Hanza AB

STO:HANZA

Earnings Call Transcript

[Operator]

Welcome to the HANZA Q1 2023 Report Conference Call. [Operator Instructions] Now I will hand the conference over to the speakers CEO and President, Erik Stenfors and CFO, Lars Ã…kerblom. Please go ahead.

[Erik Stenfors, executive]

Thank you, and thank you all for joining this presentation of HANZA's first quarter 2023. I'm Erik Stenfors, the CEO of HANZA and I will on this presentation as usual with my colleague, Lars Åkerblom, CFO. And in short, Q1 was another quarter of strong growth, and we show our best results so far. It goes all the way down to earnings per share, which almost tripled. And furthermore, we have an all-time high order backlog. So we stay very optimistic also about the future. And in Q1, we presented a new expanded sustainability strategy. Very important. I will come back to this in just a moment. But let's get started and move to Page #2. So we have divided this presentation in 3 parts. I will start by walking you through the highlights of the first quarter and Lars will give you the financial development, and then we end with a look at the future. And after the presentation, we will have our Q&A session. So please, we will welcome any questions at that point. We move to Page #3. So sales went up and almost 30% this quarter compared to the first quarter last year, and the organic growth was well above 20%. And this is despite tough comparative figures. So what makes this possible? Well, first of all, we have managed to collect a portfolio of customers, which are quite successful. And they are on different industries, some different companies we see from energy, agriculture, defense, mining, reverse vending machines. And secondly, we have an offer which is well received on the market. We have many product owning companies which are looking for alternative for these complex global supply chains and then HANZA could be this solution. And on top of that, we have also a service part. I say it's about manufacturing and services, and we are offering product development for our customers and also advisory services. And this, of course, also supports sales. So sales are good. Now in order to grow, we also need to be able to keep up the capacity with the order intake. And to do this, we have a number of activities and programs. We are investing constantly. We launched the latest investment program in December, SEK 100 million. We have efficiency programs. And we have been also quite successful with the integrations of our acquisitions. I think Lars will probably come back to this from a number perspective. But the main reason why we can handle this growth is our committed and dedicated colleagues. That is what makes this expansion possible. And it's also team HANZA who makes it possible to keep this strong cash flow. We have a cash flow of almost SEK 90 million for this quarter in the midst of the expansion. And we know that sales growth is bronze. It shows that you have an attractive offer. And profitability is silver. It shows that you actually have a business model that is working, but cash flow is gold. It shows that you have a future. You need a strong cash flow in order to be able to invest to take on new orders to be able to keep the debt down and also, of course, pay dividends to shareholders. So all in all, a really good and strong quarter. And then we turn to Page #4. I think we all became even more concerned when we saw the latest IPCC report. If you recall, it came in end of March. And the summary was that humanity is on thin eyes and it's melting fast. And it means it calls for urgent climate activities. We must, of course, also support, and therefore, we were pleased that we just introduced our expanded sustainability strategy. And sustainability is, of course, not just about the climate, it's also about the working environment. Now the good news is there's no conflict in the objectives of sustainability work and running a good company or contrary, if you reduce consumption and emissions, you will support the income statement. If you create a green company, it will be easy to recruit. You have easy to attract new customers and also suppliers. And if you improve the work environment where you will just create a better output. And in order now to follow this up, we will, in every coming interim report, have a special headline where we state the progress of the work with the sustainability. And with that, I will hand over to Lars, who will give you the review of our figures and also tell you more about our new sustainability targets.

[Lars Åkerblom, executive]

Thank you, Eric. We move to Page 5. And as Eric mentioned, we are today delivering very strong Q1 report. For the second quarter in a row, we exceed SEK 1 billion in sales. We show a growth of 29%. And of that, 23% is organic. And we see that both segments and more or less all clusters are growing and also among several different customers. And in this quarter, we do not have any major impact or actually no impact at all more or less due to increased prices on components and material or energy that we had in many of the quarters in 2022. And we also see an increased earnings. We are 100%. We have a double EBITDA compared to last year. And we reach, if we exclude electricity subside a margin of 7.7%, and we are now on close to SEK 3.8 billion in rolling 12 months sales with an airline percentage of 6.8%. And what are the reasons for this really increased both sales and earnings. And it is what Eric mentioned, 2 main factors, and it's the fact that we were early in starting the expansion programs in the middle of the pandemic we took decisions to continue to invest. And we did continue to invest during 2022 and also in the end of 2022. And that has led to increased capacity and increased sales and increased earnings. And one of the major part is, of course, the new factory in Tartu, Estonia that we opened up more or less exactly 1 year ago. We move to Page 6. And as I've said, we see increased sales and increased profitability in all clusters and in both segments. As you know, we divide HANZA into 2 operational segments, main markets and other markets. And we have, for a long time said that the other markets are not as mature as the main markets. And we have seen increased profitability, and we have said that the profitability will increase in other markets. And long term, we really do not see any reason for a difference between the profitability in other markets and main markets. And today, we see that other markets are growing organically by 30% and has increased its profitability quite a lot and reached 6.4%. And the last year, 1.5% is heavily negatively affected by the opening of the new factory in Estonia that I mentioned before. And the segment main market is continuously growing and increasing its profitability, and we have, excluding the electricity subsidy, a margin of 8.8% compared to 7.7% last year. We can move to Page 6. Eric mentioned that cash is extremely important to be able to not only make good sales and good profit. You also need to be able to get cash flow from the operation. And we have in Q1, a really strong cash flow of SEK 89 million in the first quarter compared to 13% a year ago. And if we take it to the rolling or rolling 12 months, we have a cash flow of SEK 221 million. So we've been very good in organizing the operation and react on the fact that we need to increase stock and also the fact that we are growing and we are growing in rolling 12 by SEK 1 billion, and we still are able to have a positive cash flow. So that's really good. And that, of course, together with a strong result and the share issue we did in quarter 4 leads to that the net debt is decreasing, and it's actually decreasing a lot if you compare it to the EBITDA. We are now on rolling 12 on 1.6x EBITDA in net debt. And the earnings per share, very strong, close to SEK 150 per share, SEK 149 compared to SEK 154 million in 2022. And almost half of what we did the full year in 2022 when we reached SEK 335 million. And on the AGM next week, the Board has proposed a dividend of SEK 0.75 per share. We can move to Slide #8. And the sustainability goals that we released in connection with the annual report. And there is in the annual report, a lot more information about the sustainability work and also where we are in the KPIs and how we have developed to work with the sustainability. So you can read it here, if you like. And there are not only the environmental and climate focus. It's also the safety and ethics and also employees. And what we have said regarding the environmental and climate is that we shall continue to reduce the carbon dioxide emissions from our own operations. And just to as an information, you can see in the annual report that we have reduced this from 2021 to 2022 with 21% and 33% in the 2 things that we are measuring. And we also reduced the matching resources and the energy that we use. And here, we have also, so far, been able to reduce that and also reduced the waste that we are using in the production. And here, we are also mainly down in how much waste we are using in the production. Safety and FX. Also, of course, extremely important, and we have the data security, and we have a 0 goal, and we've actually been able to reach 0 damages from data breaches and also 0 incidence of corruption. And that's also something that we really work hard with. And we are working, of course, with a lot of suppliers. The main part of the sustainability to be that we are making is part of what we are buying, and we are working a lot with the suppliers confirming that they are working with code of conduct. And from 2023, we will actually also make it mandatory for our main suppliers to sign on that they are following the code of conduct, that HANZA has as a rule for the main suppliers. And the employees ignition that is the result and what we have done in 2022 and in Q1 would not be possible without the work from the employees and safety. And we have, of course, a 0 goal on accidents. Unfortunately, we are not there, but we have decreased it if we compare it to the number of working hours, we are down by 20% in accidents in 2022. And also diversity and gender. That's something that we are working on and focusing on and will be focusing even more going forward. So these are the sustainability goals that we informed about in the end of quarter 1. And as Eric said, we will from now on in the quarterly reports, disclose how the KPIs are developing and how we are developing in the sustainability work. By that, I leave back to you, Eric.

[Erik Stenfors, executive]

Okay. Thank you, Lars. And yes, CO2 is really the great challenge of our time. We all need to work on that. Last year, HANZA reached the financial targets that we communicated back in 2018, and therefore, we launched new financial targets, including that we should reach SEK 5 billion in sales and have an operating margin of 8% in 2025. And if we look at the numbers that Lars presented, we really see that we have made a flying start towards this 2025 targets. And we have a straightforward strategy. We will continue to grow and build on our existing manufacturing clusters, existing geographies, existing technologies. And we will also further develop the service part of HANZA. So that's where we help our customers with the product development and advisory services. We're also open for acquisitions if they are in line with this strategy. Also, we will keep focus on the sustainability work. We have a unique possibility in our concept to lower number of shipments, thanks to reginal complete manufacturing. And we'll also continue to work and seek to create the best workplace in our industry. Short term, as said, we see a very positive development. Long term, we're aiming for the world. We've been clear that when we have reached the financial targets 2025, we will do a geographical expansion and launch a seventh manufacturing cluster. Where it's a question we need to come back to. But to summarize the presentation, the best time is still ahead of us. And that concludes the presentation. And now we welcome any questions, and we can turn to Page #10.

[Operator]

[Operator Instructions] The next question comes from Frederick Nilsson from Redeye.

[Fredrik Nilsson, analyst]

You have had strong organic growth for many quarters and the order book is record high. And I mean, you mentioned that you constantly do some investments in capacity, but I mean, how much additional volumes can you handle before needing substantial investments in capacity?

[Erik Stenfors, executive]

Erik speaking. Yes, I think we have touched on this before, that we have a very cost-efficient way of expanding our activities. We do this in modules. So we have bought land around our existing manufacturing clusters, so we can add the facility and also add more equipment and also new colleagues in a very cost-efficient way. So we increase the capacity at a low cost. So this can go on for a long time. In the existing clusters, we can -- I will not give in the numbers. But to reach the SEK 5 billion is no challenge. There's no step function on that road.

[Fredrik Nilsson, analyst]

Okay. I see. So rather smaller gradual investments going on all the time, then something new, big. Is that how I should interpret it?

[Erik Stenfors, executive]

Yes, that's correct. So the main cost is to launch a new cluster. And that's also why we say that we need to be really solid ground before we take the next step. Then the good part is that every time we launch a new cluster, it becomes a smaller part of the whole home, so it doesn't affect the group profitability as much as it did in the beginning. But it's correct. It will be a cost efficient small step increase, and we will reach this SEK 5 billion and more without any extra-large costs.

[Fredrik Nilsson, analyst]

Okay. So other markets, the margins are improving quite a lot year-over-year, but it's still a bit left to -- before they reach the main markets level. Does that require any substantial investments or efficiency measures? Or are they on track to reaching the main markets with the current operations?

[Erik Stenfors, executive]

I think that we are following exactly what we have stated in earlier reports. We take it step by step, and we know that our mature clusters are delivering a margin in double digits. And different clusters are on different maturity levels, but they are all progressing. I don't if I can give you a precise answer, but you see that the things we have done are bringing all clusters one step forward, and therefore, we are at about the 6% margin, which was the previous goal also on the other markets. So no big step there as well, if that was an answer to your question.

[Fredrik Nilsson, analyst]

Yes, sure. I mean, so far, you seem to be ahead of or at least in line with your 2025 target. I mean do you see any potential threat? What could treat that target?

[Erik Stenfors, executive]

I mean it could be some major world events. But for us, we are following a very simple formula. We have done this a number of years doing it step by step. One thing that is a challenge. So sales is not a challenge. And I think the capacity increase is not a challenge. The change we have is attracting new people and also skilled people. We see also when we are robotizing that we need more educated people, and we are located outside the big cities. So that is -- that's where we put a lot of our energy. And that's also why we are trying to create the best workplace in our industry, a way to find people. Also, as I said, helping environment is also good from the recruitment aspect. But I don't see that would -- I cannot see anything that for the stores, but of course, it will be hard work, especially recruiting people.

[Operator]

The next question comes from Niklas Elmhammer from Carlsquare.

[Niklas Elmhammer, analyst]

You mentioned you have a record order book and I see positive development. I was just wondering how do you view inventory levels among customers? Are you concerned about perhaps high levels there?

[Lars Åkerblom, executive]

I'm not sure if I fully understood your question about the customers.

[Niklas Elmhammer, analyst]

Yes. I mean you have very positive development. But are you seeing -- are you in some any way concerned about inventory levels among customers, they are sort of rising -- have been rising very fast recently.

[Lars Åkerblom, executive]

No, no, I got it. What you can see is that we had to increase the inventory levels quite a lot a year ago in the first half of 2022. Since that, the inventory levels have been more or less on the same level, if you compare them to sales. And where we have been forced to increase the inventory levels are mainly in the electronic business due to component shortage. And for a very long time, we have worked with reducing the risk in keeping inventory. So it's really no new even though the levels are a little bit higher, but we always bind the customer to the inventory that we buy because HANZA is not buying inventory for its own sake. We are buying for the customer. And then the customer need to be aware and take responsibility for the inventory that we are buying for them. So I really do not see a major risk. And we are also, of course, looking into the customer, customer by customer. But overall, we have strong customers. We have customers that are doing well and are strong companies. So the risk would be that the customer would go into Chapter 11 or something like that. But we really do not have that type of customer. So a long answer that can be in short that no, I don't see a major risk in the inventory levels.

[Niklas Elmhammer, analyst]

Okay. And I was wondering if you could perhaps tell us a little more about the expansion plans you have for -- you mentioned that you're in the report that you are planning expansion in Estonia, in the Czech Republic and Poland, if I'm correct? Is it possible to elaborate a little about the scope, the size of those expansions and the time plan?

[Lars Åkerblom, executive]

I don't know speaking. I don't know if we have communicated this. What we have said is that we are expanding our sheet metal factory in Estonia, but it's ongoing work. Every factory is expanding at some point. And what we do it's quite interesting, if you have a minute. So you have to have some technologies closer to each other than others. So for instance, there's no coincidence that we are expanding the shipment factory and the assembly plant because when you have done the shipment box and you have painted it, you don't want to cover it and send it somewhere and uncover it. You'd rather like to have the assembly direct. So that's the proximity needed there. If you look at our heavy mechanics, it's also very important when you have done some heavy parts that you assemble it and not ship it. When it comes to cable ownership, for instance, you can actually ship it a little bit without affecting the environment and the cost so much. So that's also part of the strategy, how we are expanding the building. Some are more important to expand than others because the proximity is important. But we haven't told you the road map that, of course, internally, we have a plan exactly which building to expand and ran.

[Niklas Elmhammer, analyst]

Okay. And regarding CapEx, I mean it's increasing as you're expanding. So do you see similar levels as in this quarter? Or how should we think about this?

[Lars Åkerblom, executive]

Yes, I can answer. I think, Eric. On Fredrik's question that was quite similar is that we have a cost-effective way of CapEx when we expand. Of course, it can be that it fluctuates quarter-over-quarter that over a longer period, we do not see major impacts on need of CapEx to be able to grow. It's going to continue in the same level as it has been in 2022 more or less. And as a percentage of sales, we are -- the depreciation is actually not going up, it's decreasing. And what we also can see is that when we are investing, we can see that we can move some of the cost for personnel into depreciation. And as Eric said, when part of the challenge is to find skilled people, that's also good and makes HANZA more sustainable towards possible personnel challenges.

[Niklas Elmhammer, analyst]

Okay. Just regarding people that you've managed to expand sales with quite a lot -- quite a small increase in number of people. So you see the need to hire more in the short term?

[Erik Stenfors, executive]

Yes, we need that constantly. But also, as I touched on before, as we are robotizing and automating our process, then we need more, let's say, engineers. So we need less people, but more skilled people, more educated people. On the other hand, we have good internally. We have HANZA Academy. So we try also to have the majority coming from inside. But yes, we will continue to employ. But as you said also, it's not a high rate of people compared to the revenue increase.

[Niklas Elmhammer, analyst]

Okay. And just regarding the margin improvement. I mean, I guess as you mentioned, major part of the margin improvement in main markets is Germany, and I assume that is Beyers. Have we seen the full effects of the coordination program? Or is there still room for further improvement?

[Erik Stenfors, executive]

I would like to expand on that because it's not just Beyers. So Beyers was the company, as you know, that was highly unprofitable when we bought it. We gave it a 1-year integration period, added some sales and made it profitable. But it was also an integration in the cluster. And it means also by our cluster function, we can split overheads on more people and so forth. So it's not just Beyers turning from red to black figures. It's also the cluster getting bigger that helps the profitability. And yes, of course, we are not ready with Germany yet. We will continue to build in Germany, we see also a huge potential there for the coming years.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Erik Stenfors, executive]

Okay. Thank you. And by that, we will then end this audio cast, and I hope to see you at our AGM next Monday. Thanks much for listening in, and bye.