Earnings Call: Q1 2021

Apr 26, 2021

Quarterly report

Thank you. I'm Erik Stenforst, the CEO of Hansa, and I wish you all a warm welcome to this presentation of the Q1 2021. I will run this together with my colleague and our CFO, Lars Ottenbaum. During Q1, we made an acquisition in Finland, and it was actually not just an acquisition, but also an important delivery and our strategy. And therefore, I'd like to just give a few words about our business model. So if we turn to H2, please. Product only company that has outsourced its production. It's normally using contract manufacturers. So that's companies producing 1 part each for this product. And you may then end up with a quite global and complex supply chain, as you see illustrated to the left. And that's why we have created Hansa. We have gathered different kind of manufacturing technologies in certain geographic areas, which we call manufacturing clusters. And what's interesting about this is that we can then lower the manufacturing costs for our customers substantially and at the same time, keep a decent margin to Hansa, normally a couple of percent higher than the single technology manufacturers. Furthermore, the customers will have an increased flexibility, only have one party to talk to, end. It will reduce number of shipments, which is quite important. It will be less impact on the environment, and you will have a more green supply chain. And if you move then to Page 3. So far, we have established 6 manufacturing clusters, as you can see on this map. And we are really pleased that we have been able to attract industry leaders to choose Hansa as the manufacturing partner. This is some examples at the bottom. And this is also a different way where we both produce in our clusters and sometimes we also streamline the supply chain for our customers. That's the service offer. And with this short introduction, I will now move on to quarter 1 and to Page 4. So the market in the beginning of this year was it's clearly gaining momentum. We saw that it was increasing actually month by month. We still have some customers area which are slow. Customer selling equipment and machinery to textile industry, to breweries, to shop fittings. And we also see a clear difference in geography where Nordic countries has been doing quite well in the beginning this year. And the lockdown in Germany that started before Christmas has more or less put the lid on the economy in that country. But we've been active with new sales, and we see also new opportunity. It comes as the consequence of the pandemic. A number of product owner would like to rethink the supply chain, and that's something we're working quite actively we have right now. If we move to operations, we had some outbreaks of the virus. It affected us negative Linde in some factories, especially in Czech Republic and in Poland. So that is our Central Europe cluster. But despite that, we have been able to work with the Roadmap 2021. This is a plan for this year that we have presented in early reports. It's all about strength in the cluster in order to handle increasing volumes and also to grow the margin on a group level. We digitalization 2 ways. So we are investing in our clusters. We have invested about €3,000,000 in the Q1, and we're also building a brand new factory in Estonia. And the second way to strengthen the cluster is that we look at strategic acquisitions. And that brings us to Page 5. And the acquisition of Soomenlebe Profiler, which we did in March 2019 this year, so a little more than a month ago. This is a manufacturer of high quality steel metal structures. They are good in welding. We have Arctic's tanks for water and fuel. And there can be no leakage, so you have to be really good in welding. Also high quality when it comes to painting. We see an example, green hood on this picture. They are operating in factory built 2014, quite new, and we are have then only to welcome 100 more colleagues to Hansa. Good customer base. They have customers in machinery. They also have customers in mining industry and in forestry. That scenario we like to grow in Hansa. So we see that this acquisition meets our demands on technology, geography and customer base and also financials. And that's why this acquisition is then a delivery on our strategy that we have been able to buy an acquisition, strengthen our cluster in an almost perfect way. You might also notice that we have updated our graphic identity from this report. And if you look at the picture, Hansa Johanso was the 1st factory who could have the new logotype. You see it on the wall in the office of Hansa Johanso. And by that, I leave the floor to Lars Aukeboom on Page 6. Thank you, Erik. And now we'll go through the figures and the balance sheet. As Erik said, we did an acquisition in the end of March, which means that SLP. It's consolidated from late March, just a small part in the P and L, waterfall balance sheet. I will come back to that. Starting with the sales, we see that we reached SEK7 1,000,000 compared to SEK5 99 1,000,000 a year ago. We are still hurt by the COVID-nineteen effect, and we also see a negative effect on the currency of approximately SEK 25,000,000. And we have identified and said that mainly one customer that are affected by the pandemic. Only that one is SEK 40,000,000. And then a year ago, we took a decision on the action program in connection with the pandemic and that when we concentrated the production in fuel sites in Cluster Sweden and Cluster Baltic. And that has a negative impact of approximately SEK 10,000,000. And then SLP contributed the time they were part of the Hansa Group, it's SEK 5,000,000. If you add those together, that leads to SEK70 1,000,000 that affect comparability between the 2 quarters this year and last year. If we exclude them, we actually see a growth of 7%. We also see increased earnings. We have an EBITDA of SEK 22,500,000, 4%. And in those 22, we have onetime cost connected with the acquisition of SLP transaction cost and integration cost. If we adjust for those, we have a margin of 5% compared to 3 Q4 last year since we didn't have any onetime cost in quarter 1 2020. We move to Slide 7. And here, we see the 2 operational markets, the segments. We have main market and other market. And we see that the main market is having a sales of NOK 300,000,000 compared to NOK 338,000,000 a year ago. And in the main margins, we have the same type of onetime effects of SEK 56,000,000. And if you adjust for that, we actually see a growth of 6% Internet sales. We have continuously strong profitability. We have an EBITDA of 5.1%. And here, we have part of the onetime cost connected with the acquisition. NIFO adjust for those, we actually see a margin of 6.3%. Other markets It's continuously improving. We see net sales, which is actually higher than last year, even though we have a negative effect on the currency. And if we adjust for that, we actually see organic growth of 7%. And we are continuously increasing the EBITA. And in quarter 1, we show a margin of 3.9% compared to almost 1% last quarter, the quarter in 2020. In both markets, we are still affected by the COVID, and we also have effect on COVID in some of the factories due to people being sick in COVID. We are still have a negative effect on Narva, and they are improving and developing according to plan, but still affecting the margins in the group. Moving into Slide 8, some other financial figures. We see the equity and equity asset ratio is bill above our financial target of 30%. It has decreased since last year due to the currency effect and has increased with the 1,800,000 shares that we issued in connection with the acquisition of SLP. We We can show in quarter 1, a continuously strong cash flow from operations, And that is mainly due to reduction of working capital. And we have, as Eric said, invested approximately €3,000,000 and that is excluding the acquisition in SFP. The operating net debt is as a result of the positive cash flow decreasing if you exclude the fact that we added on operational net debt connected with SLP. And the operational net debt it's actually decreasing if you exclude the effect of the S and P acquisition with SEK 36,000,000 SEK 11,000,000 in quarter 1. So In total, we show improved profitability and a continuously strong cash flow and a solid balance sheet in quarter 1. Over to you, Erik. Thank you, Lars. And then we turn to Page 9 and a look at the future. And we have actually quite positive view on the future. As I described earlier, we see that the market is picking up, and we expect it to be even stronger in the future. And in addition to this, we have good sales activity. NN. Again, this is both selling our clusters, but also the activities we have when we are streamlining our customer supply chain, which is quite exciting. If you look at operations, I think the limiting factor for Hansa and for the manufacturing industry, maybe for the global economy as a whole, will be the access to material and components. So far, we've been able to navigate quite well in Hansa, but that's something that we keep an eye on. But other than that, we will continue to work according to our roadmap 2021. So it means that we will continue to invest in order to be able to produce the increasing volumes, but also we will look at more strategic acquisitions. And if, but only if, it fits, we are ready to buy additional companies. And that completes our presentation, and we can then move on to Page number 10 in our Q and A session. Of the. Our first question comes from the line of Erik Kassel from ABG. Please go ahead. Hello, everyone. So first off, could you perhaps go into Some more detail regarding the raw material and component problems with, for example, raw material prices increasing quite substantially. So can you go into some more detail how this may affect you in the coming months in terms of sales and margins? Okay, we are not sitting on the same place now, Lars and I. So I will have to cooperate. I will start with a few lines and then I hand over to you, Lars. So what we see is the increase of prices, as you pointed out, with the raw material prices. That's something that is transparent for us. So in our contract. That's something that we forward to our customers. And so the price issue is not as important or it's important, of course, because the customers might have a problem to sell more units. But what is really a problem is the shortage. And then you all saw the situation for semiconductors and everybody's talking about the Volvo. And that's something, if you're lacking components, you cannot really produced Can You. So shortages is can be a problem. We have so far been able to navigate, but prices we can handle through our customer agreements. Now over to you, Lars. Yes. And you're asking about the effect on the financials. And of course, with higher prices on the raw material, and we are increasing the sales by that fact, it's I don't expect it to have a major impact, but some increase of the sales it will have. It will not substantially have any impact on the profitability in margin or so. And what we also see is that we can see some increase of the stock. We need to buy some safety stock for some parts and some components. I think that's the main areas where it affects the financials. Very good answer. Thank you. And then you said in the reports that you expect Germany to recover in the end of 2021. And just for clarity, so I can understand this and perhaps also in regards to wording. Do you have indications from your customers ramping production at the end of the year? Or should we see a gradual increase? Would sales back to normal levels at that point? I can again start to answer in general and Lars might add some comments. We are in close contact then to with our customers and especially when it comes to quick ramp ups. We have received we are receiving constantly forecasts, and they are increasing. Now the demand has been a bit quicker than we expected. Like you said, we thought that the upcoming come at the end of this year, it might come a bit earlier. But we have been working closely with our customers in order capacity. And also, we have seen last year that it's actually a feature of the manufacturing clusters that we can respond quickly to an upturn in sales due to the fact that we can share resources in a cluster. So I expect us to be quite able to handle upturn. But there is a tricky situation in Germany because of the lockdown, and it has hurt the economy. Nobody can actually tell how quick you will go back. They say the latest forecast is it will go slower than the bounce back from the financial crisis, which was quite quick. Or should you like to add something? No, I'm fine. That's no comments. Perfect. Thank you. And then in the Nordics, Which segments are you seeing increased demand from primarily? We are not presenting segments per se, but I think it's obvious that the M and E industry has have an upturn. We have saw Sandvik's report, that's a big customer of ours. And as I said before, we have indicated, I think, the segments where it's not being growing. Other than that, it's been quite over the line, quite good. Okay. Yes, perfect. And then I guess we could see some change in sales mix in the coming quarters. Do you think this would be accretive for margins? Or should they stay continue their cost to churn upwards, so to speak? Would you answer that Lars? Yes. We normally we don't give any forecast In that sense, what we say is that we expect To continue to grow, we looked positive on the market segment. And we know that in other markets, we are developing according to plan, and that will help us to increase the margins. Okay. Thank you, guys. All for me. Thank you. We have another question from the line of Fredrik Nielsen from Verei. Please go ahead. Hello, everyone. This is Hansa. Can I hear? One question about the improvement in margins In main markets, it was quite an impressive increase also relative to last quarter, Where you said that Sweden was strong, if I'm right. And if Germany still is weak, is it Finland that's driving the improvement quarter to quarter. I'm glad that we brought that up, Erik speaking. I we'll again say a few words and general then leave over to Lars. So what we stated before was that Sweden had a really good margin. And now we stated in this report, so in the in my comment that actually, it's a much larger part of Hansa now has a really strong margin. We have not ended up with specific countries, but we are seeing that more and more of Hansa is getting a very strong margin. And then I leave over to Lars to elaborate on that. We don't disclose the different segments in profitability. But what we say is that what we see is that main part now of Hansa's segments are operating on the financial target above 6%. And we also see that the cost reductions in different segments are helping us to improve the margins. I think that's more or less all I can say about audit. Okay. Thank you. One more question from me. You mentioned That you get forecast from your customers in Germany, for example, that's looking really promising. I mean, Is those forecasts the levels in those forecasts enough to take Germany into margin levels in line with your targets as well or do we need to see an even further improvement until we get to that point? Okay. As you see, we have market around 9% on several parts of Hansa. And the whole idea is that we could continuously Developed Hansa. We will be a company under development, meaning that we will take some extra cost. And we said that even though including these costs, we should be able to end up in a 6% EBIT. So that's the end goal. And it means that all clusters must come to the point when they have margin well above 6%. But if specifically Germany, how much that would impact, I then ought to answer that. Let's see if Lars can hear more on that. No. SEK. I think you can say like this that having one customer that in quarter 1 is SEK 40,000,000,000 lower sales compared to last year. And we see that We will see an increase in the market coming back in the end of the year. I think that you can easily understand that reaching our financial target of 6% when you have such a big drop in volumes It's not possible. So we need to see the market coming back in order to reach a reasonable profitability in Germany. I'd also like to add that this loss in volume is unfortunate and it's a challenge for the group margin here now, but it's not a long term challenge and it's not a challenge for the business concept. What we wanted to do when we entered Germany was to have a platform for further growth, and that has been accomplished. Then it's said that this unit in Germany with high dependence on this customer needs new orders and or return of the main customer. But it's not a problem, which is at all affecting our strategy or long term goals. They are still solid. Okay. That's all for me. Thanks. Thank you. And as there are no further questions, I'll hand it back to the speakers for closing remarks. Okay. Thank you. And I'd like to thank everyone for your attention. We are developing rapidly, and we are sure that best is yet to come. So I hope that you will keep your interest in Hansa. Thank you very much, and goodbye.