Earnings Call: Q3 2022

Nov 8, 2022

Quarterly report

Welcome to the Hamzah Q3 2022 presentation. Afterwards, there will be a question and answer session. Today, I'm pleased to present CEO, Erik Stenbos and CFO, Lars Akerblau. Please begin your meeting. Thank you, and thank you all for joining. I'm Erik Denpers, the CEO of Hamza, and we do have an interesting briefing for you today. We will both review a strong quarter and A solid strategy for the future. So let's proceed to Page number 2 and the agenda. So I will start I'm going through the latest development. Then I will hand over to Darce Okeblum, our CFO, who will express this in figures. Then we'll talk about the plan we have for the coming 3 years. Lars will give you the new financial targets. We end the presentation with a summary and a look at the future and then we end the call with a Q and A session. So please Do not hesitate to ask any questions at the end of this session. Okay. So we turn to Page number 3. In our previous call, in the Q2 call, we said that we expect a strong performance going forward, and we are really pleased to deliver according to that outlook. If we look at the quarter, it's been a growth of 40% this Q3 compared to the same quarter last year. And then we have to remember that we've been struggling with the component shortages. We still have outbreaks Of COVID-nineteen, and that means that you need to replan production. And that's always difficult, but especially so during the vacation Period. So we are really pleased with this outcome. Then also we opened new factory space in Poland in Czech Republic in China. And this is important as part of our cluster concept To have a cost efficient way to expand our facilities. And that's also why we in October acquired Our sheet metal factory, which you can see to the right on this picture, we used to have it on a lease agreement, but we acquired it. All is good to own your building is lower than cost and is easy to do fixed installation. But more than that, on the deal, we also got 11,000 square meter of land. And we also previously bought land. You see to the left in the picture our new assembly hall, the one we opened in March this year. We already acquired some land before and this is again really important because we have to prepare for the future And the idea is to expand with a limited impact on the cost side, but still with a large impact on the capacity side. So this is an excellent opportunity for the future. Also, we did the acquisition in Germany. In the beginning of the quarter in July, It was a company with 10 engineers in Munster. You might recall that Munster was the Placement there where the foreign ministers of G7 had a meeting last week. It's actually the place where it was the peace treaty for the end of 30 years of war. So it's a city with history. And it's really close to our other cities in Germany, so we formed this cluster. And together with this new acquisition, which we have renamed to Which we have renamed to HanseTech solution and our previous R and D team REMS side goes by. We now have 30 engineers helping us with product development for our customers. And with that, I give the floor to Lars on Page 4. Thank you, Erik. And to summarize The financial development of Hanse, I will present good and strong growth With the increased earnings and really strong positive cash flow, and I will come back to the cash flow. Starting with the sales, As Erik mentioned, we are up 40% compared to last year. If we Exclude the acquisition and the currency, we have a growth of 26% and we are now About SEK3.2 billion close to SEK3.3 billion. And a year ago, we were on Golin 12 on SEK2.3 billion. And remember that since Santos started, we have average growth of 17%. And combined with that, we have increased earnings. The earnings reached SEK50 1,000,000 that is 34% Higher than last year of SEK 38,000,000 and we are now on rolling 12 Close to SEK 200,000,000, SEK 192,000,000 in EBITA. As Erik mentioned, we did an acquisition of Buselmann and it Has not affected the P and L or the balance sheet. It's only minor effect on the financial figures, but it's consolidated in Q3 as well. We can move to Page 5 and go into the segments. And here we also see continuous growth of both segments. Main market It's growing by 20% if we deduct acquisitions and currency. And we have a strong Profitability of 7%, a little bit lower compared to last year. And the reason for that is that we actually Forward and reinvoys material and the cost for energy And also, we have the company that we acquired in Q4 in 2021 in mentioning Galbach is Running at the CERO level, we expect this to come back after the integration to the cluster in Germany in Q4 and Contribute to the profitability in the group. Other markets It's also growing even a little bit more with 33% and has increased the Profitability, and this is what we said and been saying for quite a while now that we will see the 2 segments Coming closer to each other in profitability, and we are glad to see that other markets are increasing the profitability Despite the fact that, as Erik mentioned, they've been growing in facilities and adding space and, of course, that Normally lowers the profitability when you're having those kind of activities. And the segment other market is As well affected by this reinvoicing of material and electricity and energy. Then we can move to Page 6 and coming back to the cash flow. We had a really strong cash flow in Q3. It amounted to SEK 82,000,000 compared to minus SEK 19,000,000 in Q3 a year ago. And that is still the fact that we have challenges with the material with shortages in components. So we need to still keep A quite high stock level in order to be able to deliver. But what we have done in Q3 is that we have Been able to get financing for the working capital from the customers. So we've been successful in getting prepayments from the customers. This also leads to that the net debt is decreasing by SEK 40,000,000 in Q3. And together with the improved profitability, we see really good Increase of the net debt compared to EBITDA, giving 2.3 times Compared to 2.6 in Q2 in 2022. And the earnings per share is also positive and increasing. We reached SEK 73 per share in Q3 and at rolling SEK 12, we are close to SEK3 in earnings per share. And by that, I leave over to you, Kirk. Thank you. And we can move to Page number 7. So today, we present not only an interim report, but a milestone, milestone representing an end of strategy 2022 as well as the beginning of Strategy 2025. So we move to Page 8 and take a closer look. 14 years ago, we decided to take Contract Manufacturing to a new level, Contract Manufacturing 2.0, if you like. And since then, we have had a quite solid history. And we stay convinced that this is due to clear plans and explicit milestones. We have built Hansa in steps in phases. And if you go back in time to 2017, we had at that point finalized Phase 2. We Trade and housing 2 development phases, and we said now it's time for Phase 3, an expansion phase. And we put some goals that we were going To do an IPO on NASDAQ's main market, establish a brand new cluster in the largest economy of Europe, Germany, Refine existing clusters and do some strategic acquisitions. And also we have to put some financial targets. And in 2017, we had about SEK 1,400,000,000 in sales And then EBIT of SEK 36,000,000. We said it's reasonable to grow with at least 10% per year. That means that by 20 22, we should be up to SEK2 1,000,000,000 and should be reasonable to have EBIT corresponding to 6% to about €120,000,000 Now we are not done Just yet with 2022, but we saw the accumulated figures last show. So we are already on the last 12 months, rolling 12 months, we are Well above SEK 3,000,000,000 in sales and SEK 175,000,000 in EBIT. So it's been a really good journey, even better than we expected. And we're also happy to see that this strong development has Has had a positive impact on the hamster share, which has tripled since we launched the targets in August 2018. But in short, we are fulfilling our targets. It's time for the next step. And then we have done, as per usual, we have carefully evaluated Our current position and done that, of course, in close dialogue with our customers. And we have also taken into account that most likely will be a recession during this period. And the result is then Hamza 2025. And I'd like to walk you through some conclusions and actions. So we turn to Page number 9. First, we have a look at our business model. It has served us well. Also through recessions, we see that our On the graph that we have a solid growth since we started Hansa, unlike many traditional contract manufacturers, which has been going down and up. And we also saw that this business model were able to bring us to these three milestones. We have built Hamza and Hamza's business model on the idea to increase customer value. That's the whole idea. And we see now for the coming years to even further increase Customer value, we will work more to develop the service side of Hanse. So Hanse is not just about manufacturing. We have our advisory services and we have the product development, I mentioned, The acquisition in Munster. So that will be we will keep the business model and further develop the service side. Let me turn to Page number 10. We have to have some goals, some sales goals for 2025. And in order to set the goals, we have to analyze The current and the future market opportunities. And we see, 1st of all, that we have a very Strong and reliable customer base, and that's why we are growing now. And that's why we will continue to grow a good spread in different areas, Such as energy sector, defense industry, we have medtech companies, mining companies And also, companies will have very long forecast. So we can predict already 2023. In addition to that, we have an advantage in our concept. So if you're a traditional contract manufacturing, for instance, you're sending machine parts, then you Turn to different companies to see if you can get a piece of the action. We are selling a concept. So the clusters together with our services and that widens Our potential customer base, so we are doing compasses for Silvan, we're doing parts for the mining industry. And that makes almost the potential unlimited. And therefore, we can also target customers which we think are appropriate for our concept. So we say that Actually, customers should not choose Hansa. Hansa should choose its customers. So moving forward, we will Focus on the existing customer portfolio. We will add some targeted new customers and also we will handle What we can say is a tailwind in the macro perspective. We see that a lot of manufacturing is now moving to be more local, which is the core of our offer. So that will also fuel our growth. And then if we turn to Page 11. We see that there will be no challenge to bring up sales, and it's actually not our challenge today either, but We have to increase our capacity. We have to do that in a good way. And how to do that? First, we analyze Our footprint and conclude that this is appropriate to our customers' wishes. So we are already located, as the map shows, in good places On the other hand, we have also seen, if you look at our acquisitions, that all acquired companies inside the Hansa Group Have performed better than they did before standalone. That's also something to bring into this strategy. We also have and we're quite proud of that we have a Strong company culture and also an organization chart, which is expandable. We made it in modules, so you can scale it. And this together with what I mentioned earlier that we also have in the cluster philosophy a way of increasing capacity in a cost efficient way. We believe that the right way forward is to further develop our existing clusters. So we will focus on the 6 existing clusters and bring them up to next level. And by that, I think it's time to go through the financial targets. So I leave back to Lars And Page number 12. Thank you, Erik. And up to the right, you see where we are today in AMSA rolling 12. We haven't finalized the 2022 yet, but this is where we are in the end of Q3. So we have approximately SEK 3,300,000,000 SEK 192,000,000 in EBITA. And we'll go down to the New financial targets that we have decided on, I'm starting with the growth. And what we have said here is that we will increase Little bit by setting the goal for SEK5 1,000,000,000 in 2025. Before, we had 10% revenue growth. And if we recalculate how to reach To SEK 5,000,000,000 is a little bit higher than 10%. And again, remember that we have been on 17% in average. Profitability, we are increasing the margin. We are setting a target on minimum 8% Operating margin, and we add a new Financial target, the debt ratio. Here, we set net debt compared to EBITDA of 2.5x. And what I said a few minutes ago is that we are on 2.3%. The capital structure, And then we also keep the dividend policy of 30% of profit after tax with consideration of the company's financial status. So these are the financial new financial targets for 2025. And by that, I'll leave back to you, Erik, for the summary and outlook. Thank you, Lars. So we turn to Page 13 and to make a short summary. So we see that we have Had a really good quarter 3 and also very strong cash flow. And we have presented our strategy for the coming years where we will be Widening our concept more towards services and working with our existing clusters, bringing in New targeted customers and also some selected acquisitions. If we then look at the future, so the near future, our outlook stays the same. We have a very good order intake due to the long term contracts of our customer portfolio and the diversified customer portfolio. So we believe it will continue in a good way. And then we know and this is very important, we know now that we're in the midst of climate change. And this next week, there will be this there is this climate conference in Egypt and every company will have to make an effort. In our concept, we can do more than other companies. We can lower our emissions. We can lower our consumption. That's Something that every factory can do, but we can also lower number of shipments. And therefore, we decided also to renew our targets for our environment policy and our sustainability. So we will have a new upgrade of that strategy as well by the end of this Yeah. Really important. Next step. We are convinced that we will be able to Deliver also on this phase and the financial target that was presented by Lars. We feel very good comfort in that, but also we have to prepare for the next step. And we have not stopped the expansion of Hamza. We will launch a 7th cluster. And we said during this phase, we will also evaluate Possible next steps to put down the Hansa flag in close cooperation with our customers As per normal. So by the end of this phase, we should be ready to launch where the next cluster will be located. And that concludes our presentation. And now we welcome any questions. Page 14. Thank you. Our first question comes from Niklas Elhammer at Carlsquare. Your line is open. Good morning and thank you for the great presentation and the inspiring outlook. My first question is maybe something you had expected. I mean, Price increases have been a considerable factor for contract manufacturers. Is it possible for you to comment on The specific effect of price increases on organic growth and margin in this quarter? I think I'll leave that to you, Lars. No, it's not really possible to and we are not It's closing those figures. And it's really hard to with the Wide priority of different customers, different products that are changing and really Say how much is the material part of the growth. But it's not the majority Of the gross, monologue is minor part of the organic growth due to material. I can add to that. Hello, Niklas. Good for thanks for your question. Also, it's important to remember that We are a concept company. So the material, which prices have been increased, is mainly on the electronic side and not on the raw material side. So I think we have a Lower impact, if you compare, for instance, for the EMS company. Okay. Do you expect any significant changes in Can changes in the pricing environment in the short term or Well, That's an odd question. I mean, there are many things going on now. You see the Different prices of electronic components, you see different currency effects, you see energy. We are glad that we use this open book system so that we are transparent with the costs to our customers. So they No, that's part of the deal that they pay for that and then we have our secured margin. But in order to tell you the future, It's my guess is as good as anyone else. We have we were expecting the good component situation by next year, very much depends on this Forecasted downturn in economy, that will help. But I cannot give any clear answer on that unfortunately. Okay. And on the outlook, I mean, you touched upon that. It seems quite encouraging. You see, at the same time, industrial companies reporting strong sales and order backlog. However, new ores are sort of flattening out. I mean, do you see a similar or a better picture? We see no signs of downturn at all. And again, I think that's due to our customer Folio that we have very long contracts in this portfolio and also the spread we have. So But having said that, of course, we will be affected like anybody else if the big recession comes, only that I think we will perform a little bit better. Okay. But you still see orders growing or? Yes. We have higher order intake than we have ability to deliver due to the component situation. So still, it's our limitation in sales It's not our capacity, but material situation. Okay. And if you possible, if you could comment on the German cluster units On the performance in terms of growth and profitability compared to the rest of the main markets. Yes. Good question. Thank you. It's a fantastic country, Germany. They have so many of these Mittelstand Product Owning Companies, which really need some help. And we have been also making Germany step by step. We Emptered in 'nineteen and it came to pandemic. We had to wait. We reopened last summer again and then we did an acquisition. And we are following the plan. So the plan we announced in October last year was that by the end of this year, we will be ready with the cluster. And that's also why we can announce the Next strategy because we will be ready with the setup in the German Juster this year. And that's, of course, being ready means also that there are new opportunities that we are not in the Fill up phase, but rather in the expansion phase. So we are quite positive about the German market. It's fairly unlimited and recession or not, we will have orders. Okay. Do you still expect good profitability from German cluster, beginning of next year or that target moved a bit? No, no. We have stayed the same like since last year that when we are financing cluster then Because everything we do, we cannot activate any costs. We take it directly on the P and L sheet. But when we are done, then ends the cost. And of course, that is like a balloon going a bit up. And we said we will be ready by this year, we will be ready by this year. So that will be an increased profitability in the German cluster. Our next question comes from Frederik Nielsen at Redeye. Your line is open. Hi. Thank you. I want to start with what you called next step. And what geographical locations are you looking at for a potential new cluster? And also, just to clarify, At the end of the period, is that the 2025 period? Or what period are you talking about there? Hello, Fredrik. The latter part of the question first. Yes, it's the end of this period. So By 2025, we should be ready to launch the next cluster somewhere in the world. But of course, I don't think you I'd like me to tell you where right now. And in fact, I don't know that. It's still in the investigation phase. But of course, we it's like a product development company. You always have to think About the next next product, and that's what we're doing also in Alsace. Okay. I see. But I mean, are there any like A few areas you could name that you are investigating at least so we could get some kind of Indication of what the areas that possibly could be interesting. I can tell you something about the trends, but it doesn't mean that we will Go in that direction, but the current trend is very strong and that is that there's a detachment between Europe and Asia and an attachment between Europe and the U. S. Because of the political situation, so there are companies who would like to remove their manufacturing from Asia and maybe even be In U. S, no more in U. S. Is more solid energy situation. That's the trend right now. But if that will be valid by the end of 2025, I cannot tell you. Okay. I see. Also, on the targets, the new targets, I mean, SEK 5,000,000,000 in 2025 would imply quite a high growth. However, there is also quite a big difference if you You managed to achieve that with the current number of shares or if you expect to increase the number of shares in order to reach SEK 5,000,000,000 in 2025. Could you elaborate a bit on that target? I mean, do you believe you need To acquire with shares in order to reach that or should it be possible to reach it without that? Specific questions, I don't know if you would like to comment on that Lars. Acquisitions is part of the business plan, and I think we can expect Some acquisitions, we have historically done like one acquisition per year or so. If we, at that time, need to or decide to also Increase the number of shares to the share issue, that is hard to we cannot really tell. It cannot be So that it won't happen either. But on the other hand, it will make On acquisition and increase in number of shares, we still need to focus on the earnings Per share an increase and profitability per share. And the target of SEK 5,000,000,000 can, of course, also be We can reach higher than that if we do some bigger acquisitions. So it really depends on the size of the acquisitions. I think also that sorry, if I may add, yes, we would like and we have many of our colleagues as shareholders And we like that. And sometimes we do acquisition with shares to make sure that people stay on board. But like Lars said, EPS, of course, we must increase the earnings per share. It must be shareholder value when we do an acquisition. And we cannot be more precise on that. Sorry about that. Okay. I see. Thank you. And one last question from me. I mean, as you mentioned, you have a diversified customer base. And overall, you see a strong order intake. But Mikael, could you tell us anything about differences in demand between different segments just to get a better understanding About where we're heading in the economy, considering your wide exposure, it would be interesting to hear your view. I mean, if I ask, I cannot comment on my specific customers, but I can comment in general that we see, of course, that Heat pumps, for instance, is a booming market. Recycling machines is a booming market. Defense industry is a booming market. Mining industry is still going really strong. Medtech, that is where we are, still strong. So Cannot be more precise with the specific customers, of course, but we see strong demands from more sectors. Okay. That's all from me. Thank you very much. Thank you. Thank you. Our next question comes from Anders Roos, I had just one question. If you're looking at your new target of SEK 5,000,000,000 by 2025, that implies some 12% to 14% CAGR up to then, and that's a little bit more than the 10% growth target you had before. Is that mainly organic? Or is it also some acquisitions? Hello, Anders. Two comments. First, 2022 is not closed yet. So we don't know the outcome of that, if we're going to do The increase? And secondly, yes, we have targeted some acquisitions in this moving forward. And then we have said we target acquisitions in our current geography to increase capacity. That would be the goal. And maybe just a third comment that we have in by history, since we started Hansel, we have been running at 17%. Okay. Yes. That's true. So and also the 8% margin, Is that something which is you will reach that by 2025? Or do you have a more aggressive time Scheduled for that target level? The sooner the better, of course. Maybe Lars would like to comment on this. It's Very much connected to the general economy also, of course. Well, I'd say, as you say, the sooner, the better. What we can say, and we got the question from the audience saying that how will we reach That's Morgan. And we are in many of the factories and many of the clusters, We are on this level already. We are in the the classes are at different Stage in development. And what we have said is that we see no difference in the possibility to have High profitability in the different clusters doesn't matter if the clusters belongs to other markets or main markets. So we cannot say when we can reach 8%, but what I can say is that we are above 8% In a large part of Hamzah, and we are well, we know well the reason for the other clusters that have not yet reached 8%, the reason why they are not making 8%. And Anders, I think we also announced previously that our oldest classes are well above 10% and that is not going to be an easy ride, But we feel extremely confident because there's a function of scale. So when we increase the clusters, the margin comes because we have the opportunity to share resources and all that. So it's not a complicated function to do this, Merely that we have to make all these clusters much sure before we take the next step. Okay. Yes. That was all questions for me. Thank you. Thank you. And we have no further questions on the phone line. So I hand back to Erik and Lars. Okay. Thank you. And as there are no more questions, I'd like to thank everyone for joining this call today. And we could turn to Page 15 and conclude that all you need is 1. Thank you very much for