Thank you. Good morning, everyone, and welcome to HANZA third quarter 2020 earnings call. I am Erik Stenfors, the CEO of the company, and I will, together with Lars Åkerblom, our CFO, present the interim report we released this morning. The agenda, we will start with the business update, then we will do a financial review, moving on to look at the future, and then end with a Q&A session. Next slide, please. To understand the recent development of HANZA, it is important to understand our business model. If you look in the middle, we have an axis called customer value. We have worked with ways to increase the customer value. On the bottom level, you will find contract manufacturers, the traditional value. Produce a part according to specification and documentation. We also offer that, but we also have moved up one step. We have product development.
We have a design department. We support the R&D team or a customer, to help them. We don't have any own products. What we produce and what we develop is for our customers. With this, we increase the customer value. You can call us both a contract manufacturer and contract developer. On the next level, we have created something we call manufacturing clusters. We support regional and complete manufacturing. We have grouped together a number of different manufacturing technologies, and by doing that, we can offer production of the parts, but also complex assembly, final test, and logistics. A one-stop shop. On the top level, we have advisory services. We have our own model called MIG, stands for Manufacturing Solutions for Increased Growth and Earnings.
A way to analyze our customer supply chain, can we propose on how to streamline it, not only do we propose how to do that, we are also ready to help to execute. This business model has led to good growth, if you look at the graph down to the left. You can see that the 11 fiscal years HANZA has existed, we have had a solid growth of approximately 20%. We have also been able to show an industry-leading margin. We have in our mature clusters an operating margin of close to 10%. Next page, please. We move on to the third quarter, and it has been impacted by the COVID-19. If you look at the sales this quarter, it is actually flat compared to the same quarter last year on a top level.
If we go down a bit, we see that some factors have increased sales and some factors have lowered sales, and the result has been that there is a tilt in the sales load, and that has led to an earnings level which is far below what we expected in the beginning of the year. Lars will soon give you more details about this. On a positive note, we have in this quarter seen some volume stabilization. We have increased number of sales discussions. It's an increased demand for this regional and complete manufacturing in the wake of the COVID-19 pandemic. Also, a good note, we have been switching program. We were running a, let's say, reactive program where we call it Resistor. That was an action program to cope with the COVID-19 outbreak and the lowered volume. That was finalized during the third quarter.
Now we moved on to a more proactive program, our investment program, which is investment in machinery, but also robotization, optimization, which is quite important for our future growth. During the quarter, we also completed our organization. In the beginning, we acquired a company in Germany a year ago, and in the beginning that has been run as a separate project. During this quarter, it was put back in the line organization, now we have a complete organization which is both modern and agile and scalable. We have built HANZA in modules, which makes it possible even to acquire a new company, put inside the organization without the need to redo the whole organization. Sustainability. For those of you who have read our annual report, you know that sustainability is an important focus area for HANZA. This quarter, we did something quite interesting.
Far, we have been working with KPIs, how to reduce our emissions, how to reduce our consumption. Now we also turned to looking at our customers. We will have a project to measure the positive impact on the environment when we streamline one of our customer supply chain. Quite exciting, and we will come back with more information about that. Now we take next page, and I leave over to Lars.
Yes. We divide the group into two segments, two operating segments, the first one is the main market, and that is the markets or the clusters in Sweden, Finland, and Germany. Erik said that the COVID has affected HANZA, it has especially affected the main markets. We can see in Sweden, which is one third of HANZA, is decreasing the sales and also the margin. We were a year ago above 9%, now we are below 6% in EBIT level. We can also see that in Germany and Finland, it's also decreasing in volumes and by that, also in profitability. The largest customer of HANZA is in the textile industry, it's actually down in the yearly volume of SEK 100 million . Still, we are making money. We have operating margin of a little bit over 4%.
Of course, a lot lower than last year where we were on 9%. We can see that it is approximately the same level as it has been in the quarter one and quarter two accumulated figures as well. We move to the next page. We move over to the other markets, and here I think we have the positive news is that we have said for a long time that we will see an increase of the profitability in the other markets. This quarter we see an increased profitability. Again, with the COVID-19, we see some customers and some clusters are negatively affected, and some are positively affected by the COVID-19. We have Narva that is affected negatively, and we see a decrease of 40% in volumes. That, of course, results in a significant loss in that site.
HANZA Mechanics Tartu in Estonia is positively affected by the COVID-19 and has, by that, also increased in profitability. The other units are more or less in line with what we expect or normal development. In total, we see that the EBITA has increased, and we are on the same level today in quarter three as for the main market of a little bit over 4%. Compared to one year ago when we were on a breakeven level. That's positive. We move to next slide. To start to compare with last year, last year we acquired Ritter in beginning of quarter three. It's less than one month in the comparable figures that are not the same now. The Ritter Elektronik GmbH was part of the group for more than two months in 2019, quarter three.
It's more or less comparable figures. We see that the decrease of sales is actually lower in quarter three than it was in quarter four. We are more or less on the same level of sales. We have still continued focus on cash flow, and that has been the main focus. I will come back to that, but we see a little bit decrease in the cash flow due to large investments in this quarter. As Erik said, the part of the Resistor programs to lower the cost Ritter , we made an investment of the site in Åtvidaberg, MBO, and that was done and finalized in the end of the quarter. We move to next slide. We see that the sales in total dropped by approximately 8%, and that is in line with the quarter two, a little bit less.
We were approximately down 10% before. It has stabilized in quarter three. We see that the EBIT is increasing compared to last year. We are on SEK 15 million in EBIT compared to SEK 14 million. Last year we had a little bit of a one-time cost for the acquisition of it. If you compare the figures without the one-time cost, it's SEK 15 million compared to SEK 21 million The decrease is, of course, due to the lower EBIT we have in the main markets. We have a little bit increase of the operating net debt in the quarter, and that is due to the fact that we made a hold on the investments in quarter two.
In quarter three, we released some of the investments when we felt that the market was more stable. In one time, in comparison with one year, we still have a positive cash flow and been able to reduce the operating net debt. We have a stable equity to asset ratio, which is in the end of quarter three on 32%. We turn back to Erik on the future.
Yeah.
Go to slide nine.
Slide number nine. We look a bit to the future. We expect the demand to continue to be weak, and for how long? It is impossible to say. If you look up to the right, you see the OECD's forecasts of the GDP, and it is very much depending on what scenario you believe in. If you think there will be a quick recovery or if there will be a new outbreak of the coronavirus. It will take some time, but I think what we all agree on is that there will be an end to this pandemic. It means also that with long term, we feel that we will keep our strategy. We have something called Strategy 2022, which is basically that we will work in our six current manufacturing clusters, add new load, and also work with more efficiency in those.
That is still valid, meaning that we will neither increase nor decrease our footprint. Connected to this is also the financial goals. They have been reviewed and analyzed by the board of director, and the conclusion is that they are still valid. We will keep, for instance, our goal to grow more than 10% per year and to reach an EBIT margin of 6%. I talked about the new demand for our model of complete and regional manufacturing. There's also another demand, and it's a larger company who are interested in reshaping the supply chain, and we are now having some interesting discussions with some larger companies regarding this. We also have some discussions regarding potential acquisitions. Because there are quite few companies out for sale after the pandemic. We are not buying companies in order to be bigger.
We are buying companies in order to be better. It has to be a clear industrial and financial logic, but if so, we are ready to do more acquisitions. By that, we can turn to the next page and open up for the Q&A session.
Thank you. If you have a question to ask for the speakers via the audio teleconference, please press zero one on your telephone keypad now. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Once again, that's zero one on your telephone keypad to ask a question. Our first question comes from the line of Erik Cassel of ABG Sundal Collier. Please go ahead. Your line is now open.
Hello, Erik and Lars. This is Erik Cassel from ABG Sundal Collier. You mentioned that your largest customer in Germany has reduced volumes by 5% on an annual basis. Is this more of a temporary slowdown now in Q3, or should we consider this as lost volumes for 2021 as well?
Hi, hello, Erik, and good to hear your voice. I cannot answer that. Nobody can answer that. The textile industry has been hurt by the lockdown, first of all, of all the stores, and then secondly, because of a lot of work at home. People are not buying clothes as much as they should. That is multiplying through the value chain, and we are working with the end people who are making the machines for the textiles. It's impossible to say exactly when it will open up again. We have a close cooperation with that customer. As I said before, what we know is that it will open up again. They make their own forecast. I'm not allowed to reveal that, but it's like if you have a traffic jam, somebody's hitting the brake on the highway, and then there's some jam.
It takes some time to get the cars moving again. I'm sorry, I cannot give an answer to that.
Yeah, I understand, sir. You benefited last quarter from COVID-19-related products as ventilators. Do you have any noteworthy volumes from these contracts now as well, or has it kind of returned to normal?
We are not commenting on specific customers, but we can say that we, at this point, still have both an increase and a decrease due to the COVID-19 . It's the same thing there. For how long, it's hard to tell.
Okay. We can assume that this contract is still in place?
Yes. We have not lost any contracts.
Okay. Yeah, perfect.
Volume that is increasing heavily, but we have more decrease than increase as you see from the total-.
Yeah
sales.
Yeah. We also talked about interest in back sourcing back in Q2, and I assume that this has continued, and could we see some new contracts in the near term as a result of this?
We are constantly signing new contracts. It's not always we are allowed to make a note on that. Normally we also start with a rather small volume, so it's not really called for a press release anyway. The dialogues are increasing, meaning that the number of contracts signed will also increase, meaning that eventually the load will also go up. I'd just like to refer back to your previous question. I think it's important to restate that we have not lost any customers, we have not lost any products, actually ever in HANZA's history. The downturn is completely connected to lower sales from our customers.
On the other hand, we are now gaining new market shares, and I think that is in general, when it's in low economy, you should focus on getting more market shares, and then when the economy goes up, you have an even nicer ride back.
All right, perfect. Then you announced some contracts back in Q2, for example, a DNA analyzer, that I think was due in Q1 2021. Is this still on track or has there been any change in timeline?
No changes. That's a very interesting contract. We have, as I said, other contracts also with our design departments, which is really an advantage for us to help our customers to bring out new products.
Yeah. Then also the investments you are making now, the restarted program. Do you already have orders that will utilize this capacity or is it more in preparation of increased demand?
It's a rather long-term. When you do investments, you can have a lead time of up to six months before you see the machine up and running. It's important to do these investments. That's part of our Strategy 2022. We have a firm belief in our business plan and our way to get more customers in. That means that we have to prepare also the organization for that. We are glad to have reopened this investment program. It's really necessary for the future.
All right. Lastly, I have to ask, given the rise in cases and lockdowns in Germany, for example, do you have any indication of the potential impact compared to the first wave? I know you mentioned the risk of a second wave in the last report, so I assume you are well prepared for this.
We are well prepared. We were actually well prepared already from start. We had a pre-warning in China when our factory there had to close down, and then it was in Europe, and we quickly made a program to keep our factory safe. Then we also launched this action program, Resistor, which has been really successful. I think that we are well prepared. We are also prepared with new actions should the situation be worse. We are also ready for an upturn. Again, if there will be a second wave, if that would be harder than the first wave, I think nobody can tell.
Yeah. All right. Well, thank you very much. That was all for me.
Thank you.
Thank you. Our next question comes from the line of Fredrik Nilsson of Redeye. Please go ahead.
Hello. Fredrik Nilsson from Redeye here. I want to get back to the demand situation in the main market.
Can you get a little bit closer to the microphone? It's hard to hear.
Is it better now?
Yeah, a lot better. Thank you.
Okay. Regarding the main markets and the demand, I suppose you're not satisfied with the margin in that segment in this quarter. As you haven't announced any additional reductions of capacity, I suppose you expect a gradual rebound in demand. Are there any reductions that you already have announced that are coming into the numbers later?
We have not done any more reductions. The reduction program was in Q2, and in Q3 we saw a slight upturn from low level. We haven't seen any downturn. That's where we are right now.
I move to another question then. Prior to COVID-19, you were positive on the margin outlook of the markets, and we really saw improvement in this quarter. Is that a sign of the long-term efficiency measures paying off?
Yes, it is. We have said several times that we see the cluster in Sweden as the most mature, and we have taken costs for changing the ERP systems and investing in the organization and efficiency. Without giving any prognosis, we see that, of course, the other markets are maturing, and we are certain that we will over time reach a higher profitability in those markets. If it is going to be every quarter from now on, it's impossible to say. We see definitely that the operations in these clusters are getting more and more mature and more in the line that we like to run operations within HANZA.
Okay. There was a mixed picture for the demand in the other markets. Was it quite normal in total, or were there any major negative or positive effect on the margin from the COVID-19 ?
I think that what I said is that we will see as an example of two important factories for us, one is Narva and the other one is Tartu. We saw that in Narva, it was affected with 40% approximately in decrease in volume. Of course, with that kind of decrease of volumes, it will have a quite big impact on the profitability. It is a mixture. Of course, when you see an increase, you have a positive effect. I would say that the negative effect with the downsize of 40% is actually higher than the positive effect on an increase.
I can add to this that in speaking that we have two trends overlapping. One trend is the base trend where we announced already last year that we will see an increase of profitability in the other markets as we have already a leading margin in the main markets. On top of that is then the corona trend, which is changing the volumes. Under the corona trend, we have the base trend that we're increasing profitability outside the main markets.
Okay. One last question from me. What is your best guess regarding the GDP scenarios, given what you see in your business?
Fredrik, you are asking really tricky questions. What is your scenario? We cannot guess. There are other things, even though that the main happening today is our report, there is other circumstances like the election in the U.S.A., which can also have an impact. It's impossible to say. We can only tell what we see right now, and that is that the market is gaining momentum. We have an upturn in the Q3 compared to the Q2. We hope that's to sustain, but on all circumstances, we are confident in getting more market shares. It can be more market shares of a shrinking market or an expanding market.
Okay. That's all from me. Thanks.
Thank you.
Thank you. Once again, I remind you, if you do have a question via the audio teleconference, please press zero one on your telephone keypad. We currently have no further questions via the audio teleconference. I will now hand back to the speakers.
Okay. That ends this presentation. Thank you so much for calling in. I hope to be able to meet you again in our next earnings call. Thank you.