Earnings Call: Q3 2020

Nov 3, 2020

Thank you. Good morning, everyone, and welcome to Hanse Third Quarter 2020 Earnings Call. I'm Erik Steinforsch, the CEO of the company and I will together with Lars Hokeblom, our CFO, present the interim report we released this morning. And 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 and A session. So next slide please. So to understand the recent development of Hanse, it's important to understand our business model. And if you look at the middle, we have an exit called customer value. We have worked with ways to increase the customer value. On the bottom level, you will find contact manufacturers, the traditional value. Producer part according to specification and documentation. We also offer that, but we also have moved up one step we have first development. So we have a design department, we support the R and D team of our customer to help them. So we don't have any own products. What we produce is for our and what we develop is for our customers. But with this, we increased the customer value. You can call us both contract manufacturer and contract developer. On the next level, we have created something we call manufacturing clusters. So 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. And 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 and can we propose how to streamline it? And not only do we propose how to do that, we are also ready to help to execute. And 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, Hans has been existing. We have had a solid growth of approximately 20%. And we've also been able to show an industry leading margin we have in our mature clusters have an operating margin of close to 10%. So next page, please. And then we move on to the Q3 and it has been impacted by the COVID-nineteen. If you look at the sales this quarter, it's 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 has 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. And 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 region on a complete manufacturing in the wake of the corona pandemic. And also a good note, we have been switching program. We were running, let's say, reactive program where we call it resisto that was an action program to cope with the virus outbreak and the lowered volume. That was finalized during the Q3. Now we moved on to a more proactive program, our investment program, which is investment in machinery, but also the 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 beginning, that has been run as a separate project. But during this quarter, it was put back in the line organization. So now we have a complete organization which is both modern and agile and scalable. We have built possible even to acquire a new company put inside the organization without the need to redo the whole organization. And sustainability, for those of you who have read our annual report, you know that sustainability is important focus area for ANSA. And this quarter, we did something quite interesting. So far, we have been working with KPIs, how to reduce our emissions, how to reduce our consumption. But now we also turned to looking at our customers. We would have a project to measure the impact, the positive impact on the environment when we streamline one of our customers' 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 2 segments, 2 operating segments. And the first one is the main market and that is the markets or the clusters in Sweden, Finland and Germany. And Eric said that the COVID has affected the Hanse and it has especially affected the main markets. We can see in Sweden, which is onethree of Hansa is decreasing the sales and also the margin. And we were a year ago above 9%, and now we are below 6% in EBIT level. We can also see that in Germany and Finland is also decreasing in volumes and by that also in profitability. And the largest customer of ANFA is in the textile industry and it's actually down in the yearly volume of SEK 100,000,000. But still we are making money. We have operating margin of a little bit over 5%, 4%, of course, a lot lower than last year where we are on 9% And we can see that it is approximately the same level as it has been been in the quarter 1 and quarter 2 accumulated figures as well. If we move to the next page, We move over to the other markets. And here I think we have a positive news is that we have said for a long time that we will see an increase of the profitability in other markets. And this quarter, we see an increased profitability. We see that again with the corona, we see some customers and some clusters are negatively affected and some are positively affected by the COVID. We have Narva that is affected negatively and we see a decrease of 40% in volumes and that, of course, results in a significant loss in that site. On the other hand, Tycho in Estonia is positively affected by the corona and has by that also increased in profitability. The other units are more or less in line with what we expect or normal development. But in total, we see that the EBITDA has increased and we are on the same level today in Q3 as for the main markets of a little bit over 4%. And that is compared to 1 year ago when we were on a breakeven level. So that's positive. And then we move to next slide. And to start to compare with last year, last year, we acquired Ritter in beginning of quarter 3. So it's less than 1 month in the comparable figures that are not the same. So the Ritter was part of the group for more than 2 months in 2019 quarter 3. So it's more or less comparable figures. And we see that the decrease of sales is actually lower in quarter 3 than it was in quarter 4. So 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. And as Erik said, the part of the resistor program to lower the cost of it. We made an investment of the site in Oteroal and 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 in quarter 2 a little bit less. We were approximately down 10% before. So it has stabilized in quarter 3. We see that the EBIT is increasing compared to last year. We are on SEK 15 1,000,000 in EBIT compared to SEK 14 1,000,000. Last year, we had a little bit of one time cost for the acquisition of Littus. If you compare the figures without the onetime cost, it's 15% compared to 21% and the decrease is, of course, due to the lower EBIT we have in the main markets. We have a little bit decrease or 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 2. In quarter 3, we released some of the investments when we felt that the market was more stable. But in one time, in comparison with 1 year, we still have a positive cash flow and been able to reduce the operating net debt. And we have a stable equity to asset ratio, which is in the end of quarter beyond 32%. Now turning back to Erik and the future. Yes. So we go to Slide 9. Number 9. So we look a bit to the future. We expect the demand to continue to be weak. And for how long? It's impossible to say. If you look up to the right, you see the OECD's forecasts of the GDP. And it's 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. But 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 a bit 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 6 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. And connected to this is also the financial goals. So they have been reviewed and analyzed by the Board of Director and the conclusion is that they are still valid. So we will keep for instance our goal to grow more than 10% per year and to reach margin EBIT margin of 6%. Then 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 and we also have some discussions regarding potential acquisitions. Now, because there are quite few companies out for sale after the pandemic. Now, we are not buying companies in order to be bigger. We are buying companies in order to be better. So it has to be a clear industrial and financial logic. But if so, we are ready to do more acquisitions. And by that, we can turn to next page and open up for the Q and A session. Thank you. And our first question comes from the line of Erik Kessel of ABG Sundal Collier. Please go ahead. Your line is now open. Hello, Erik and Lars. This is Erik Kessel from ABG. So 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, 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. And that is multiplying through the value chain and we are working with the people who are making the machines for the textiles. And it's impossible to say exactly when it will open up again. We have a close cooperation with that customer. But as I said before, what we know is that it will open up again. They make their own forecast. They are not allowed to reveal that. But it's like if you have a traffic jam, somebody is hitting the brake on the highway and then there's some jam, it takes some time to get the cars moving again. So I'm sorry, I cannot give an answer to that. Yes, I understand. And then you benefited last quarter from corona 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 corona. And it's the same thing there for how long it's hard to tell. Okay, okay. But we can assume that this contract is still in place? Yes, yes. I mean, we have not lost any contracts. Okay. Perfect. Volume that is increasing heavily, but we have more decrease than increase as you see from the total sales. Yes. And then we also talked about interest in back sourcing back in Q2. And I assume that this has continued. And could we see some contracts, new contracts in the near term as a result of this? We are constantly signing new contracts and it's not always we are allowed to make a note on that. And normally, we also start with a rather small volume. So it's not really a call 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. And I 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 Hansel's history. So the downturn is completely connected to lower sales from our customers. But 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 even nicer write back. All right, perfect. And then you have announced some contracts back in Q2, for example, 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 and that's a very interesting contract. And 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. Yes. And then also the investments you're making now and the restarted program, do you already have orders that will utilize this capacity or is it more of in preparation of increased demand? So it's rather long term. When you do investments, you can have a lead time of up to 6 months before you see the machine up and running. So 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 and that means that we have to prepare also the organization for that. So we are glad to have reopened this investment program. It's really necessary for the future. All right. And then 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 1st 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 and 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 factories safe. And then we also launched this action program Resistor, which has been really successful. So I think that we are well prepared. We are also prepared with new actions with the situation be worse, and we are also ready for an upturn. So but again, if there will be a second wave, that would be harder than the first wave, it's I think nobody can tell. Yes. 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 Nielsen of Redeye. Please go ahead. Your line is now open. Hello, good evening, Tom from Redeye here. I want to get back to the demand situation in the main market. Can you come a little closer to the microphone? It's hard to hear. Is it better now? Yes. Not 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. And I mean, as you haven't announced any additional reductions of capacity, I suppose you expect a gradual rebound in demand. Or are there any reductions that you already have announced that are coming into the numbers later? We have not done any more reductions. So the reduction program was in Q2 and in Q3, we saw an slight upturn from low level. We haven't seen any downturn. So that's where we are right now. Okay. I'm going to move to another question then. Prior to corona, you were positive on the margin outlook in other markets, and we really saw improvement in this quarter. Is that a sign of the long term efficiency measures paying off? Yes, it is. It's 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, what we see that, of course, that 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, but 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 Handfa. Okay. So it was a mixed picture for the demand in the other markets. I mean, if you was it quite normal in total? Or were there any like major negative or positive effect on the margin from the corona? I think that what I said is that we see as an example of 2 important factories for us. And one is Narva and the other one is Titan. And we saw that in Narva, it was affected with 40% approximately in decrease in volume. And of course, with that kind of decrease of volumes, it will have a quite big impact on the profitability. So it is a mixture. But of course, when you see an increase, you have the positive effect, but 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 speaking that we have 2 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. But 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? Erik, you are asking really tricky questions. What is your scenario? And we cannot guess. And you know 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. So it's impossible to say. 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 stay, but under all circumstances, we are confident in getting more market shares. So 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. And 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 and I hope to be able to meet you again in our next earnings call. Thank you.