Hanza AB

STO:HANZA

Earnings Call Transcript

[Operator]

Today, I'm pleased to present CEO, Erik Stenfors; and CFO, Lars Åkerblom. Please go ahead for your meeting.

[Erik Stenfors, Founder, President & CEO]

Good morning, and thank you for joining this audio cast. I'm Erik Stenfors, CEO of the company; and next to me, socially in a secure distance, I have Lars Åkerblom, our CFO. We will present the year-end report and we published it this morning, we go directly to Page #3. I'd like to start with a short introduction of HANZA. It's also good in order to understand the current development. We are a high-tech manufacturing company powered by customer value. If you look to the left, we have designed a concept. We call it complete manufacturing services. What we have done is we have grouped together different kind of manufacturing technologies in areas which we call clusters. And by doing this, we can offer both part production and part assembly for our customers, all under our slogan "All You Need is One ." And currently, we are up to 6 such clusters. You see the picture to the right. We are active in Sweden, Finland, Germany, Central Europe, Baltics and China. Now these clusters have different sizes, and they also have a different degree of maturity, but they all are under the same concept. And in addition, we also offer advisory services. We help our customers to streamline the supply chain, which also adds value. At the bottom, you see some customer examples. We're really proud to work with successful companies. And in the middle, you see a sales growth. HANZA has been one of the fastest-growing manufacturers. And already in 2019, we were able to reach SEK 2 billion in annual turnover.So after this introduction, we turn to Page 4 and to the year 2020. It was a tough year. For us, it started good though. We had a very strong beginning. We have customers forecast pointing at a double-digit increase percentage-wise. We prepared accordingly. So we invested and we trimmed our clusters. But then the cloud started to pile. And by end of first quarter, we had a full thunderstorm. And it was more or less just to buckle up because you cannot really affect your customers, the sales volumes. But what it can do is affect the cost side. So we immediately launched an action program, we called Resistor. It was in the beginning of the second quarter in April. And what we did was that we tried to lower our fixed costs in order to survive a possible long period of low sales. And we did that through merging companies in Estonia and in Sweden.Now already in Q3, there was some daylight. We saw some volumes coming back. We didn't expect it so early, but that was the fact. And then when it came to Q4, it was a more mixed weather. We saw that in the Nordic countries, we had still some increased volumes. Whereas in the rest of Europe, especially Germany, there was a new lockdown just before Christmas. And it seems like it's been separated that in other countries and the companies here, has been doing rather well, whereas the rest of Europe has been still struggling. And we also have disease issues outside Nordic country, especially in Czech Republic.So when we summarize the year, the increase rate was only 4% and the earnings level was far, far below what we expected in the beginning of the year and Lars will soon come back to this.So let me turn to Page 5. The good news is that we expect this to be just a blip in our growth curve. It's a temporary slowdown. And why do we believe this? Well, we have not lost any customers. On the contrary, we've been working very close with our customers. We even received some awards during these difficult circumstances. So we are confident that the volumes will eventually come back.And another positive note is that we did refine our organization during 2020. That was actually one of the goals we had. And if you look to the right, you see the group management. This was downsized from 6 to 3 persons to make it more agile. And we also decentralized some of our group functions. Yes, this is important. I'm proud to say that we truly now have a modular and scalable organization. And this is actually a cornerstone for our future growth.Also on the same topic, preparing for growth. We made a decision by the end of last year in December to start building a new factory in part of Estonia. Perhaps, it's a quite substantial investment, EUR 8 million. But we believe the timing is good. This will be ready by the beginning of next year, 2022. And that is at a point in time where we do believe that the volume will have come back. And that leaves 2020 behind us. And before I move on to the future, I will leave the floor to Lars to give the financial development.

[Lars Åkerblom, Executive VP & CFO]

Okay. Thank you. Starting with Page #6, the financials for Q4 2020. What we see is that the sales are, of course, quite heavily impacted by the pandemic. We see that one of the biggest customer in HANZA, being in the textile industry, have lost approximately SEK 25 million compared to quarter 4 2019. We also see that the action program that Erik mentioned has an impact on lower sales, approximately also SEK 25 million in Q4 compared to the year before. And we also see a currency effect. We see that the -- mainly the Euro is weaker. And since we have quite a central part of the sales in euros, it has an impact on half of that approximately SEK 15 million in Q4.And if you deduct those, you see that there's actually an increase of the sales of approximately 2%. If we compare those [ SEK 494 million ] compared to the [ SEK 548 ] million the year before an adjustment for these 3 major things that has impact. And that is an organic growth of the existing customer base and, of course, new customers.Also, the earnings has been affected by the lower sales, but we have 2 positive things in the earnings. And the first is other markets where we have said for a long time that we will see an increase in profitability, and we see that we are increasing the profitability in other markets. We also see that in Sweden, which is the biggest cluster, downturn in profitability in percentage-wise in Q3. Now Sweden is back and have a market-leading profitability of approximately 9%.And going also into the sales of the main markets, the main market is Sweden, Finland and Germany. We see that we have here have the biggest drop in sales, and that is due to this big customer within the textile industry. On the other hand, we see sales in other markets it's actually increasing. If you deduct the currency effect, you have an increased organic growth of a little bit over 3%.We move to Slide 7. Looking into the balance sheet and the cash flow and the year, the full year 2020. As Erik said, we see a limited growth, approximately 4%. And here, we have had a little bit effect on the acquisitions we did in 2019. That was not part of the other group for the full year 2019, but has been part of the group for the full year 2020. In Q4, we have the same number of companies. There's no acquisitions having any impact on the Q4. Looking into the EBITA. We had a big impact for this Resistor project, downsizing and preparing for long-term effects on the COVID. And if you adjust for that cost, you have an EBITA of SEK 73 million, compared to SEK 68 million in the year before. And what has been prioritized in HANZA has always been the cash flow. And we are proud to say that we had another quarter of really good cash flow, we have been able to -- in a year of good cash flow, we have deducted or reduced operating net debt with approximately SEK 80 million, down to SEK 271 million, and that is approximately 23% of the net debt. That is, of course, strong going into 2021.We then turn to Page 8, looking at the share. We are trading today at approximately SEK 14 per share. If you look into the right, you have a graph showing the currency -- or the rate, the check price at the start of every year. You see that we have a decrease in the share in 2021. But looking from the history perspective, it's quite a good growth anyhow. Remember we have a market value close to SEK 500 million, SEK 475 million approximately. And the Board decided, and you can see that in the report, to propose a dividend of SEK 25 per share for the Annual General Meeting. And that should be seen as delayed dividends for the year 2019 rather compared to the 2020 financial year. Leave over there, looking into the future.

[Erik Stenfors, Founder, President & CEO]

On Page #9, please. So looking ahead, what will happen? What will HANZA do next. well, as Lars described, we have had a really good outcome of the stress test on our larger clusters. It means that the strategy forward is rather clear, it's increase the remaining clusters. And this is actually a strategy revisited. That was the strategy we had already when the pandemic started.And secondly, we will continue to explore the German market. So far, we have just scratched the surface. Our concept has been really well received in Germany. And right now, we have heavy travel restrictions, hard to meet customers. But as soon as those are released, then we will continue to work. I'm sure that we will be able to get a space on German customers later on. Then we have 2 global trends, which are actually our brands. At first, it became obvious last year that the complex global supply chains are quite fragile. And we see backlash to the globalization. Now it's more regionalization. And this really fits into our cluster concept.And secondly, the environment will again go back to be priority #1. Here, we have a chance through our advisory services to help with not only streamlining the supply chain, but also making it green, lower the CO2 emissions. So that's something we will focus on the coming years.Then a few words about acquisitions. This is an important part of our business model. Now we don't buy companies to be bigger, but to be better. And here's the promise: any time we buy a company, we will clearly state exactly how that acquisition will increase the customer value. So a bit midterm and long term, it looks really good, but it doesn't mean that we are without challenges right now. Still, we have the lockdown. It's prolonged in Germany to March. Still, we have some outbreak of the virus. And now we also have a new challenge. It started to beget shortages of material and components. And this is something that HANZA, like all other manufacturers will struggle with this year, a bit expected after a downturn in the economy.But all in all, we see that still some clouds above us, but in the direction we're heading, it's a clear blue sky. So we see a promising future -- and by that, we go over to Page 10, and we welcome your questions.

[Operator]

[Operator Instructions] Our first question comes from Erik Cassel from ABG.

[Erik Cassel, Research Analyst]

Erik from ABG here. You touched upon this, but Sweden has a solid margin of 9%, but that would kind of imply that other regions in main markets are barely profitable right now. So I assume it's mainly the German part of the business that is driving down margins. But could you comment on the profitability in Germany and how you see it developing going forward?

[Lars Åkerblom, Executive VP & CFO]

Well, we cannot comment on Germany individually. But you're definitely correct, that having a SEK 25 million decrease in turnover, of course, leads to lower profitability. And we have also seen in Finland, which is the third part of the main markets, we have been affected by a downturn in some of the customer areas where they are, by having -- the main reason for the lower profitability in the main market is, of course, the downturn of the biggest customer in the group, that is in Germany.

[Erik Stenfors, Founder, President & CEO]

And I also like to add to that, that again the size is important in Germany. So far, we have a single factory. We had downturn of sales force in Sweden, but we were able to increase the margin. Whereas in Germany, we don't have the same bandwidth yet. And that was what I was referring to previously that the way forward is to increase the smaller clusters, then they will be able to handle any coming downturn better in the future.

[Erik Cassel, Research Analyst]

Okay. So another question on margins. Given that you work a lot with metals, are the high sheet metal prices affecting margins in any way right now? Or are you easily available to transfer those prices to your customers?

[Lars Åkerblom, Executive VP & CFO]

Yes, we have, in the step-up towards customers, we have normally possibility or revised or even in demand to adjust the prices when the metal prices are changing. So it should not affect the margin. And we are able to push that growth to the customers yet.

[Erik Cassel, Research Analyst]

Yes. So no kind of short-term effect here in Q1 until you transfer?

[Lars Åkerblom, Executive VP & CFO]

It could be, but that is minor. I think that the major impact can come from the shortage in possibility to buy raw material that could be broadly the biggest problem right now.

[Erik Cassel, Research Analyst]

Okay. And then you had several contracts announced during the year now that should come in primarily now in H1 in 2021. Do you have kind of a ballpark estimate of the total volumes from those contracts that we could see in 2021?

[Erik Stenfors, Founder, President & CEO]

The simple answer is no. we haven't revealed the -- that's a bit of a challenge we have that sometimes the customer doesn't want to announce. They have switched to HANZA because they are still working with another supplier. Sometimes the market value is secret for their competitors. We have been quite -- we are not grounding the market with press releases, rather commenting that we are active in getting new customers. What I think is important is that what we have seen in 2020, which is new, is that we not only get manufacturing contracts, but also design contracts. We are now helping our customers both via the product development and product manufacturing, which is an even more complete concept. But I'm afraid we cannot give any numbers.

[Erik Cassel, Research Analyst]

Okay. And then on the net debt position, it has improved now over the year and to a large extent, driven by working capital. And I think it's about 9% of rolling 12-month sales right now. But I'm kind of wondering how much of working capital increase we could see in 2021, if any, when volumes ramp up again given the restructuring you have done?

[Lars Åkerblom, Executive VP & CFO]

You're definitely correct in the way you are thinking that it is a percentage of sales. So when the sales are growing, of course, and the working capital, will increase. We don't give any forecast on how much we expect the working capital to the net debt to change in the future.

[Erik Cassel, Research Analyst]

All right. And last question for me and perhaps a real long shot. You mentioned in the report and also in the conference call that you had forecast for customers of double-digit growth in the beginning of 2020. Do you have any such forecast to share with us actually for 2021, and that was a long shot.

[Erik Stenfors, Founder, President & CEO]

It's a long shot. I promised to share that with you 1 year from now.

[Operator]

[Operator Instructions] Our next question comes from Fredrik Nilsson from Redeye. Apologies, it seems that Fredrik is disconnected. Our next question comes from Fredrik Nilsson. Fredrik, can you hear us.

[Fredrik Nilsson, Equity Research Analyst]

Yes, I can hear you. Okay. Nice. I want to get back to the strong margin in the Swedish cluster despite the lower volumes. And you touched upon Germany, but I want to look at Finland. Why is that such a big difference likely between Sweden and Finland in terms of how well they managed to uptake solid margins despite lower volumes?

[Erik Stenfors, Founder, President & CEO]

Again, the answer is simply in its size. We are 4x bigger than Sweden. Much easier to [indiscernible] But in order to have a good margin, you have to have a number of different reasons. First of all, you have to have customer value so that you can actually charge your customer and still they will make a good deal.Secondly, you have to have enough customers in your factory. So if you felt no impact of the channel and that was ultimately [indiscernible] cluster, so we can actually borrow resources to even different purpose. And that's why we can handle upturns and downturns more easily than [indiscernible]. So all together, I expect you to see some good increase also the Finnish cluster. So in the future, we can post some better margins.

[Fredrik Nilsson, Equity Research Analyst]

Okay. And other markets continued to improve its adjusted margins. Is that mainly due to the restructuring you made for the years paying off? Or did the market improve as well?

[Erik Stenfors, Founder, President & CEO]

Yes. That's one part of it. It's also that the other markets are getting more and more mature and hoping that we hand the way of producing and doing business. So there is a lot of work [indiscernible] forecasted. And when we see that the other clusters are getting more and more mature, they are also increasing profitability.

[Fredrik Nilsson, Equity Research Analyst]

Okay. And one last question from me. I'm well aware that you do not make predictions, but you seem quite optimistic regarding this year. What signals do you get from your customers?

[Erik Stenfors, Founder, President & CEO]

I think I said that both up and down. Why we are so optimistic is because of our business model. We see that this is really working as with our valued customers we still getting new customers, customers who used to have different manufacturers are switching to HANZA. But still, this is a company under development. And that means also that while we are bringing new clusters, since this pandemic really slows us down.Again, we are confident because we've seen this slowdown. But make no mistake short term we still have the challenges we had before, they are still here today with the pandemic. It's not over yet. But we understand that in 1 year from now, the real pandemic unless something dramatic has happened. And that's also why we feel that we had a good stress test of organization. We see exactly where we have our strengths and weaknesses in the plan, adjust them, with new plan coming through and we will have the full strong and better HANZA.

[Operator]

Thank you. There appears to be no further questions. So I will hand back to the speakers for any other remarks.

[Erik Stenfors, Founder, President & CEO]

Okay. We have no more parts of our presentation. So we thank you so much for taking your time to listening into this audio cast, and we hope that you will speak to us again when we present the next report. Thank you very much for listening.

[Operator]

This now concludes our conference call. Thank you for attending. You may now disconnect your lines.