in annual sales. At that point, we decided to take the next step and launch our concept in a large economy of Europe, Germany. We did so by the end of summer '19 and worked with expansion during the autumn of 2019, and then came the pandemic. It was quite hard on us. We had 1 customer who lost half of its volume, and later on, it was the shutdown, and in Germany it was quite severe. We couldn't do any customer meetings, couldn't do any factory audits. By the latter half of 2020, we sat down and did analysis, how to proceed, and we concluded that the market will return eventually, and we also think that the need for HANZA's offer will increase. Why? Because the pandemic points to the weaknesses of the global and complex supply chain. So therefore, we decided to make a quite extensive activity plan, which we call Roadmap 2021, the largest we ever did in the history of HANZA. And then we turn to Page #4. So on this page, you see the 6 places where we have put down the HANZA flag, that's where are the areas where we try to collect different kind of manufacturing technologies within small industrial parks, we call manufacturing clusters. And in this Roadmap 2021, there was a lot of activity. So we started already in January to build a new production facility in Estonia, 12,000 square meters will open up in just a couple of months. In Finland, by the end of first quarter, we acquired a really high-tech company when it comes to treatment of mechanic structures. Then we decided to move to a larger facility in China, and we opened up in Sweden a new department for conformal coating, that's when you protect electronics from harsh environments. And now the latest move was the acquisition in Germany, which we did just on October 26. So a lot of activities.Next, we will then turn to Page #5. We can summarize the third quarter with one word, busy. Busy because of all of these activities, but we have an organization which is decentralized, meaning that we have excellent precedence of the different clusters, you see the organization chart to the right. So actually, we can work in parallel with all these activities, meaning that we're moving HANZA forward quite quickly now. And also, we have a modular organization, meaning that we can add the acquisitions without the need to redo the whole organization. So that was, of course, a large part of the work during third quarter, especially due to negotiations with this acquisition. But we also have some group priorities. We are working with the global HR function. Our aim is to create the industry's best workplace. We're also working with sustainability. If you look down to the right, you see how we then transform product owning companies from a setup with traditional contract manufacturers to the cluster structure of HANZA. And by doing that, you lower the cost, but you also lower the CO2 emissions because you reduce number of shipments. And now we are working to quantify, doing an analysis exactly how much CO2 you can save by moving manufacturing to one of our clusters. Also working with information security. There's a cyber war going on and we have to protect not only HANZA's factory, but also our customers' documents. If we turn to the market situation, so Lars will talk more about this. We had an upturn in sales. We see a strong position. We see new orders coming in. Good sales in the Nordic regions. In Germany, it's a good order intake, which comes before the sales, and Lars will tell more about this. But it's a turning point. So it's really good, the order growth in Germany. But we are, of course, having the battle with material shortages like the rest of our industry. It has impacted our sales and our earnings, but then again, we hear a lot from our customers' feedback that we are doing fairly well under these difficult circumstances. Let me turn to Page #6. The acquisition, Beyers, or Beyers, as it is pronounced in German. This is a model acquisition. We have talked about this many times that we do not acquire companies to become bigger, but to become better. And then we have a list of acquisition criteria. You see them in the middle box here. Geography. So we were located in Remscheid, that's just east of Dusseldorf, this company. Beyers is located in Monchegladbach, just west of Dusseldorf. So the distance is only 70 kilometers, so ticking that box. And technology. What we have done in Remscheid is the fact through focusing a lot of R&D. We're not only contract manufacturers, we are also selling contact design. And we have manufacturing own mechanics, final assembly and also a portion electronics, but that's the smallest part of our previous factory. So that's why we were aiming to get more electronics. And that's also what we got from this acquisition. It's state-of-the-art manufacturer, you see the building up to the right. Been doing electronics since '85, a lot of competence, good machinery, modern tailor-made building from 2009. So we really got the technology increase worked on the EMS side. Culture management. We do quite extensive due diligence also on the HR side, not only on the legal, financial and tax side, in order to make sure that we have the same philosophy and company culture that we can make an easy integration and that box was also ticked. Customer base. They've also been hurt from the pandemic, of course, and they had one customer working with machinery to events, to theaters and sports events, and of course that was down this year, but it's coming back like the other customers we have in Germany. So also really good customer base. And sales this year is expected at EUR 18 million, and Lars will come back to this. But I'd like to stress, this is not only another acquisition, this is a restart of our expansion in Germany. That's important. And by that, I leave to you, Lars, on Page #7.
Thank you, Erik. Looking into the quarter 3 report. It is a strong report, solid and strong report. What we show is organic growth and continuous margin increase. We could have even been stronger with better material situation, so the material shortage has reduced both sales and earnings in Q3. And also, as a start, to remind that July in quarter 3 is always a month that takes down the sales and the results. So based on that, we see it as a really strong quarter 3 report. Looking into the sales, we have a 19% increase of sales. If we take away the acquisition of Levyprofiili and the currency change, it is a 12% increase. So we reached close to SEK 600 million in sales in quarter 3. And on rolling 12, we are up close to SEK 2.3 billion in revenue. The earnings are above the financial goal, which is 6%. We reached 6.3%, by SEK 37 million in EBITA, compared to last year's 4.3% and SEK 21.4 million in EBITA. And on rolling 12, we are on SEK 119 million with a margin of 5.2%. And then we turn to Page #8. Looking into the segments, we see a really strong development of main markets from a profitability perspective. Main market shows a growth of 6% organic growth, but profitability of 9.5% on EBITA level compared to 4.3% in 2020. Other markets has a really good sales development. We see an organic growth here of 20%, but the same level of profitability as last year, 3.4%. And the main reason for not reaching as high profitability in other markets as in main markets, what we foresee is the material shortage and the challenges with material in quarter 3. And that we see in the future that this will even out and not be as big of a problem or such a big difference between the markets going forward. Now we turn to Page 9, looking into the balance sheet and the cash flow, and we see that we are having the same level of equity to assets ratio, 32%. We have a cash flow that is negatively affected by the increased stock as a security level and increase of working process, et cetera. And here we see that going forward, we will go into a more normal level of stock and not see the continuous increase of stock. And by that we will continue to have a strong cash flow. The net debt has increased also due to the increase of stock. But if we look and compare it to the EBITDA and the fact that we have increased the net debt by the acquisition and also by the fact that we are building a new building in Estonia, we see that, going back to the same time in 2020, it's actually more or less the same net debt. And if you compare it to the EBITDA, it's less. So the EBITDA compared to the net debt has decreased from EUR 3.7 million a year ago to EUR 2.9 million, and the result leads to a stronger earnings per share. For the first 9 months, we see earnings per share of SEK 1.56 compared to negative figure a year ago. We turn to Page 10 and the acquisition of Beyers. And the purchase price of Beyers was equal to the equity in the company, approximately EUR 2.7 million, and that purchase price was paid in cash. And the reason for that is that we see that we have a strong balance sheet and we are able to finance this with our own resources. There is also an additional purchase price that can be a maximum SEK 2.5 million, and that is based on increased sales for the fiscal year 2022 and 2023. We see transaction integration cost occurring in connection with this acquisition of approximately EUR 1 million, and the main part of this will hit the P&L in the fourth quarter of 2021.In itself, the estimated sales for 2021 in Beyers is SEK 18 million, and that is decreased due to the pandemic with approximately 10%. And the result is also negatively affected by the downturn in the economy due to the pandemic and the lower sales, and they are right now running on a breakeven level. And the net debt in Beyers is, before any changes due to IFRS, German GAAP, is approximately EUR 4.5 million. We expect this acquisition to have a positive effect on the HANZA Group, both growth and profitability, already in 2022. By that, I leave over to you, Erik, the summary and the outlook on Page 11.
Thank you, Lars. And the short summary. We saw a very successful quarter. We're increasing sales. We are increasing margin, not only from 1 year ago, but also from the second quarter this year, and that's under a very difficult material situation. And also we finally saw the upturn in the order intake in Germany, which we have been waiting for and forecasted. Also, we did a great acquisition. This is really a perfect fit to our operation in Germany. And as I said, it was not only an acquisition, it was a restart of our German expansion. And this, together with the Roadmap 2021, when the other activity kicks in, we really feel that we have an excellent condition for further profitable growth. So in short, we are facing a bright future. And with that, I leave over to any questions and Page #12.
[Operator Instructions] Our first question comes from Adrian Gilani with ABG.
This is Adrian from ABG. I had a question, first of all, regarding the profitability. So in Q2, you mentioned that 70% of your clusters had an operating margin of around 10%. Is that still the case for Q3? Or is that figure either increased or decreased since then?
Adrian, this is Erik speaking. We haven't revealed those figures, that was more a way to explain that our top clusters are having a higher margin than normal contract manufacturers. But what we have said, and what I think is important from this quarter is that we only have 2 solid months since July is the vacation period, so if you compare quarter 2 to quarter 3, there is an upturn in the margin. Maybe Lars, if you'd like to add to this?
No. Okay. No.
Sure. Also, regarding the other markets segment, how much did costs associated with building the new factory in Estonia affect other markets in this quarter?
Actually, there is no impact on the P&L. That is purely on the balance sheet. Of course, there's some work with the construction, but it would not affect the figures on the other markets in the P&L this quarter.
Okay. And as for the market in general, when you say that raw material prices and component challenges should persist into 2022 in your reports, do you expect these issues to have an even impact across all your markets? Or should we factor in a harder hit on some markets than others?
I guess, [indiscernible] I think that we have guided also that initially because of the almost extreme growth in the other markets, we had higher challenges there, but we're also coming to terms with those, meaning that it will be, let's say, more even challenges or less challenges in total. Lars, would you like to add something?
No. I think what we see and what we expect is the effect to -- that is, of course, hard to predict, but that they will not be so hitting one of the segments harder than the others. We foresee that to even out going forward.
Okay. And just another question on the recent acquisition of Beyers. So you say it's roughly at breakeven right now and is expected to contribute positively to profitability in 2022. What kind of margins can we expect for Beyers, first of all, in 2022? And also how long do you expect it will take for them to reach sort of mature profitability of around 10%?
Again, we cannot give any numbers, but what we have said is all the activities we're running now on this Roadmap 2021 is to build capacity. We have a very strong market position, and we know that the electronics parts we have currently in Germany is not large enough for the order intake. So that's the beginning of this. So this, combined with the return of the customers or buyers should give a decent margin. But of course, we cannot give you an example. But we have said that already next year, this will contribute both with the sale, obviously, but also with the margin.
Okay. And just one final question on the cash flow. So obviously, working capital weighed on operating cash flow in this quarter. Can we expect this to somewhat be reversed already in Q4? Or will the supply chain issues force you to hold more inventory for a couple of quarters going forward?
We don't give any forecast on that. What we say is that we foresee that this rapid need of increased stock will even out and that would lead to a more normal cash flow. But if that also leads -- the material situation leads to possibility to decrease the stock and free up working capital. And when that can happen, we are not able to give you any answer right now.
Okay. But just as for the current trading, you haven't been able to decrease inventory right now in Q4 at least?
In Q4, we haven't released the figures, but in Q3, we still have to increase the stock and invest into working capital, partly due to the fact that we also increase in sales, of course, but also in order to secure material. And the material situation is hard for us to predict. But what we see is that most likely what we predict is that we will come into more normal cash flow situation and a more normal need of working capital going forward.
Our next question comes from Fredrik Nilsson with Redeye.
I want to start with the differences between the main markets and the other markets. I mean, you seem to have handled the material shortages in main markets very well; however, other markets did not. And looking at the change in margins relative to last quarter, the difference is quite substantial. Could you tell us a bit about why is there a big difference?
I can start, Lars, and just highlight that you saw also that in the other markets, we had a 20% organic growth, which is also quite high. And starting new projects, starting and expanding with these circumstances is quite hard. And only we had 6% organic growth in the main markets. But now we say that most likely the best of 2 worlds, we will increase the growth in main markets, and we will increase the margin in the other markets, that's what we are stating when we say it will be more similar in the future. So it was a special situation in this quarter.
Okay. One more question from me. Very high margins in main markets. So how did Germany perform during this quarter?
As Adrian noted, we have previously said that we have about 2 digit margins, and of course, if you look at this, there must be not too much added from Germany. We have said that we've not really restarted Germany yet. So it is fair to take the conclusion that Germany is lowering the margin in this segment.
Okay. I see. But I mean, it was quite a substantial increase in the margin compared to the second quarter this year, for example. So if it's not Germany, then I suppose Sweden and Finland doing even better. Is that the right conclusion then?
I can't make any other conclusion.Thank you, Fredrik. And that's a reminder that we did some good activities in Finland in the beginning of the year. So of course, that will also help the situation like the activities we do in Germany will help us in a couple of quarters from now.
[Operator Instructions] We have no further questions. I hand back the word to our speakers.
Thank you. Then we turn to Page 13, and I'd like to thank you again for joining this audio cast, and I hope that you will follow us in the future and a final reminder that All You Need Is One. Thank you, and goodbye.