Hanza AB

STO:HANZA

Q2-2025 Earnings Call

[Operator]

Welcome to the HANZA Q2 Report 2025 Presentation. [Operator Instructions]

Now I will hand the conference over to the speakers, CEO, Erik Stenfors; and CFO, Lars Åkerblom. Please go ahead.

[Erik Stenfors, executive]

Thank you, and good morning. Thank you for joining us in the middle of summer. I'm Erik Stenfors, CEO of the company, and it will be my pleasure to walk you through HANZA's second quarter 2025 together with our excellent CFO, Lars Åkerblom.

Now every quarter tells a story, and this one is about moving fast forward in a slower market. As you might know, if you'll be following us, HANZA is not a traditional contract manufacturer. Our model is different and so is our speed of development. So we have many activities going on right now. And in this presentation, we will focus on 3 main areas. Leden, the acquisition we did in March this year, where our swift integration now turned into a capacity expansion driven by strong customer demand. We will talk about LYNX. That's our defense focus program, which is now accelerated by a targeted acquisition just last week, and we will talk about the future. We see now that volumes are rising again. This is the first time since the downturn began.

So a lot of good information will come up today. And we have the agenda structured the usual way. I will present the general development. Lars will talk about the sustainability and the financial review. We will have a Q&A session, and that's the point where all questions are warmly welcomed. So please use that.

Let's start with Leden. This is a company that really has met our expectations. They have a very high technical expertise. They have a healthy corporate culture and should be after our thorough HR due diligence. And just to recap, this is a contract manufacturer of mechanics. They are specializing in sheet metal mechanics, machining and complex assembly, have about 600 people, where 200 are in Estonia and 400 in Finland. Estimated sales this year about SEK 1.1 billion.

We started integration as soon as closing was done then in March. It's going really well. We have split the organization. If we look to the right, what we do is that we take the 4 Leden units in Finland and bundle them together with our 3 existing units, creating a new Cluster Finland under the leadership of Jukka Haapalainen, fantastic new leader we got with the acquisition. He used to be then CEO of Leden is now then President of Cluster Finland. Then we took the unit in Estonia in Tallinn and grouped it together with the other units under the leadership of the also fantastic Liivar Kongi, who is our President of Cluster Baltics.

It's been working well. The financial reporting works really well. No problem to put this report together. Rebranding, you see also the new signs on the building. What has been a challenge though is that we got with this acquisition, new customer base. We got, for instance, EATON, it's the power management company. We got Danfoss, working with cooling and heating and motor drives. We got more of ABB. You know that company, electrification, automation. They are growing quickly, and that puts us in a bit of a dilemma. Should we grow with the companies we have -- our customers, we have excellent dialogues with them or should we focus then on streamlining operations. It's an easy call.

Scale now optimize later. So what we have done is we accepted the growth. If you check then, and Lars will probably come back to this in the numbers. If you check the sales for this quarter, it's for Leden above 15% more than this SEK 1.1 billion expected, and it's just the first quarter. So we are working with extra shipments. We are working with overtime. We are working with production across several factories, downloading the margin, but the good part is only temporary. The beauty is when you integrate a factory -- a company like Leden into HANZA, the capacity of HANZA and Leden 1 plus 1 becomes more than 2. So already within this year, we will have a new capacity solution in place, and that will lead then to a very quick upturn in the profitability. So that's about the Leden case.

If we then look at LYNX. This was, let's say, a response to the new security situation in Europe, which was very clear when the new administration took office in the U.S. LYNX is about targeting the defense sector. And we have a concept that works really well for that. We have electronics, mechanics, complex assembly in local places, exactly what is needed for the expansion of this sector. And I think also we have good experience with defense is nothing new for us. We've been working with them for many, many years. But I think also on a personal note that this is not just good for business. It's also good for Europe. It's about Europe. It's about democracy. I think every contract manufacturer should ship in some capacity for the defense industry right now. It is really important.

On the other hand, we must, of course, safeguard capacity for other industries, for other customers. And the talk on the street now is that the defense is eating up all the capacity, what will be left for the other industries. And that's why it was so important with this acquisition of Milectria. It brings expertise. It brings a new customer base, but it also brings a capacity platform where we can grow with this sector without having to lower the capacity for other industries. Now we are waiting for the approvals from the authorities. It's a standard process. We expect that to be ready by September. We have said at that point, we will have a little -- not opening ceremony, but closing ceremony when we close the deal in the headquarter in Finland and talk more about the new customer base.

We cannot reveal so many details right now and talk about this LYNX project, how that will proceed over the coming year. And you are must -- you are much welcome to please join us then we will send out invitations. What we can tell already now is that Milectria comes with 1 factory in Finland, 2 in Estonia and 1 in Abu Dhabi. It brings our total staff up to 3,500 people divided, as you can see on the map to the right. It brings a sales of about SEK 300 million annually, same case as with Leden or better and worse, how to say it, but this area will expand even quicker than Leden, but we do have a capacity platform. So we are not afraid of this increase. We will be able to handle this, thanks to the plan we have made in LYNX.

And again, more about this in Finland in September. And this will then be kept as a special part, and that is also unusual. Instead of putting the different factories to the different clusters like Leden, we will keep this as a special unit, as a special part of the LYNX project. More information to come within soon.

And with that, I leave the floor to Lars to talk about sustainability.

[Lars Åkerblom, executive]

Thank you, Erik. And the sustainability work in Q2 was focusing on including Leden that we acquired in March into the figures. So now we have in the figures you see to the right, Leden factories are included. We also started to work with the DMA, including Leden to prepare for the CSRD reporting by the end of this year and the beginning of next year to fulfill the requirements. We also worked with the annual employee survey, the feedback we get from our employees. We work with that, changing where we can improve things based on the feedback we get from our employees.

And we also have quite interesting project in Estonia, bringing in people from the open prisons working in our factories in both Tartu and Narva. And next step will be to also do this in Tallinn. We see on the figures that the injury frequency rate are stable at the level we have been for quite a while. And we also see that the hazard waste is increasing a little bit due to the fact that we took down one painting line in Sievi, and that increased this temporarily. We also see that energy use is increasing. That is due to the acquisition of Leden.

Coming into the financials. We see a strong increase of the net sales, increasing with 24%, and we also see an organic growth of 3%. And we are a little bit above this SEK 1.5 billion in the quarter and same level as in Q1. So accumulated, including Leden in the full period of the first half year, we are a little bit above SEK 3 billion or SEK 3.051 billion. As Erik mentioned, we see a change in the market. We see that for the first time since the downturn in the economy, we see increased receivable of orders and the volumes that will increase in -- we expect to increase in the second half year. So that's a major change in the operation right now.

Earnings, the adjusted operating profit, which actually this quarter is the same as the operating profit is SEK 106 million. And having a continuing increase of the margins, if you take the comparable units, we have 7.8% coming from 4.1% a year ago and 7.3% in Q1. Erik mentioned the challenges we have in the Leden factory, and that reduces the margin for the whole group. Leden is approximately on 4% in margin in Q1 compared to 7% in March. We expect Leden to increase the profitability. We also have arranged the transaction or the acquisition of Leden with an earn-out that is depending on the profitability in Leden. So if this lower margin continues, we also will have a release of the earnout in the balance sheet.

Orbit One that we acquired a little bit more than a year ago at that time being on 6% approximately in margin are now on the same level as the rest of HANZA if you exclude Leden. So that's really positive and show good development of companies that we acquire that we can rearrange some parts and increase the profitability quite fast after the acquisition. The earnings per share increased to SEK 1.13. And for the first half year, it's SEK 2.23.

Looking into the cash flow, we continue to have a strong cash flow. We saw that the cash flow peaked in Q4, but it continues to be strong also in the first half year. We have not seen the full effect of the work we do with the working capital in Leden. So we expect to have a positive -- continuously positive cash flow also when we are able to release some working capital in Leden. And what you see on the graph to the right is actually when we acquired company, we increased the net debt compared to the EBITDA and then we are able to work it down. So both in Q2 '24 and in Q1 '25, you see that the net debt compared to the EBITDA is increasing a little bit. And we are -- regarding the net debt compared to the EBITDA, we are well below the 2.5x that we have as a financial target.

We will, with the acquisition of Milectria, increase that temporarily, but we expect the net debt compared to the EBITDA to continue to decrease. We have a solid balance sheet. We have equity-to-asset ratio that actually increased during Q2 despite the fact that we paid out dividends, and we are on 35%. So we have a solid balance sheet. We also decreased the net debt, if you include the dividends approximately with SEK 100 million.

Coming into the segments. We see, which I think is very positive. We see that other markets are at a higher level and closer to the level of the main markets. And for you that have followed HANZA for quite a while been hearing me and Erik saying that there shall be really no reason to have a lower margin in other markets compared to the main markets. It's more matter of how mature the factories are and the programs that we call the ONYX programs, where they are in what phase they are. And now we see the result of both the fact that the factories are more mature and that we have done this ONYX program with restructuring.

So we see an increased margin in other markets compared to what we have seen previously. We see an organic growth in main markets. We see a slight decrease of our organic growth in other markets. And we see a profitability that are in line with historical figures, except for the fact that other markets are increasing the profitability.

Ownership and share, we have the same main owner. We have some differences. Some financial institutions are increasing their shares, their ownership and some are decreasing, but no major changes. We increased the number of shares in the beginning of the year when we acquired Leden. We see that Erik continues to increase his owning and holds now 640,000 shares corresponding to 1.4% of the ownership.

And by that, I leave back to you, Erik, for a summary.

[Erik Stenfors, executive]

Unless you like to comment on this slide.

[Lars Åkerblom, executive]

Sorry. Yes, the Milectria acquisition, and it's 100% of the shares in the contractual manufacturing part of Milectria. We also acquired the factories, the real estate where the operations is run. The purchase price is set to EUR 16.4 million, and it's based on EBITDA multiple of 4.9x of cash and debt-free basis. And this will be a cash deal. So there are no HANZA shares involved in this acquisition. And similar to what we did in Orbit and in Leden case, we have an earn-out and the earn-out can be a maximum EUR 18 million based on the revenue in 2025 to 2027.

But in -- to reach the full earn-out, the sales in the company needs to be more than doubled during this period. As Erik mentioned, we are waiting for government approvals that we cannot really steer, but we expect them to be ready in September and we also expect this to, from the start, have a positive impact on both sales, operating margin and maybe most important, earnings per share.

Now Erik, now you can do the summary.

[Erik Stenfors, executive]

Thank you, Lars. And today, my family is also buying shares. I see on your list, Lars, that I need to get up to 2% in order to be on the top 10 list. Okay. The key takeaway of today's presentation, this quarter, this last year and maybe the key takeaway how we work is that we keep moving, even putting on some extra speed when the economy stands still. And by doing that, we create a strong position for the future. We talked about the Leden acquisition, how we're now increasing capacity. We talked about the LYNX program, which we won for up to a year and embrace this Milectria before we then integrate it into our clusters next year.

But as I said in the beginning, we have many other activities going on. In February this year, we opened a new factory in Tocksfors, Sweden. It's now in full swing, a lot of work behind that. We decided also to expand our building in Arjang Mechanics in Sweden because of a strong demand from the energy sector. In Poland, we have the streamlining project. We talked about this in earlier reports going really well and also contributing to the margin in other markets that Lars talked about. This is still a slow market in Germany, of course, sad for the volumes. But still, we feel that this is bringing new opportunities. We really like to increase our presence in Germany.

Then if we look ahead, clear signs that the downturn that started early '24 is now reversing. That was also our initial expectation in the beginning of '24, it was said that it could be a destocking exercise and demand will pick up already second half of '24. We didn't believe in this. This was a normal downturn of the demand that will last for a couple of years. But it's well in line with our plan. And then, of course, we work with HANZA 2028. It's on the final phase. We were in this quarter talking to a number of customers. We have a very close dialogue. We would like to, of course, develop HANZA according to the demand and the strategy of our customers.

We will call for a Capital Market Day at the end of this year, where we will tell you about this next important step of HANZA.

And with that, we can now open up for any questions.

[Operator]

[Operator Instructions] Next question comes from Anders Akerblom from Nordea.

[Anders Akerblom, analyst]

So firstly, I would like to ask a bit on profitability in the other markets division. I mean, obviously, you reported a very healthy margin uplift. Could you just walk us through this in a bit more detail, particularly as you didn't see any positive organic sales growth in the quarter in the division?

[Erik Stenfors, executive]

Would you start, Lars or...

[Lars Åkerblom, executive]

I can start. Anders, it is, as I said, we have been working since the downturn a year ago, a little bit more than a year ago with this ONYX program, restructuring, adjusting the cost base to the volume -- the sales volume. So it's not driven by growth of sales. It's driven by higher efficiency and lower cost and the switch in the customer base, et cetera. So that's the main driver of the increased profitability in other markets.

[Anders Akerblom, analyst]

And I get that and appreciate the answer. But I mean, just looking sequentially, it's like some 240 basis points uplift. So it seems like -- I mean, have these effects come through just now in the quarter? Or is there a positive impact from Leden here given the lower margin profile in other markets? Or just how should we think going forward? I mean, is this a -- do you think that it's reasonable to extrapolate this margin to some extent? Or will we see a partial reversal? Just anything on that would be really appreciated.

[Erik Stenfors, executive]

I can also add before you say something more, Lars, that we have also stated that the profitability is not a question of where the cluster is located, like Lars said, but rather how mature it is, how well organized it. We have a special concept where we really have to create the cluster. It takes some time, but it's really efficient when it's in place. And in Poland, it was all about this acquisition, Orbit One that initiated the right size. We could do the things we like to do. We could have specialized factories and all that. So it's -- we were running about 6.5% something before the recession. And now we are up to 7.5%. It's nothing dramatic. It should be above 8% like main markets. Lars, would you like also to comment more on this.

[Lars Åkerblom, executive]

No, I can comment on -- you asked about if Leden contributing. And yes, as we have said in this call, the main challenge in Leden is in Finland. So Leden has the most negative impact on the group in main markets, so not in other markets. And as Erik said, Poland is the main difference, Orbit One coming in, in other markets at lower margin, increasing the margin. And then more or less all different -- all the clusters in other markets are increasing profitability, but not dramatically. It's in line with our expectations.

[Anders Akerblom, analyst]

Okay. No, that makes sense and kind of negates my next question, which was going to be why margins were down so much in main markets sequentially on the healthy organic growth. So mainly as Leden and Finland is the most sort of challenged short term in terms of elevated costs, if I understand you correctly.

[Lars Åkerblom, executive]

Yes. And it's really not that dramatic either. You have a big factory, you move into a large factory and you start up and before you get full efficiency and are able to get the profitability on the level where it should be combined with high demand of sales, that's -- it's not unusual that, that takes additional cost in order to keep the customer happy.

[Anders Akerblom, analyst]

Makes sense. And asking on recent acquisitions, I mean, given in part that -- I mean, obviously, you're buying these companies on rolling earnings. How do you sort of ensure that even in a more challenging market when profitability is a bit more constrained that this is value creative, and I mean, particularly then with regards to integrating these companies in an efficient and good manner and raising profitability. Could you talk anything about your expectations for -- not in the lease Leden in terms of when the profitability uplift could be expected to be realized?

[Erik Stenfors, executive]

I can maybe start there, Lars. I think that in general, if you look at, for instance, Orbit, we acquired a year ago, this is a sunshine story, a company that has a maximum come to 6% margin, goes down quickly when the volumes goes down, has not gone up again and now it has the same margin as HANZA. So what I think is when we buy a company that, of course, we choose them carefully. We are looking for competence, how to expand our offer to the customer. So the input is silver, but the output is gold. And when we then talk about Leden…

[Anders Akerblom, analyst]

Yes. I guess I maybe mean…

[Erik Stenfors, executive]

Yes, I understand. But if you then look at Leden, so there are different challenges in different ways. So Orbit was lower volumes. In Leden, we have the opposite story that we have increasing volumes. So in any way, our concept helps. It restructures and you see you're pointing out that we had a decrease organically in other markets, still we're increasing the margins. So of course, sales growth helps to increase the margin, but we can also increase the margin when the volume is down. So I expect to answer your question about Leden that we should have a quick rise of the profitability when the capacity exercise combining Leden with the rest of the group is done. Now we were just in the integration phase. So we had to quickly start with the capacity expansion program also, but we are quite used to that. So that will be within this year. And that's why we can also restate our financial goals for this year.

[Anders Akerblom, analyst]

Not restate, reiterate your financial targets for the year, right, just so I understand.

[Erik Stenfors, executive]

Reiterate is a better word, yes.

[Anders Akerblom, analyst]

Yes.

[Erik Stenfors, executive]

Yes. But you see...

[Anders Akerblom, analyst]

Sorry I missed something.

[Erik Stenfors, executive]

Yes. The old answer is then increasing margin by 0.5% unit per quarter and then you have [ on top of that ], it's not complicated mathematics.

[Anders Akerblom, analyst]

No. No. And just one final question, if I may. On the recent acquisition of Milectria, I just noted that kind of looking at revenue per employee, it was about SEK 1 million, quite a bit below the average in your most recent acquisitions, which is around, say, SEK 1.5 million. Could you specify a bit what drives this? I mean, if it's only kind of more manual processes and if you expect room for efficiency improvements in this operation and possibly then also kind of the costs associated with potentially pursuing efficiency measures, if there are any, to begin with?

[Erik Stenfors, executive]

So we will not go into any details regarding this acquisition, but yes, it's more labor-intensive. And you cannot really calculate number of people. You have some customers where we have fully automized production with almost no people involved, and then we have a lot of manual labor depending on volumes, depending on target area and so forth. But again, we will give you much more details when we have...

[Anders Akerblom, analyst]

Is there automation opportunities? Okay.

[Erik Stenfors, executive]

Yes. I think that in the military sector, we don't run into high volumes so often, which makes it more specific case. But we do have a plan how to increase capacity, which we will come back to in September.

[Operator]

Next question comes from Forbes Goldman from Pareto Securities.

[Forbes Goldman, analyst]

Yes. Right. First question here is on demand. And you mentioned that some of your customers are seeing higher demand towards the end of the year. Could you perhaps specify if this is broad-based or specific sectors?

[Erik Stenfors, executive]

I think that is the news because we have always had sectors growing even though in this lower economy. So we saw energy and defense security growing, but now we see more in general. So -- and I think if you've been looking -- we cannot give details on our customers, but if you've been looking at the reports, you see some upturns in the mining sector, you see some upturns in automation companies. So there is some areas which are moving now, different areas, which is really, really good.

[Forbes Goldman, analyst]

Got it. And second one on cash flow has been quite solid year-to-date. You previously mentioned that maintenance CapEx will -- well, CapEx needs will not be that high this year, considering you recently acquired Leden. And also now with the latest acquisition of Milectria, wondering how we should think about CapEx needs going forward into next year. From my point of view, it looks like it should be fairly low levels next year as well.

[Lars Åkerblom, executive]

I can answer on that one. It's not only the fact that Leden had high standard and new machines and no major needs of investments. It's also that we -- in the old HANZA, so to say, invested quite a lot previous years. And we've been saying that the CapEx level will go down. And what you see in both Q1 and Q2 now is that the investment level, if you exclude acquisitions and also if you exclude factories is a lot lower, and we expect that to continue. We will, of course, not stop investing. There will be investments in replacing machines, et cetera.

And if we see that the volumes are increasing again, then you will see an increase of investment in the future, of course. Milectria is with the SEK 300 million compared to the -- a little bit SEK 6.5 billion or so in HANZA is not a major part. So you will not see any major impact on that acquisition for investments. And also that business is not that heavy in investment needs either.

[Forbes Goldman, analyst]

Great. And finally, perhaps just on operating cash flow and how we should think about this going forward? Do you have a specific cash conversion target that you're aiming for?

[Lars Åkerblom, executive]

No, we have not set that. What we have is the net debt compared to the EBITDA that shall be under 2.5x. And as you see, we are on 2.1x. It will increase a little bit with -- when we do the acquisition of Milectria. So that's the only financial goal we have related to the net debt.

[Operator]

[Operator Instructions] Next question comes from Jakob Söderblom from Carnegie Investment Bank.

[Jakob Soderblom, analyst]

Yes. Can you hear me?

[Erik Stenfors, executive]

Yes.

[Lars Åkerblom, executive]

Yes.

[Jakob Soderblom, analyst]

Perfect. I have 2 short questions that following up on my end here. I was wondering if you could talk a bit about sales activities during the quarter. And if you compare it, I'm guessing then have seen some green [ sprouts ] across your different sectors and so on. But how -- can you talk about anything, you haven't released any [Technical Difficulty] changed across the quarter starting from April kind of a bit of a hesitation, I'm guessing with everything going on with trade policies and so on. But what are you seeing now? You have entered the summer months? And if you can give some color on this.

[Erik Stenfors, executive]

So, I think this was mentioned -- it was mentioned in the report that, first of all, if we look at the LYNX program, this has been really successful. And we are saying that already this autumn, we will be able to launch new deals. So that has been a really successful program. It's something that really fits the market, our concepts. In general, sales is good. We have had a number of new discussions. And that's also the challenging part that we cannot reveal so much until the deal is done and maybe also old suppliers are excluded. So -- but I can promise you, you will hear some news about the new sales during the autumn.

[Jakob Soderblom, analyst]

Excellent. Just a final one I'm guessing a question on inventory development, have been by natural reasons coming down quite a bit if you look at the multiple of the sales. Do you have any type of target view around this? Do you expect to come back like pre-COVID levels? Or I mean, it's a bit of a different supply chain situation now than it was a couple of years back. But what can we expect from? Is it to drop down below 20% compared to sales? Or how do you view this going forward from here?

[Lars Åkerblom, executive]

As you said, Jakob, we are quarter-by-quarter or so decreasing the stock levels compared to sales. And what we are focusing on is actually the total working capital because it also has an impact on type of products and product mix and customer mix. But we have not set externally any sort of target figures on the working capital level compared to sales. We have said previously that we aim to come back to pre-COVID levels, but we have not set any sort of target on that one.

[Jakob Soderblom, analyst]

On that, do you feel that you are...

[Erik Stenfors, executive]

Just to add on that…

[Jakob Soderblom, analyst]

Sorry, continue.

[Erik Stenfors, executive]

Okay, thank you. So to add on that, one of the challenges is if you are a product only company that you have all these different suppliers and the material is flowing back and forth. And it's all about throughput time, the time before -- between you bought the component and you have the ready product. And there, we have a beauty of the scale. So the larger and more integrated our clusters become, the throughput time also becomes shorter. So here, we also have advantage both for ourselves and for our customers, which brings down the inventory.

[Operator]

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. Then I'd like to thank you again for your time and your attention today and hope that you will keep following us. There is much more to come. Thank you, and bye for now.