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[indiscernible]. Welcome to the HANZA Q3 2022 presentation. [Operator Instructions] Today, I'm pleased to present CEO Erik Stenfors and CFO Lars Åkerblom. Please begin your meeting.
Thank you. And thank you all for joining. I'm Erik Stenfors, the CEO of HANZA. And we do have an interesting briefing for you today. We will both review a strong quarter and a solid strategy for the future, so let's proceed to Page #2 and the agenda. So I will start by going through the latest developments. Then I will hand over to Lars Åkerblom, our CFO, who will express these in figures. Then we talk about the plan we have for the coming 3 years. Lars will give you the new financial targets. We end the presentation with a summary and a look at the future. And then we end the call with a Q&A session, so please do not hesitate to ask any questions at the end of this session. Okay, so we turn to Page #3. In our previous call, in the Q2 call, we said that we expect the strong performance going forward, but then we are really pleased to deliver according to that outlook. If we look at the quarter: It's been a growth of 40% this Q3 compared to the same quarter last year. And then we have to remember that we've been struggling with component shortages. We still have outbreaks of COVID-19, and that means that you need to replan production. And that's always difficult but especially so during the vacation period, so we are really pleased with this outcome. Then also we opened new factory space in Poland, in Czech Republic, in China; and this is important. That's part of our cluster concept to have a cost-efficient way to expand our facilities. And that's also why we in October acquired our sheet metal factory, which you can see to the right on this picture. We just have it on a lease agreement, but we acquired it. [ What is good ] to own your building is lower the cost. And it's easier to do fixed installation, but more than that, on the deal we also got 11,000 square meter of land. And we also previously bought land. You see to the left in the picture our new assembly hall, the one we opened in March this year. We already acquired some land before. And this is again really important because we have to prepare for the future. And the idea is to expand with a limited impact on the costs side but still with a large impact on the capacity side, so this is an excellent opportunity for the future. Also we did an acquisition in Germany in the beginning of the quarter, in July. It was a company with 10 engineers in Münster. You might recall that Münster was the placement there where the foreign ministers of G7 had a meeting last week. It's actually the place where there was the peace treaty for the ended Thirty Years' War, so it's a city with history. And it's really close to our other cities in Germany, so we formed this cluster. And together with this new acquisition, which we have renamed to HANZA tech solution, and our previous [indiscernible] Remscheid, [ it goes by ], we now have 30 engineers helping us with product development for our customers. And with that, I give the floor to Lars and Page #4.
Thank you, Erik. And to summarize the financial development of HANZA, I will present good and strong growth with increased earnings and really strong positive cash flow. And we'll come back to the cash flow. Starting with sales. As Erik mentioned, we are up 40% compared to last year. If we exclude the acquisition and the currency, we have a growth of 26%. And we are now about SEK 3.2 billion, close to SEK 3.3 billion. And a year ago, we were on rolling 12 on SEK 2.3 billion. And remember that, since HANZA started, we have had an average growth of 17%. And combined with that, we have increased earnings. The earnings reached SEK 50 million. That is 34% higher than last year of SEK 38 million. And we are now on rolling 12 close to SEK 200 million, SEK 192 million, in EBITA. As Erik mentioned, we did an acquisition of Budelmann. And it has not affected and -- the P&L or the balance sheet. It's only minor effect on the financial figures, but it's consolidated in Q3 as well. We can move to Page 5 and go into the segments. And here we also see continuous growth of both segments. Main market, it's growing by 20% [ if we backed ] acquisitions and currency. And we have a strong profitability of 7%, a little bit lower compared to last year. And the reason for that is that we actually, yes, forward and re-invoice material and the costs for energy. And also we have the company that we acquired in Q4 in 2021 in Mönchengladbach. It's running at 0 level. And we expect this to come back after the integration to the cluster in Germany in Q4 and contribute to the profitability in the group. Other markets is also growing even a little bit more at 33% and has increased the profitability. And this is what we said and been saying for quite a while now, that we will see the 2 segments coming closer to each other in profitability. And we are glad to see that other markets are increasing the profitability despite the fact that, as Erik has mentioned, they've been growing in facilities and adding space. And of course, that normally lowers the profitability when you're having those kind of activities. And the segment other market is as well affected by this re-invoicing of materials and electricity and energy. Then we can move to Page 6 and coming back to the cash flow. We have really strong cash flow in Q3. It amounted to SEK 82 million compared to minus SEK 19 million in Q3 a year ago. And that is still the fact that we have challenges with the material, with shortage issue in components, so we need to still keep a quite high stock level in order to be able to deliver, but what we have done in Q3 is that we have been able to get financing for the working capital from the customers. So we've been successful in getting prepayments from the customers. And this also leads to that net debt is decreasing by SEK 40 million in Q3. And together with the improved profitability, we see really good increase of the net debt compared to EBITDA, giving 2.3x compared to 2.6x in Q2 in 2022. And the earnings per share is also positively increasing, reached SEK 0.73 per share in Q3. And at rolling 12, we are close to SEK 3 in earnings per share. And by that, I leave over to you, Erik.
Thank you. And we can move to Page #7, yes. So today, we present not only an interim report but a milestone representing an end of strategy 2022 as well as the beginning of strategy 2025, so we move to Page 8 and take a closer look. 14 years ago, we decided to take contract manufacturing to a new level, contract manufacturing 2.0, if you like. And since then, we have had a quite solid history; and we stay convinced that this is due to clear plans and explicit milestones. We have built HANZA in steps, in phases. And if you go back in time [ to '17 ], we at that point finalized phase #2 [ with placing HANZA in ] 2 development phases. And we said now it's time for phase #3, an expansion phase. And we put some goals that we were going to do an IPO on NASDAQ's main market; established a brand-new cluster in the largest economy of Europe, Germany; refined existing clusters; and do some strategic acquisitions. And also we have to put some financial targets. And in 2017, we had about SEK 1.4 billion in sales and an EBIT of SEK 36 million. We said it's reasonable to grow with at least 10% per year. That means that, by 2022, we should be up to SEK 2 billion. And it should be reasonable to have EBIT corresponding to 6%, so about EUR 120 million (sic) [ SEK 120 million ]. Now we are not done just yet with 2022, but we saw the accumulated figures Lars showed. So we are already -- on the last 12 months, rolling 12 months, we are well above SEK 3 billion in sales and SEK 175 million in EBIT. So it's been a really good journey, even better than we expected. And we are also happy to see that this strong development has had a positive impact on the HANZA share, which has tripled since we launched the targets in August 2018, but in short: We are fulfilling our targets. It's time for the next step. Then we have done -- as per usual, we have carefully evaluated our current position and done that, of course, in close dialogue with our customers. And we have also taken into account that there most likely will be a recession during this period. And the result is then HANZA 2025. And I'd like to walk you through some conclusions and actions, so we turn to Page #9. First, we have a look at our business model. It has served us well, also through recessions. We see that our -- on the graph that we have a solid growth since we started HANZA, unlike many traditional contract manufacturers which has been going down and up. And we also saw that these business models were able to bring us to these 3 milestones. We have built HANZA and HANZA's business model on the idea to increase customer value. That's the whole idea. And we see now for the coming years, to even further increase the customer value, we will work more to develop the service side of HANZA. So HANZA is not just about manufacturing. We have our advisory services and we have the product development. I mentioned the acquisition in Münster. So that will be we will keep the business model and further develop the service side. Let me turn to Page #10. We have to have some goals, some sales goals for 2025. And in order to set the goals, we have analyzed the current and the future market opportunities. And we see, first of all, that we have a very strong and reliable customer base. And that's why we are growing now and that's why we will continue to grow. A good spread in different areas such as energy sector, defense industry. We have med tech companies, mining companies and also companies with very long forecasts, so we can predict already 2023. In addition to that, we have an advantage in our concept. So if you're a traditional contract manufacturing, [ for instance, you're just turning ] machine parts, then you turn to different companies and see if you can get a piece of the action. We are selling a concept, so the clusters together with our services, and that widens our potential customer base. So we are doing compasses for Silva and we're doing parts for the mining industry, and that makes almost the potential unlimited. And therefore, we can also target customers which we think are appropriate for our concept. So we say that actually customers should not choose HANZA. HANZA should choose its customers, so moving forward, we will focus on the existing customer portfolio. We will add some targeted, new customers. And also we will handle what we can say is a tailwind in the macro perspective. We see that a lot of manufacturing is now moving to be more local, which is the core of our offer, so that will also fuel our growth. And then if we turn to Page 11, we see that there will be no challenge to bring up sales. And it's actually not our challenge today either, but we have to increase our capacity. We have to do that in a good way. And how to do that: First, we analyze our footprint and conclude that this is appropriate to our customers' wishes. So we are already located, as the map shows, in good places on the Earth. We have also seen, if you look at our acquisitions, that all acquired companies inside the HANZA Group have performed better than they did before, standalone. That is also something to bring into this strategy. We also have -- and we are quite proud of that we have a strong company culture and also an organization chart which is expandable. We made it in modules. You can scale it. And these together with what I mentioned earlier that we also have in clustered philosophy way of increasing capacity in a cost-efficient way, we believe that the right way forward is to further develop our existing clusters, so we will focus on the 6 existing clusters and bring them up to next level. And by that, I think it's time to go through the financial targets, so I leave back to Lars and Page #12.
Thank you, Erik. And up, to the right, you see where we are today, announced rolling 12. We haven't finalized the 2022 yet, but this is where we are in the end of Q3. So we have approximately SEK 3.3 billion, and SEK 192 million in EBITA. And then we go down to the new financial targets that we have decided on and starting with the growth. And what we have done here is that we will increase a little bit by setting the goal for SEK 5 billion in 2025. Before, we had 10% revenue growth. And if we recalculate how to reach to SEK 5 billion, it's a little bit higher than 10%. And again remember that we have been on 17% in average. Profitability. We are increasing the margins and we are setting a target of minimum 8% of operating margin. And we have a new financial target, the debt ratio. Here we set net debt, compared to EBITDA, of 2.5x. And what I said a few minutes ago is that we are on 2.3x. And the capital structure. The equity-to-asset, equity-and-asset ratio, we actually leave unchanged. We think that the 30% is a good target and we keep that. And then we also keep the dividend policy of 30% of profits after tax, with consideration of the company's financial status. So these are the financial -- new financial targets for 2025. And by that, I leave back to you, Erik, for summary and outlook.
Thank you, Lars. So we turn to Page 13 and to make a short summary. So we see that we have had a really good quarter 3 and also very strong cash flow. And we have presented our strategy for the coming years, where we will be widening our concept more toward services and working with our existing clusters, bringing in new targeted customers and also some selected acquisitions. If we then look at the future. So in the near future, our outlook stays the same. We have a very good order intake due to the long-term contracts of our customer portfolio and the diversified customer portfolio, so we believe it will continue in a good way. And then we know -- and this is very important. We know now that we are in the midst of climate change. And this next week, there will be this -- there is this climate conference in Egypt. And every company will have to make an effort. In our concept, we can do more than other companies. We can lower our emissions. We can lower our consumption. That's something that every factory can do, but we can also lower number of shipments. And therefore, we decided also to renew our targets for our environment policy and our sustainability, so we will have a new, yes, upgrade of that strategy as well by the end of this year. So really important. Next steps. We are convinced that we will be able to deliver also on this phase and the financial targets that was presented by Lars. We feel very good comfort in that, but also we have to prepare for the next step. And we have not stopped the expansion of HANZA. We will launch a seventh cluster. And we said, during this phase, we will also evaluate possible next steps to put down the HANZA flag in close cooperation with our customers as per normal, so by the end of this phase, we should be ready to launch where the next cluster will be located. And that concludes our presentation, and now we welcome any questions. Page 14.
[Operator Instructions] Our first question comes from Niklas Elmhammer at Carlsquare.
Yes. My first question is maybe something you had expected. I mean price increases have been a considerable factor for contract manufacturers. Is it possible for you to comment on the specific effect of price increases on organic growth and margin in this quarter?
I think I'll leave that to you, Lars.
No. It's not really possible to, and we are not disclosing those figures. And it's really hard to, with the wide [ variety ] of different customers, different products that are changing, and really say how much is the -- a material part of the growth, but it's not the majority of the growth, not at all. It's minor part of the organic growth is due to materials.
I can add to that. And then -- Niklas, good -- thank you for your question. Also it's important to remember that we are a concept company. So the material which prices have been increasing are mainly on the electronic side, not on the raw materials side. So I think we have a lower impact than if you compare, for instance, for an EMS company.
Okay. And do you expect any significant changes in this pricing environment in the short term or...
Well, that's the hard question, I mean, but there are many things going on now. You see the different prices of electronic components. You see different currency effects. You see energy. We are glad that we use this open-book system so that we are transparent with our costs to our customers. So they know that that's part of the deal, that they pay for that, and then we have our secured margin, but in order to tell the future, it's my guess is as good as anyone else. We have -- we were expecting a good component situation by next year. It very much depends on this forecasted downturn in the economy. That will help, but I cannot give any clear answer on that, unfortunately.
Okay. And on the outlook, I mean, you touched upon that. It seems quite encouraging. We see, at the same time, industrial companies reporting strong sales and order backlog. However, new orders are sort of flattening out. I mean, do you see a similar or a better picture?
We see no signs of downturn at all. And again I think that's due to our customer portfolio, that we have very long contracts in this portfolio; and also the spread we have, so -- but having said that, of course, we will be affected like anybody else if the big recession comes, only that I think we will perform a little bit better.
Okay, but do you still see orders growing or...
Yes. We have higher order intake than we have ability to deliver, due to the component situation, so still it's our limitation is, say -- is not our capacity but the materials situation.
Okay. And is it possible if you could comment on the German cluster unit, on the performance in terms of growth and profitability compared to the rest of the main markets?
Yes. Good question. Thank you. It's a fantastic country, Germany. They have so many of these Mittelstand product-owning companies which really need some help. And we have been also making Germany step by step. We entered in '19. Then it came, the pandemic. We had to wait. We reopened last summer again, and then we did an acquisition. And we are following the plan. So the plan we announced in October last year was that, by the end of this year, we will be ready with the cluster. And that's also why we can announce the next strategy, because we will be ready with the setup in the German cluster this year. And that's, of course, being ready means also that there are new opportunities, that we are not in the buildup phase but rather in the expansion phase. So we are quite positive about the German market. It's fairly unlimited, and recession or not, we will have orders.
Okay. Do you still expect good profitability from German cluster beginning of next year? Or that target moved a bit.
No, no. We have stayed the same, like, stance since last year that, when we are financing a cluster, then -- everything we do, we cannot activate any costs. We take it direct on the P&L sheet, but then we are done. Then ends the cost, and of course, that is like a balloon going a bit up. And we said we will be ready by this year and we will be ready by this year. So that will be an increased profitability in the German cluster.
Our next question comes from Fredrik Nilsson at Redeye.
Yes. I want to start with what you called next step. And what geographical locations are you looking at for a potential new cluster? And also, just to clarify: "At the end of the period," is that 2025 period? Or what period are you talking about there?
Fredrik, the latter part of the question, first. Yes, it's end of this period, so by 2025, we should be ready to launch the next cluster somewhere in the world, but of course, I don't think you expect me to tell you where right now. And in fact, I don't know that. It's still in the investigation phase, but of course, we -- just like a product development company, you'll always have to think about the next, next product. And that's what we're doing also in HANZA.
Okay, I see, but I mean, are there any like -- a few areas you could name that you are investigating, at least, so we could get some kind of indication of what areas that -- possibly could be interesting?
I can tell you something about the trends, but it doesn't mean that we will go in that direction. But the current trend is very strong, and that is that there's a detachment between Europe and Asia and an attachment between Europe and the U.S. because of the political situation, yes. So there are companies who would like to remove their manufacturing from Asia and maybe even be in U.S. More -- in U.S., there's more solid energy situation. That's the trend right now, but if that will be valid by the end of 2025, I cannot tell you.
Okay, I see. And also, on the targets, the new targets, yes. I mean SEK 5 billion in 2025 would imply quite a high growth. However, there is also quite a big difference if you manage to achieve that with the current number of shares or if you expect to increase the number of shares in order to reach SEK 5 billion in 2025. Could you elaborate a bit on that target? I mean, do you believe you need to acquire with shares in order to reach that? Or should you -- it would be possible to reach it without that?
Specific questions. I don't know if you would like to comment on that, Lars.
Acquisitions is part of the business plan, and I think we can expect some acquisitions. We have historically done like one acquisitions per year or so. If we at that time need to or decide to also increase the number of shares through a share issue, that is hard to, and we cannot really, tell. It cannot be said that it won't happen either, but that -- on the other hand, if we'll make an acquisition and increase the number of shares, we still need to focus on the earnings per share and increase then the profitability per share. And the target of SEK 5 billion can, of course, also be -- we can reach higher than that if we do some bigger acquisitions. So it really depends on the size of the acquisitions.
I think also that -- yes, sorry. If I may add just -- Fredrik. We would like -- and we have many of our colleagues as shareholders and we like that. And sometimes, we do acquisition with shares to make sure that people stay onboard, but like Lars said, EPS, of course, we must increase the earnings per share. It must be shareholder value when we do an acquisition. And we cannot be more precise than that. Sorry about that.
Okay, I see. And one last question from me. I mean, as you mentioned, you have a diversified customer base. And overall, you see a strong order intake, but I mean, could you tell us anything about differences in demand between different segments? Just to get a better understanding about where we're heading in the economy. Considering your wide exposure, it would be interesting to hear your view.
I mean, if I just -- I cannot comment on my specific customers, but I can comment in general. We see, of course, that heat pumps, for instance, is a booming market. Recycling machines is a booming market. Defense industry is a booming market. Mining is still going really strong. Med tech areas where we are, still strong. So I cannot be more precise with specific customers, of course, but we see strong demands from all sectors.
[Operator Instructions] Our next question comes from Anders Roslund at Pareto Securities.
Yes. I had just one question. If you're looking at your new target of SEK 5 billion by 2025, that implies some 12% to 14% CAGR up to then. And that's a little bit more than the 10% growth target that you had before. Is that mainly organic, or is it also some acquisitions?
Anders, 2 comments. First, 2022 is not closed yet, so we don't know the outcome of that, if we're going to do the increase. And secondly, yes, we have targeted some acquisitions in this, moving forward. And then we have said we target acquisitions in our current geography to increase capacity. That would be the goal, yes. And maybe just a third comment, that we have -- by history, since we started HANZA, we have been running at 17%.
Okay. Yes, that's true, so -- and also, the 8% margin, is that something which is you will reach that by 2025? Or do you have a more aggressive time schedule for that target level?
The sooner, the better, of course. Maybe Lars would like to comment on this. It's very much connected to the general economy also, of course.
No. I'd say as you say. The sooner, the better. What we can say -- and we got the question from the audience saying that how will you reach that margin. And we are -- in many of the factories and many of the clusters, we are on this level already. We are. And the clusters are at different stage in development. And what we have said is that we see no difference in the possibility to have high profitability in the different clusters. It doesn't matter if a cluster is -- belongs to other markets or main markets. So we cannot say when we can reach 8%, but what I can say is that we are above 8% in the large part of HANZA. And we are -- we know well the reason for the other clusters that have not yet reached 8% and the reasons why they are not making 8%.
And Anders, I think we also announced previously that our oldest clusters are well above 10%. And that is not going to be an easy ride, but we feel extremely confident because there's a function of scale. So when we increase the clusters, the margin comes because we have the opportunity to share resources and all that. So it's not a complicated function to do this, merely that we have to make all these clusters mature before we take the next step.
And we have no further questions on the phone line, so I'll hand back to Erik and Lars.
Okay, thank you. And as there are no more questions, I'd like to thank everyone for joining, yes, this call today. And we can turn to Page 15 and conclude that all you need is one. Thank you very much for your attention.