Hanza AB
STO:HANZA
Earnings Call Analysis
Summary
Q3-2023
HANZA's earnings call reflected a narrative of strength and steady growth. With the highest operating margins to date at 9.3%, the company is nearing its financial targets of at least an 8% margin and SEK 5 billion in sales. Key operational highlights include a 7-year journey to the first billion in growth — now accelerating faster, expansion into Germany, an acquisition improving earnings, and the expectation to continue growing, with particular strength seen in the defense and security sector. Risks like potential negative cash flow due to new orders are being managed successfully. Strategically, HANZA remains committed to capacity expansion, aiming to hit the HANZA 2025 strategy's objectives. Organic growth is anticipated, leveraging a diversified customer base with no single client representing over 10% of sales, and sales are believed to remain strong in the Nordics and Germany. Future growth is not quantified but the previous target was 10% yearly, suggesting optimism about the company's trajectory.
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Welcome to the HANZA Q3 2023 presentation. [Operator Instructions]
Now I will hand the conference over to the speakers CEO, Erik Stenfors; and CFO, Lars Åkerblom. Please go ahead.
Good morning. Thank you for joining this presentation of HANZA's Third quarter 2023. My name is Erik Stenfors. I'm the CEO of the company, and I will be glad to give you this update together with our CFO, Lars Åkerblom.
Now we understand that there are some concerns about general economy and its possible impact on subcontractors. And therefore, we are pleased to report a good growth in the quarter and also that we see a solid 2024. And we will spend some time at this call to go through our sales and marketing position. We make it more understandable why we are so confident in the continued growth and we will also look at the mechanism behind the rapid growth in earnings. This report shows the strongest operating margin to date, 9.3%. And we will try to give you more about this as well.
And again, I will keep the normal structure. I will first explain the development in words. Then I hand over to Lars, who will describe it in figures. And after that, we will make some conclusions for the future. At the end, we have the Q&A session, please use that. Lars and I will be more than happy to answer any of your questions.
But first, this was a very special quarter. [indiscernible], it was back in '08 when we created a company with just a vision to try to make value in this industry. And here we are 15 years later, we had about 2,200 colleagues in 7 countries, and we have sales of about SEK 4 billion. So it's been quite successful and how did this happen? When we turn our vision into a strong business model, as you might know, we have combined different kind of manufacturing technologies and also services. We help our customers with product development. And we also have advisory services, so we help our customers to streamline the supply chain.
And this business model has led to a solid customer base, which in turn resulted in a long-term growth. Actually, we are still the youngest contract manufacturer of our size in the Nordic region. It also means that we have been growing the fastest. But the business model, of course, is just part of the explanation. The main reason is that we've been able to collect really talented people in HANZA. And this is something we are very proud of. If you have a chance, please visit our factories.
Okay. Here we are, 15 years. And we have strengthened the company in phases. So -- actually, we can grow in 3 dimensions. We can grow by technologies. That was in the beginning. We added different manufacturing technologies. We can grow by geographies. It's also something that we have done and most recently, the expansion to Germany, and we can grow in size. And now we decided that this phase, HANZA 2025 strategy, we will focus on capacity.
And the reason, we see we have different sizes and degrees in maturity of our different parts of HANZA, and we see that there is a clear scale advantage. When one of our manufacturing clusters reached a sales growth, let's say, about -- for about SEK 1 billion. And this is also one of the reasons for the increase in earnings that we are simply growing and Lars will give you more about this. It was interesting to see our growth took 7 years to reach the first billion and then it's faster and faster.
But then we move to this quarter. And take a look closer then at the sales situation, which we know is quite important for understanding the HANZA's future. I would say we have 2 advantages. First, it's regarding our current customer base. And secondly, it's about new sales. We take them one by one. So the current customer base had some features. First of all, we have made sure that we have no dominant customer. The largest customer we have is well below 10%. And if we add the 10 largest customers, we will still go below 50%.
Then we have been focusing to bring in customers from industries that doesn't go in line with the general economy. So for instance, we have a defense company, energy, recycling, and then we make sure that not everyone moves up or down at the same time. And number three, the features of our customer base is that we focus on customers with long order cycles. So for instance, we are producing for Siemens, gas turbines. This is something with a long lead time. Same thing with forest equipment to John Deere or equipment for the textile industry [indiscernible]. It means that if the demand is moving in any direction, we will have a heads up over a year ago. These are the 3 things that make it easier for us to predict the current customer base.
And then there are new sales. Also here, some advantages. First of all, we are not selling just the part like electronics board or sheet metal mechanics. We are selling a concept. We are selling, all you need is one part to parts production and parts assembly. It means that we have a range of different products from compresses to reverse vending machines. The small units and large units and the potential for new sales is rather large, much larger than if you were just selling one commodity.
And in addition, we have these advisory services [indiscernible], manufacturing solutions for increased growth in earnings. That's when we go and sell a better supply chain. And that led to the largest orders so far in HANZA's history, the one we took in July, Mitsubishi, where we are replacing, and listen to this, somewhere between 40 and 50 suppliers with HANZA, gives them a great advantage and gives us a large order. So these are the features of new sales.
Yes. Then it's operations. So everything is not just about selling. It's also about executing. And here, we work in different directions. First of all, we have something we call modular expansion. We tried to expand on the places we are located right now. We see some examples on the picture to the right, where we have bought an adjacent supermarket in Poland and are now connecting this to our factory. So the factories to the right in this picture [indiscernible].
In Estonia, we have expanded in steps. Now we are opening a new factory and to the right by the end of this year, and we have also a new factory in [ Norway ]. So all in all, we are just shy of 10,000 new square meters in Estonia by the end of this year. So this is one part.
Second part is that we do acquisitions then to increase capacity. We had a really good acquisition in October '21, the company in Germany that was a nice factory but underloaded due to the pandemic. We were able to add new orders and now it's profitable. And this is also another reason for the increase in earnings. If you buy a company with lower margin, it would download us. When we fill it, it comes back.
Quality is, of course, the main thing in our industry, and we have been running at a very high level of quality and continue to do so, of course, the reason for being allowed to have new orders. But we are still having a backlog in parts of the group. We have not been able to catch up with the capacity, especially in other markets. So that's why we have this big expansion, as you see in the picture also of the other market. It will be ready by the end of this year and the beginning of next year. And this together is why we then are confident that we will be able to continue to grow and especially in other markets that we have strong sales model and also we are catching up with capacity.
And with that, we will give the floor to Lars, who will start with a very important area, sustainability.
Thank you, Erik. And yes, sustainability is important for us, and Erik mentioned importance of the employees. And what we have done in Q3 regarding sustainability, is to do the normal annual employee survey, and we were glad to see that the feedback was positive. We have improved the result in all important segments. And also, we have started a project on to release a new intranet in 2024. And with that new intranet, we're able to communicate with all the employees in HANZA.
And then we also see more work, more cooperation with both suppliers and customers in the sustainability part. We have started up 2 factories with the Ecovadis sustainability platform. And we also have a pilot project with a Norwegian customer on the carbon footprint of the production on item level, but we see generally higher activity in the sustainability work.
And then we have the KPIs that we, since a couple of quarters, disclosed in every quarter and we can see that the injury is on a flat level. It is, as always, a little bit high. We want it to be 0, but we are on the other hand, glad that there are no major or severe incidents or accidents that we have. And then we can see that the energy use in relation to sales and the waste in tons in comparison to sales is decreasing. So that is positive.
Coming into the financials, and I will present highest level of profitability. So far in HANZA history together with a strong balance sheet and little bit weaker cash flow, but I will come back to that. Starting with sales, we are up 14% to SEK 955 million in Q3. We had in Q3 last year, a bit of material and energy that we invoice to the customer with no or low margin, and we actually disclosed that already a year ago. If you adjust for that, we are on 10% in growth. And we are now on rolling 12 on SEK 4.1 million compared to SEK 3.5 million for the full year 2022 or at SEK 3.3 million, if we look into the rolling 12 a year ago. So we are -- have increased rolling 12 by 25% from a year ago.
Earnings. We have a significant increase of the earnings, and we are up to SEK 89 million in EBITDA compared to SEK 50 million a year ago, and we have increased the margin to 9.3% compared to 6% a year ago. And rolling 12, we are on SEK 324 million compared to SEK 215 million a year ago. And if we look into the rolling 12 a year ago, we were SEK 192 million. So we have increased profitability quite substantially.
And if we look into the rolling 12 when we adjusted for the subsidies of energy that we received in the beginning of the year, we are on a margin of 7.9%, so very, very close to the financial target of 8%. And we also increased the earnings per share. We are on SEK 1.21 compared to SEK 0.73 for the quarter and year-to-date of SEK 4.21 compared to SEK 2.28. So we've been able to get the result also down to the net result and glad to be able to show increased earnings per share.
The segments. And starting with the main market, we have an extremely strong organic growth of 16% and with a record level of profitability of 12.4%. Part of that is, again, this material and energy that we invoiced in Q3 in 2022, but still it's extremely high growth and profitability.
Looking into the other market segments, we reached SEK 405 million compared to SEK 391 million. Here, we have quite big effect on the currency on one side and then on the energy and the material side. So if we compare and include those things, we are on the 1% organic growth. And the reason for the weaker organic growth in other markets is the things Erik presented before the expansion programs and bringing in new projects into the production, et cetera.
So -- and we have said this many times that in the long run, we do not see any difference between other markets and main markets in the growth or the profitability. So here, we expect an improvement in the coming quarters.
Looking into the KPIs and the cash flow. We had, as I said earlier, weaker cash flow in Q3. And the reason for that is, again, the new projects that we bring in. We had a big order in beginning of Q3 to MLE. That is one project that is consuming working capital. But we are not satisfied with the cash flow we had in Q3, and we have activities, and we expect the cash flow to be better in the coming quarters. Net debt is on 1.5x compared to the EBITDA, and a year ago, we were at 2.3x, and we have a net debt of SEK 642 million. It has increased a little bit in the last quarter.
And CapEx. We have invested in the quarter of SEK 77 million, and part of that is the new factory in the Baltics, and that is SEK 10 million out of those SEK 77 million. And year-to-date, we are on SEK 238 million and the building is a quite substantial part of SEK 74 million. And the reason for the CapEx is, of course, to meet the growth and the expansion program but also to support automization and robotization programs we have within HANZA.
And looking into where we are compared to the financial targets, we are on rolling 12 on SEK 4.1 billion and the financial target for 2025 is SEK 5 billion and 7.9% in rolling 12 EBITDA. So very close to the financial target of 8%. We are well above the financial target in equity to asset ratio and also below in the net debt compared to EBITDA on 1.5x and the financial target is 2.5x and we, as you know, paid out dividends in May.
By that, Erik, I'll leave back to you and the conclusion and outlook.
Thank you, Lars. And let's end this presentation with some important conclusions for the future. First of all, for the reason mentioned, we have a solid outlook for 2024 based on our current existing customer base and also potential for new sales. And we expect also a new mid to happen. And also, we see that the trend is still our friend. We have had an exhibition in Finland in September. That's the picture down to the right, [indiscernible]. And it's clear that also in Finland now, production is moving back. So this back sourcing trend is strong in Finland. We will increase our presence also in Finland.
And finally, it's worth noting that the M&A market is growing. We see more and more opportunities, and we also see price expectation return to realistic. It was a bit of a price frenzy some months ago. And it means that we are also open for further capacity acquisition. But it should be then within our existing technologies and our existing geographies. Again, what we're aiming at now is to increase capacity before we take the next step, which we also said will be geographic expansion.
So all this together is why we stay very positive about the future. And by that, we are ready to answer any questions.
[Operator Instructions] The next question comes from Fredrik Nilsson from Redeye.
You mentioned that you see increased demand from current customers in next year. But could you elaborate a bit on how good is your insight and visibility into that because I think we have some other examples where the tide turned quite fast anyway, so to speak. So I want to -- if you could elaborate a bit on your insight into that number?
Yes, of course, Fredrik, Erik speaking. Yes, and I think that's back to what I was referring to a couple of slides earlier that our customer, many of those has a very long order cycle. So it means that they can see far in the future, and it means that we get very long forecasts. And also what I mentioned that we have been aiming at some areas which are still in a very good growth phase.
We talked about defense, but we also have agriculture. We have forestry. We have energy companies. We have recycling companies. And all of those are actually increasing. And I think what is also important is that we have avoided some markets. So we are not into telecom or automotive or consumer products. And that means that we don't have this destocking programs that many others are talking about. We don't have these quick fluctuations in our demand. Was that a fair answer, Fredrik?
Yes, absolutely. I think it was. And I want to move on to the very strong margin, in my view, in main markets. I mean, are there any onetime effects or similar? Or is it fair to assume that you have reached a higher underlying level? I mean the second quarter was strong as well.
There's no -- this is Lars -- no onetime effects. As you know, we disclosed the onetime effect we have had so far in 2023, and that was the energy subsidy. So no, there is no -- this is a fair -- underlying fair result on the main market. Part of the reason is the fact that we have done the acquisition in Germany. As we said, it took a year to reorganize and get the volumes up and get it profitable. And now we see effect when Germany as a cluster is profitable as well compared to last year when it was on zero level or so.
Okay. And lastly, you showed some figures on your efficiency regarding energy and it had improved quite a lot over the last years. Could you elaborate a bit on that? Is that partly due to acquisitions with another mix? Or -- what have you done in order to improve that figure?
We are investing in machines with better efficiency. We are improving how to produce products and we are also having a new facility where we -- that is more energy efficient than the old factory. I don't know if, Erik, if you want to add any comments on the energy use?
Not really. It's an ongoing process, and we have started in one and that we will continue with that. So no more comments on that.
The next question comes from Niklas Elmhammer from Carlsquare.
I was coming back again to the very strong margins, and you are basically down at the level of your financial targets. Do you see room for further expansion in the short term or seeing that you are almost at your targets?
We are -- [indiscernible] first of all, at least 8% and at least SEK 5 billion. We may surpass that. But we will grow, and we know that growth will also affect earnings sometimes. That's what we see in the other markets. But steadily, we are getting better and better. So the -- it's on a high level every time we grow. But so far, we have not said that we're going to change the financial targets. But of course, if growth continues and [indiscernible] goes up, at some point, we need to restate that. And we also said, when we have reached our goals, it will be time for the next geographic expansion. And it should be no later than the end of 2025. Sorry to sound a little bit like a politician, but I have no specific answer more than that, Niklas.
Okay. And you're right in the report that order intake is still good. But there are some variations between customers and geographies. I mean maybe you don't want to talk about customers, but could you elaborate a little bit on geographies, if you're seeing some areas that are very strong and some of that lagging behind?
We don't see any weak market. Germany is strong, Nordics are strong. But of course, we see variation between customers and that's normal. It will be very odd if everybody was increasing or decreasing at the same time. The idea is that we will have more increase and more new sales and decrease and that's what we have. Thanks for the recent mention. But I would say geography, we have strong markets everywhere, but customer, of course, is a different grade of expansion.
Okay. And then finally, maybe just a little bit of housekeeping or detailed question. You had some negative impact in Q3 from the extra sales of energy and components from last year. I mean I would assume that we are seeing something similar in Q4 as well? Or...
Do you want me to answer that, Erik, or?
Yes.
Yes. What we saw in Q3 in 2022 was this booming energy prices. And right now, we do not see the energy prices or we see that they are on a stable level and not as high as they were a year ago. So from an energy perspective, if the prices are not changed, we do not see that we will have similar onetime sales as we had in 2022. I think the same goes for the materials. So yes, I would expect that we will have similar, maybe not as high impact in the coming quarter when we compare the Qs between the years.
The next question comes from Anders Roslund from Pareto Securities.
I had a couple of questions. I'll start off with the cash flow. You mentioned that you are having a little restrained cash flow because you are building up orders for new orders but also older orders. Could you elaborate when will we see the Mitsubishi coming on board? Is that a new starting point already or other new areas like the defense?
Anders, it's Erik speaking. It's already not up and running, but we have come far. We are not -- we didn't give you a precise time table for that. We said that within the year from when we announced it, it should be in full swing. So we are somewhere starting this. Cannot give you some many more details on that.
But I'd like to comment on the cash flow because I think that the easiest way to have a positive cash flow is to stop growing. And what we have been able to do is to grow and have a positive cash flow. This quarter, it was weak and not up to our expectations. I will not blame circumstances. It is a quarter with more challenges due to vacations and with start and stop of the production. But that's something we must come back to a normal very strong cash flow. We should be able to both grow another strong cash flow. So it's a bit disappointing this quarter, but it's -- again, it's for a good reason that will continue to grow.
Okay. So it's not really about building up inventories for coming orders that you are preparing?
Anders, that's what I'm trying to say that when you get new orders and you're building up inventory, that's when you have a negative cash flow, and that's the challenge of growing. But normally, we've been able to both grow and have a positive cash flow. So yes. I don't know, Lars, if you will take this further?
No. But short answer to Anders, is that yes, that's part of the reason for the increased working capital.
Okay. Let's look into next year. You are saying that from your existing clients, you expect an organic growth. Is that their plans you are talking about then or your plans or together or?
Now we are very close to our customers and I spend all time out to our main customers trying to see their end market and things are going really well for our main customers. So we see that there's a growth needed and there's expectation also that we can follow that growth. And then we're talking about existing customer base. Of course, we expect also to get new customers.
Okay. And could you say something more about the defense sector where it seems where you also get some new orders there?
Yes, it's is a huge demand from that sector, and we have Defense & Security. So it's also [ sign ] security products we are producing for other customers. It's a huge demand for said reasons, and we expect it to be like this for a very long period of time.
And finally, do you see -- do you have anything more in the pipeline regarding the -- similar to Mitsubishi? New interesting deals?
Yes.
The next question comes from Oliver [indiscernible].
Erik and Lars. I just had one question regarding the outlook for 2024. The organic growth is declining, but remains in a positive territory. Despite the economic outlook, you guide for positive growth during the next year. Could you add some more information here? Or are we talking about 1-digit growth? Or -- where are we?
Oliver, that would be your forecast. So I cannot give you -- I can say that standard growth and our previous financial target was 10% per year. And I think that is what you should expect, but I cannot give you any numbers for next year.
I understand. That's all the guidance I need. You mentioned that you have a large potential customer as well coming in and you also mentioned that the acquisition market is becoming more normalized. Are there any interesting dialogues here?
Yes.
Exciting news then.
Again, the short answer. That would be, yes, we are closely monitoring, but we are really careful. We are not a buy and build case. We're not -- we would like to increase our skills with an acquisition. It should not just be to get bigger. And therefore, it should be within our existing technologies, our existing geographies. So it is limited a bit. But yes, we have some exciting discussions. We always had that.
The next question comes from Tommy [indiscernible] from Inderes.
I have a couple of more questions regarding the market. So do you have an estimate for the market growth for your relevant markets in '24? And do you expect to outgrow the market?
Tommy, it's really difficult if we are -- if we were an EMS company selling electronics, there are [indiscernible] that provide the market and the growth for next year. We are selling products. So rather it would be an estimate on the [ GNP ] or something or GDP in English, is really difficult. So we cannot give you any such number, but what we can say is that we've been able to grow also when there's been a shaky market. That's when we have been able to sell more [indiscernible], and that is something that is combined then with our solid customer base. So let's put it like this. I think we will grow faster than colleagues in our industry.
All right. And then my last question would be, you touched on the report about the regionalization trend where the supply chains are moving from Asia towards Europe? Is this -- do you see a change in this recently talking to our customers? Or is this something that has already happened in 2023? Could you elaborate on that?
Yes. I think it's been a lot of talks about this and now it's happening. I would say it's more. If you go into details, I see more new products being born and produced locally because it's always a hassle to move production, and that's why we sometimes come in and say, but you can actually do it, we can help you. But the easy way out is to say that for the future, we produce locally and we will keep the old products where it is today. But it's happening more and more, I would say, as an increased discussion and we saw again at the exhibition when we were in Tampa. It was really exciting because you heard so many people talk about these colleagues, prospects, customers. So yes, it's getting a stronger trend.
[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Okay. Thank you, and thank you again [Audio Gap] continue to follow us. Thank you so much, and bye for now.