Hanza AB

STO:HANZA

Earnings Call Transcript

[Erik Stenfors, Founder, President & CEO]

Good morning, everyone, and thank you for joining this presentation of HANZA's second quarter 2020, a quarter that has been challenging without doubt, but also offer some good new opportunities as we shall see. We have prepared an agenda. We will start with a general overview of the quarter. Then we will do a financial review, followed by a look at the future and we will end with Q&A sessions.And presenters will be myself, Erik Stenfors, CEO of HANZA; and Lars Åkerblom, our CFO. So let's start, shall we? If you please move to Page #3. First, I just like to make a quick introduction to the HANZA Group. We are a manufacturer. We manufacture products, not for ourselves, but our customers.And we have quite well-known customers such as ABB, [indiscernible] defense company SAAB and Siemens. We founded the company in 2008, and it's still a company under development. Now we are expanding our customer area from the Nordic countries to the rest of the Europe, we entered Germany last year.In 2019, our sales just exceeded SEK 2 billion, and we are traded on the main list of NASDAQ. Now what separates us from a traditional contract manufacturer is the way we do the manufacturing. Whereas traditional manufacturing company has 1 technology, we have grouped together a number of different contract manufacturing technologies into certain areas, which we call manufacturing clusters. And so far, we have opened up 6 clusters. You see on the map to the right, we have in Sweden, Finland, Germany, Baltics, Central Europe and China. And in total, we have just around 1,800 employees, but we also use [ rentals ].And in addition to this manufacturing model, we also have advisory services. We have developed a model called MIG, where we analyze our customers' supply chain and come up with solutions, you see to the bottom right, where the blue box will be the customer, surrounded by suppliers, how we can simplify the supply chain and come up with a better solution. So that sounds in a nutshell, manufacturing clusters and advisory services. So if we then move to the quarter, Page 4 please. It was a tough quarter, and I think it's best explained if you look at the graph to the right, Konjunkturinstitutet. In English, I think it's National Institute of Economic Research.It was a very sudden drop in April, much harder and longer than the financial crisis as you see to the left in the graph, And what to do, how to act. The first priority was, of course, to protect our colleagues. So we introduced corona processes, a way to make sure that -- or at least try to make sure that there was no outbreak in our 17 factories. Secondly, to protect our customers, there could be a possibility that one or several of our factories need to be closed, either by infections or because of decision from the government. So we made contingency plan, and we also started a real-time management, where we have daily updates, corona bulletins.Then the [indiscernible] situation. And HANZA like any other company was stuck with a customer base. You cannot really change your customer base in a short while.And if you, for instance -- this goes for every company, if you had a large exposure to automotive, you will probably see a huge drop. If you have a large exposure to med tech, you might see even upturn in sales. So chose rather to buckle up and turn up the sales development of our customers. So we couldn't really affect the top line, but we could affect the rest. So we started an action program, we named Resistor, in early April. And in Sweden and Estonia, we did some merger of factories. We had some duplicate technologies. In Sweden, we had -- if you see in the map to the right, we had an electronics factory in Åtvidaberg, which we merged with our electronics factory in Årjäng. That was a way to lower our fixed costs without reducing our offer of several technologies. And we did a similar transformation in Estonia, where we had sheet metal mechanics and machining, both in Tartu and Narva. And we unified that. So we had heavy mechanics in Narva and the rest in Tartu.Now in Germany, it was a more difficult situation. That was in the midst of integration. We had acquired a company last year. And now the largest customer of that acquired company was exposed to the textile industry, which was severely affected by the pandemic, meaning that we had to reorganize the company and rather the business since it was hard to travel to finalize the streamlining of the business and also act on the lower demand from that large customer. But that was successful. And by the end of this quarter, we actually have a new organization in place, and we have done the things we need or necessary for the future. But overall, a quite challenging and tough quarter, but there were also some positive notes. If we then turn to Page 5.We have had a philosophy of decentralization in HANZA. We are going to expand our customer markets, and we like to have a market-oriented organization. The best way to do that is decentralization. It also has another advantage. It creates an agile organization. So when we needed to act in several factories at the same time, we could do that as opposed to if it was run centralized. We also were lucky that up to this date we have no confirmed infections of COVID-19 in our group. And then something else happened, quite interesting. We have had our business model to lower the cost for our customers and also give some benefits for the environment. But now it was obvious. And you see some articles to the right that COVID-19 has revealed how fragile the complex global supply chains are. And there is a need to change the supply chain. This is actually our core offer.So the number of customer activities increased and also it pushed some deals to be completed during second quarter. Worth mentioning is, for instance, that we, despite the travel restriction, were able to finalize MIG analysis in Finland in an industrial customer where, listen to this, we were able to suggest a double-digit percentage reduction in the manufacturing cost.Now probably we'll move to Phase 2 of that project. The first phase is to make the analysis and present it to the customer. Secondly, in our offer is also to execute this. So that was a good success. Secondly, we won assignment to develop DNA analyzer. It's quite interesting topic these days. And it's important to remember that HANZA is not only a contract manufacturer, but also a contract developer. So we have a design department, 20 engineers. And then we're then assigned to create this DNA -- develop this DNA analyzer according to specification given by the customer. It will be ready by the end of this year or beginning of next year, and then it will be put into volume. And the benefit of us, as a manufacturing company also developing this product, is that we can use, what we in our tech language call DfX; design for manufacturing, design for assembly, design for testability.So this product will be easier to manufacture at the later stage. We also signed an agreement with a new customer in logistics management could there be quite substantial volume next year, and we widened our cooperation with an existing customer that actually led to that we did some investments, which Lars Åkerblom will explain to you. So I leave over now to you, Lars.

[Lars Åkerblom, Executive VP & CFO]

Thank you. Then we move to Slide 6. And what we can see in quarter 2 is that COVID-19, of course, had a significant impact on both the sales, but also on the earnings. And on the earnings in 2 ways. We had onetime costs for, what Erik [indiscernible] told you about the merger of the technologies in both Estonia and Sweden and also we had the smaller cost in -- onetime cost in Germany, that amounted to total SEK 27.5 million, but we also have negative effect due to the lower volumes. I will come back to that. If we take away these onetime costs and look at EBITDA, we have approximately the same level as 1 year ago, approximately around SEK 36 million EBITDA.We, of course, focused on cash flow to be stable and ready, and I will come back to that as well. And the Board decided to not propose any dividends to the AGM. The business in Åtvidaberg was merged into the other electronic factory. And we also are happy to find a solution to do an MBO deal with the management of that site, that had a positive effect for the employees and also the cost for merging these technologies.And as Erik said, we also are confident in some customers, part of the customers and factories. So we decided to continue doing investments even though we are uncertain or have this uncertainty regarding the volumes due to corona.We move to Slide 7. We, of course, don't have any exact figures on the lowering of sales due to corona, but it's approximately 10%. So what we see in the sales is the combination of acquisition, smaller positive effect on the currency, approximately 1% of the sales has increased due to currency and then a negative effect due to corona of 10%. And we see that have increased in Q2. We saw it in the end of Q1, but it has increased in Q2. We see also on the result on the EBIT that we have dropped and we see it on both business segments, both the main markets and the other markets, we see a drop.We have continued to have a positive cash flow. We have cash flow from operations, which is SEK 27 million. And in the first half year, it's SEK 94 million. And so that's quite good. And what we see is that we have stable solidity and net debt that is decreasing. And we also took some of the government loans for taxes, and that is shown in the cash flow as an increase of interest-bearing short-term debt.Move to Slide 8. As I said, we took -- early we decided to take actions due to corona. We initiated this Resistor program, and this has affected the result in Q2 with SEK 27.5 million. And on this SEK 27.5 million reduction of write-downs of machinery and equipment, which is SEK 10 million of those. And what we see is, of course, that this will increase the EBIT in both Sweden and Baltics and Germany in the end of this year. And we have such a negative effect of the fact that we were quite early in taking this decision. We have not had any major contribution from the authorities, it's only SEK 1 million in quarter 2. And also, we have negotiated, discussed with the banks, and we have a really good discussion with the banks and support from the bank. So we have entered into new agreement regarding the covenants with the banks that are adjusted due to the corona effect, the COVID-19 effect on the EBIT and EBITDA.Then I'll leave over to you, Erik, for the conclusion.

[Erik Stenfors, Founder, President & CEO]

Thank you. So if we look a bit at the future, we see in the near future that still some of our customers are affected by the COVID-19. And we must be aware of that there might be a second wave. So if you please move to Page 9.But if we look at long term, we see that we have already done quite drastic action plan, which we -- as Lars described, gives us a better situation from Q4. And also, we see that in the customer portfolio, up to the right, we have quite solid customers. They will handle the downturn. And some of them are now thinking about new R&D projects in order to be ready when the demand is normal again. And we also see new sales opportunity. As I described before, we had more discussions than ever now since so many customers are discussing that they need to do something with the supply chain. And also, we see an increased number of possible acquisitions. Some of these 1 technology companies, they understand there's a new industrial landscape coming on.And it could lead to some new interesting deals further on. And also, as you saw Lars describing, we still have a very good financial situation in HANZA. So we are able to do acquisitions, if needed. So in summary, due to the strong customer portfolio, new business possibilities and new acquisition possibilities, actually, we see that the potential now is greater than it was before the COVID-19 outbreak. With that, we can turn to Page 10 and open up for the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from the line of Oskar Vikström from ABG.

[Oskar Vikström, Analyst]

Yes. So my initial question is a bit regarding these new customers that you announced. So the way you worded it was basically that the situation has forced them to act and do some new agreements here. What I was a bit curious was, a, are these customers that you had discussions with prior to the COVID-19 situation? And then also, just in general, with this new level of activity and customer discussions, what's sort of the time frame there from -- from initial discussion to actually striking an agreement with these customers?

[Erik Stenfors, Founder, President & CEO]

Okay. Erik. I will -- and Oskar, I will try to answer that question. So first of all, I was expecting that due to the travel restrictions and the situation that it will be low customer activities. I was amazed to see that it was pushed forward by our customer. A couple of these customers were completely new, emerged during the quarter and also were started during the quarter, which is not really normally in our business where you have longer sales period. When you ask when it will come to some results, it depends on what kind of customers they are. If you look at our traditional sales model with our manufacturing clusters, we still have a period of sample production pre-series, [ volume ] series. But when it comes to the MIG part, like the MIG project I described, that means that if we move forward with this customer is rather quick and we talk about reshaping supply chain, meaning that some substantial load could come HANZA's way within a quarter.But this is not a forecast, but this is a general statement when it comes to MIG analysis that if we move forward, normally that is much, much quicker process than compared to traditional sales. So the answer to question 1 is that some of these customers were new from the quarter, and we were able to even have a completion, that's not normal. And the second is that depending on type of sales, then we will see either production coming 2021 or maybe even 2020. Was that made clear?

[Oskar Vikström, Analyst]

Yes, that's a great answer. And secondly, so now you have taken these costs for your action program and you're saying that we will start to see the impact here in Q4. So my question is, basically, could you give an indication of what sort of level of fixed cost you're counting on saving here? And would the effect come 100% in Q4 or more progressively over time?

[Erik Stenfors, Founder, President & CEO]

I would ask Lars to try to answer that question.

[Lars Åkerblom, Executive VP & CFO]

What we have said and we don't -- given any forecast, what we have said is that we -- main part of these costs are noncash flow items and that is still the fact. And in what way and how much we will save in the end of the year, we haven't filed. So I cannot answer that. But of course, we would not take these type of onetime costs if we didn't believe that we would have a good return on investment and a positive cost effect on it. And that's the way I can answer that, I think.

[Oskar Vikström, Analyst]

Understood. And just -- so in Q4, you would expect most of the effect even if you can't say how much it is, but it would come [indiscernible].

[Lars Åkerblom, Executive VP & CFO]

I mean it's not -- it's not like we take these onetime costs and then you see the full effect in 1 quarter. It will be the effect will come in the end of this year and, of course, continue. What we see when we merge technologies is that the fixed costs go down. So we will make a higher profit on the volume that we are able to keep and merge to another factory.

[Oskar Vikström, Analyst]

Yes. Understood. And yes, I mean, obviously, governmental support was quite low, as you explained, SEK 1 million almost. In Q3, should we expect any sort of impact there? Or would it be out of the figures completely?

[Lars Åkerblom, Executive VP & CFO]

Based on what we know about the different governments and where we have operation, I would say that it's about the same level. Sweden, which is, of course, the main part of this has not made any -- made any new information, new type of programs. So I would expect it to be in the same level.

[Oskar Vikström, Analyst]

Yes. Okay. And just 1 final question. So you're now almost a month gone by of Q3. Could you just give some commentary on how the quarter has started maybe and put it into relation to Q2 and your feelings as things are right now? I mean, obviously, we can't know if there's a second wave coming or anything, but just maybe some commentary on the first month here in Q3.

[Lars Åkerblom, Executive VP & CFO]

Erik, you take that one?

[Erik Stenfors, Founder, President & CEO]

Yes. I think that July is always a very slow month, and it's been, of course, lower this year than previous year. I think that many of the customers took the opportunity to close their business during the summer more than previously. How that will affect the sales? We also have, of course, some holidays in Sweden for the factories. I would say that it's yet to be revealed. I think that August will be very interesting. July doesn't tell us so much. It's -- either it will be an upturn in August or it will be some part of the portfolio, but still keep the low levels. So it's too early to say I would include.

[Oskar Vikström, Analyst]

Okay. I understand. That was all I had.

[Operator]

And the next question comes from the line of Fredrik Nilsson from Redeye.

[Fredrik Nilsson, Equity Research Analyst]

Fredrik Nilsson from Redeye here. I want to follow up on the government support. I mean compared to most other companies, it's a very small amount that you received and the guiding for the third quarter was really different as well, I believe. I mean how come you are able to achieve more out of the government support? Are they more favorable for other types of companies? Or could you elaborate a bit on the numbers?

[Lars Åkerblom, Executive VP & CFO]

I can answer. Okay.

[Erik Stenfors, Founder, President & CEO]

If I start off, I can't say that the support is for temporary action.So if you do a temporary thing, then you use the support and then you go back to normal. We believe, at least in the beginning of this last quarter that this will be a severe downturn as you saw in the graph. And therefore, we make this action program, which is a substitute where we permanently lower the cost, not temporary. Please Lars, if you've something else?

[Lars Åkerblom, Executive VP & CFO]

No. Just to be clear, we have 2 types of governmental support. We have 1 which is loan, and that has -- we have used, and that's one of the reasons for the -- as I said, the interest-bearing short-term debt has increased quite a lot. So from a liquidity perspective, we have support. Then we have the support that affects the P&L. It's not that big. And again, we have different operations in different countries and Sweden has support. But in many of the other countries, we don't have any support at all, more or less. And as I said, it is for temporary things where we really are in bad shape, and we haven't filed for that in Sweden.

[Fredrik Nilsson, Equity Research Analyst]

Okay. You seem quite cautious regarding the second half of 2020. If we look at the second quarter, did you see any improvement in demand during the end of the quarter?

[Erik Stenfors, Founder, President & CEO]

I can answer that. Erik speaking. I would say it was not as bad as we expected from the beginning. We saw and -- and I think that we follow the [indiscernible] quite much. And you saw if you move into the next month, this was April I showed, you can see the coming months, and you saw it was an upturn in demand in this growth. And that was -- as we have a customer portfolio rather reflecting the whole economy, we are a bit tied to this graph. So it means that it didn't continue to go down. It went up a bit, but it was not back to a normal level. It was still on a very low level. Is there something else, Fredrik?

[Fredrik Nilsson, Equity Research Analyst]

Yes, yes, I think it's a good answer, yes. One last question from me. The increased number of customer dialogues. I mean given that you have done some reductions in your staff, how much additional volumes can you handle with your current staff?

[Erik Stenfors, Founder, President & CEO]

I think that we are not giving any numbers, but we can say that our cluster model is quite strong. It means that we can balance between the factories, and we can have a really good possibility to increase [indiscernible]. And that was also one of the drawback with the stand-alone site. We had [indiscernible] that was a probe for a very interesting market in Sweden, but it was a stand-alone unit, which was harder to manage in this crisis, and that was also the reason why it was merged with the cluster in Western Sweden. In Estonia, it was the same thing that we had still some duplicate technologies, which we have now streamlined. But I cannot give you any numbers, but I think that we are fairly set for both an upturn and the downturn at this point.

[Fredrik Nilsson, Equity Research Analyst]

Okay. That's all from me.

[Operator]

[Operator Instructions]As there are no further questions, I'll hand it back to the speakers.

[Erik Stenfors, Founder, President & CEO]

Okay. Then we will end the session. Thank you so much for calling and hope that we will have a chance to discuss further when we release the next report, which will, as I said, be quite interesting to see if the demand goes up or if there is a second wave. But long term, we have a solid belief in the future in HANZA.Thank you.