Hanza AB

STO:HANZA

Earnings Call Transcript

[Operator]

Hello, and welcome to the HANZA Q2 report 2021. [Operator Instructions] Today, I am pleased to present CEO, Erik Stenfors; and CFO, Lars Åkerblom. Speakers, please go ahead with your meeting.

[Erik Stenfors, Founder, President & CEO]

Thank you, operator. Good morning, everyone, and thank you for joining us in the middle of the summer. I'm Erik Stenfors, the CEO of HANZA; and I work together with our CFO, Lars Åkerblom, present the second quarter 2021. And also a reminder that this presentation is already available on our homepage, hanza.com. Now the second quarter is an interesting quarter for anyone who is following our company. The Q2 number shows and the Q2 activities has quite a lot about the future. So let's go ahead and move to Page #2. And a short market update. In the time of -- we have with our customers, so that's the product-owning companies, we see some clear priorities now. There is a deep discussion on how to streamline the supply chain, not only to lower the cost and increase the flexibility, but also to lower the exposure to supply chain disruptions. And that's, of course, driven by the experience from last year during the pandemic. There's also a refocus on sustainability, which is really good, something we like to work with. So it's a lot of discussions how to make your manufacturing process more sustainable and less impact -- negative impact on the environment. And also a hot topic, of course, is the shortage of material and components. That also puts a light on the supply chain because you really like to have a short manufacturing process. So a short time between the arrival of the components and the delivery of the ready products. So if we move on to HANZA, we still are affected by some customer areas that was lowered during the pandemic. We have customers selling equipment to stores, to breweries, to textile industry. We expect them to come back by the end of the year. But the good side is the fifth trend, driven by the priorities mentioned is really towards local company manufacturing, which is the core concept of HANZA. And that means also that we have seen a number of new customers and products this spring. And on top of that, Germany has now reopened. And this gives us a number of also new opportunities. So all in all, we are quite optimistic about the sales development, and that's also why we have launched this year activity program.And then we move to Page #3. We call it Roadmap 2021. Here, in the previous presentations, we have this perspective. So we are building them step by step. But in the light of this increased demand for our offer, we have decided to accelerate the development of our clusters. And of course, the different degrees of maturity gives different capacity and also different contributions to the group margin as Lars will come back to. So this year, we have decided to accelerate the development. And in the first quarter, we started building a new factory in Estonia. We see on the picture here, the -- how it looks today. It will be open by the beginning of next year. And we also made a strategic acquisition in Finland, a company that has been well integrated now and it's really supporting the Finnish cluster. Moving on to Q2. So in Sweden, we launched a quite extensive investment program on the holding area for electronics, so that is to protect components on circuit boards. And in China, we decided to move to new premises. So we will eventually have about 8,000 square meters. The factory relocation will take place this quarter. So that's where we are right now. And before I move on to tell you a bit about the future, I will give the floor then to Lars, who will tell you about the financial development. And I think then Lars, we will move to the next page, Page #4.

[Lars Åkerblom, Executive VP & CFO]

We start with Page 4, textiles and the sales. And we see that net sales has grown. They are up 13% and amounts to SEK 630 million. We have made an acquisition that has contributed to the sales, approximately SEK 40 million, and then we have also Åtvidaberg, that is not part of the group anymore since we moved that production to other production in Sweden, and that is affecting negatively with approximately SEK 10 million. If you adjust for those, we have the growth of -- and as Erik said, we could have sold more. We are hurt by the shortage in components and that has affected both the sales and also the results, a little bit negative.We are now on a rolling 12-month sales of SEK 2.2 billion. And as you can see that the first half year is SEK 1.2 billion, so we are on a higher level in sales for the first half year compared to the second half year last year. We have a strong quarter from an earnings perspective, the EBITA amounted to SEK 40.4 million, and that is 6.4% in margin compared to last year or minus, but that last -- the quarter last year was affected by SEK 27.5 million in onetime cost for an early decision to make actions in the middle of the COVID pandemic. And as I said, the material situation has been strained and has affected the result, negative a little bit. And we are now on the rolling 12 months operating profit of a little bit over SEK 100 million. In the first half year, we are on SEK 63 million. So here again, we have us 2020.We move to Slide 5. We see the 2 different segments. We divide the company into the Main markets and Other markets. And Main markets are where we have production and customer in the same geographic area. And again, we see a growth. We have 11% increase of sales in the Main market. We also here have a currency effect of approximately SEK 9 million, and we have really strong margin. We are close to 8% in EBITDA margin. We are compared affected with a onetime cost of approximately SEK 10 million. We also see a really strong profitability in Other markets, and we see also quite strong sales increase in Other markets, we are up 17%. Here, we also have a currency effect of SEK 12 million. And this is, I think, very positive. We have, for a long time, worked with the development of Other markets, and we see in many consecutive quarters that we have increased both sales and profitability in the Other markets. And that, of course, is the key to reach the financial goal of 6% in the group total. And in the Other markets, we are reaching a margin of 5%. And both segments are affected by the component shortage. So it could have been even stronger results in the 2 segments. We move on to Slide 6, looking into the balance sheet and the KPIs. And we have an equity ratio of approximately 32%. And that is affected by both the dividends that we paid out, with SEK 10 million in this quarter and also negative affected by the currency exchange rate. And we have also made an acquisition that affects the equity [indiscernible] situation. We have a net debt that is increasing a little bit in the quarter, and that is mainly driven by the building of the factory in Estonia, but also the need of increasing the stock to the shortage in components and a little bit delayed sales, as we have mentioned a couple of times now, that has affected both the net debt and the cash flow from operations. Cash flow is still positive, but if you compare it to last year, we have real big change in the working capital. It has a negative effect this quarter of SEK 36 million compared to a positive effect of SEK 10 million. This we expect to come back when the component situation is getting better. We had a strong earnings per share. We reached 73 -- SEK 0.73 in the quarter. And SEK 1 for the first half year. And that is partly -- mainly due to the increased profitability, but also the fact that we are able to keep the financial cost at the same level at the growth of the company. And now, Erik, I'll leave over to you for looking ahead.

[Erik Stenfors, Founder, President & CEO]

Thank you, Lars. And then we turn to Page #7. And I think that the future numbers, it shows a very solid quarter and a progress according to plan. Should not be a surprise for those who have been following HANZA. What's interesting is the market development, where we see that we have this very strong position, and we have sales coming in our direction due to different trends and the opening of the German market and returning volumes. And all these calls for increased capacity, and that's why we're running this program, Roadmap 2021. And we have done a number of activities, as I showed previously, and we will do more activities in our clusters. And we are also open for further strategic acquisitions. We are constantly analyzing different opportunities. Now, we are not running a buy-and-build strategy. So we're not buying companies in order to become a larger company, but we are buying a company in order to be a better company. So still the guiding star is the customer value. But having said that, I think there are a number of companies which are of interest for us and it could come more acquisitions. Also very important, we have created a good culture in HANZA. And now we see that we will expand HANZA with new colleagues. We have fantastic colleagues, Lars and I today. We will have more colleagues both through possible acquisitions and through recruitment. And then it's really important to keep the company culture. So we have a good and competent HR function in HANZA. And they will be a very important focus area moving forward. And by that, we have reached the end of the presentation. And now we open for any questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Erik Cassel of ABG Sundal Collier.

[Erik Cassel, Research Analyst]

So first off, I assume that it's still Germany that's running down the margins in key markets. So do you expect recovering volumes to be enough to sort of lift the margin all the way to 10% operating margin? You mentioned 70% of HANZA had this quarter, if that's even possible.

[Erik Stenfors, Founder, President & CEO]

I think I can start answering. Maybe Lars will continue. So we're speaking -- and good morning, Erik. Good day to you. I think that we have been clear that our model makes it possible for double digits, the margin in our clusters. We are not going to give any forecast if and when that happens, but now we see that the majority of HANZA is running that. On top of that, we have the -- so that is actually our business model, that we will continue to grow and be able to develop and still maintain a good margin after the cost of the new constructions. I wouldn't give a forecast for Germany more than saying that it was quite profitable unit and as it stated when it comes to Germany, then it's been a downturn, that we expect it to come back, and that should, of course, lead to increased margin. And on top of that, we see, as I stated before, a number of new opportunities in Germany. Germany is a huge market, it's larger than all the Nordic countries together. So maybe, would you like to add something on that?

[Lars Åkerblom, Executive VP & CFO]

No, just commenting that you are correct in that Germany is -- is part of the main market that is with the lowest profitability and taking margin down to the Main market, that's correct.

[Erik Cassel, Research Analyst]

Okay. So I assume that it is [indiscernible] customer, I think you said you still -- production was on level in Q2 2020, correct?

[Erik Stenfors, Founder, President & CEO]

So we -- this is a slow-moving sector with -- also, I think, really good forecast. So they have been able to forecast the downturn. And I think they are the same accurate with upturn. So the frontline is shops like H&M and this, and then it matures into the machine makers. But I think that we have a solid forecast of course, subject to force majeure. But otherwise, I think we can see quite well how it will move on the coming year.

[Erik Cassel, Research Analyst]

Okay. And then you mentioned that the shortages have had a negative effect on results this quarter. I think Lars said they had a small effect. But anyway, is it possible to quantify that in any way? And also if you have a feel for the potential impact in the third quarter as well.

[Erik Stenfors, Founder, President & CEO]

I would say that when I talk to the customers, we are quite satisfied. Everybody knows about this situation, and they think that -- we hear positive words that we are doing good in a hard market. I wouldn't be able to quantify it only to say that we have higher orders than we can deliver, and it's not due to capacity Q2 materials, and this is expected to continue. But I wouldn't be able to quantify it into some numbers, unfortunately.

[Lars Åkerblom, Executive VP & CFO]

No. I can add. You can look into the P&L, we've got some briefing there, you can see on the sales and then you have the change in work in progress in this quarter, plus SEK 41 million and the last -- same quarter last year was minus SEK 15 million. So there you give some numbers on the effect on the sales. And of course, that is also due to the increase of the sales in total, but that gives you a little bit briefing of the size.

[Erik Cassel, Research Analyst]

Okay. Very helpful. And then, then the last one for me. Cost dynamics on margins at the moment. In other words, how much cost increases are you seeing in terms of raw materials and components? And how much have you increased prices? And is there a potential effect on margins as well?

[Erik Stenfors, Founder, President & CEO]

Would you try to comment on that, Lars?

[Lars Åkerblom, Executive VP & CFO]

I think that no, we will not quantify that. But it -- I think you can say that like this, that it's -- it doesn't change the fact that we have an organic growth in HANZA. So the 10% that we are growing is not due to the price increases, that there are also 2 sides to this. And one is the price increase and the other is the shortage where we don't get -- try to find components. So there are 2 parts of this shortage problem.

[Erik Cassel, Research Analyst]

Okay. But no effect on the margins as a result of these cost increases?

[Lars Åkerblom, Executive VP & CFO]

A little bit, but not big ones. Normally, what we do is that we are just forwarding the increase of the material to the customer, and that leads to higher sales and very lower margins since that is not part of our contribution, but it's not in quarter 2. It's not very much and doesn't change the picture of the development of HANZA.

[Operator]

[Operator Instructions] Our next question comes from the line of Fredrik Nilsson of Redeye.

[Fredrik Nilsson, Equity Research Analyst]

Hi, everyone. Looking at the actual figures you reported today, they came in quite a bit above the preliminary figures. Was it the strong end of the quarter?

[Erik Stenfors, Founder, President & CEO]

I think that it's been strong over the quarter and continues to be strong. It's just that you cannot really predict exactly the amount of deliveries, so we forecasted higher than.

[Fredrik Nilsson, Equity Research Analyst]

I see. I see. So yes, the margin is obviously increasing in both of your divisions, but could you tell us a bit about the other markets? I mean prior to 2020, you were quite optimistic, then the pandemic came and I mean if you're happy with its performance now? And what's the potential going forward in that division?

[Erik Stenfors, Founder, President & CEO]

So the other markets you're talking about?

[Fredrik Nilsson, Equity Research Analyst]

Yes, exactly. Yes.

[Erik Stenfors, Founder, President & CEO]

So it could be interesting to know also that there was some impact on the pandemic also in the second quarter in Central Europe, which is part of the other markets. So that also impacted a bit. Other than that, we did the restart of our unit in Narva, which we described also part of the Other markets, which has been quite costly, but also quite successful. It's a huge demand for that unit. So when I say the units which are lowering the margin, but we are aware of it, and we also know that the situation is getting better.

[Operator]

Thank you. We currently have no further audio questions. I will hand back to the speakers for any further remarks.

[Erik Stenfors, Founder, President & CEO]

Okay. Thank you. So I'd like to thank you all for taking the time again to join us.