Earnings Call: Q4 2020

Feb 16, 2021

Today, I'm pleased to present CEO, Erik Stenforce and CFO, Lars Vokebu. Please go ahead for your meeting. Good morning, and thank you for joining this audio cast. I'm Erik Skjefors, CEO of the company. And next week, So, in the security sense, I have Lars Akerblum, 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 Hansa. 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 customer all under our slogan, All you need is 1. 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 size 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. Hansel has been one of the fastest growing manufacturers. And already in 2019, we were able to reach SEK 2,000,000,000 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 the double digit increase percentage wise. We prepared accordingly. So we invested and we trimmed our clusters, but then the clouds started to pile. And By end of Q1, 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 So we immediately launched an action program, we call it Resistant. It was in the beginning of the Q2 in April. And what we did was that we tried to lower our fixed cost 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 seen some increased volumes, whereas in the rest of Europe, Germany, there was a new lockdown just before Christmas. And it seems like it's been separated that the Nordic 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 countries, especially in Czech Republic. So when we summarize the year, the increase rate was only 4%, And the earnings level was far below what we expected in the beginning of the year, and Lars will Soon, we'll 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're 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, it 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 can 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 Tartus, Tonga. For us, it's a quite substantial investment, EUR 8,000,000. But we believe the timing is good. This will be ready by the beginning of next year, 2022. And that is 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 call to Lars to give the financial development. Okay. Thank you. Starting with Page number 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 customers in Hanse, Being in the textile industry, we have lost approximately SEK 25,000,000 compared to Q4 2019. We also see that the action program that Erik mentioned has an impact on lower sales, Approximately also SEK 25,000,000 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 the central part of the sales in euros, has an impact on half of that, approximately SEK 16,000,000 in Q4. If you deduct those, You see that there's actually an increase of the sales of approximately 2% If you compare those 4 94 compared to the 548 the year before and adjust them for these three 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 are at 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, we see a 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 here have the biggest drop in sales and that is due to this big customer within the textile Industry. On the other hand, with the sales in other markets, it's actually increasing. If you deduct the currency effect, you have Increased organic growth of a little bit over 3%. 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 limited growth, Approximately 4%. And here we have 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 EBITDA, we had a big impact for this So resist the project downsizing and preparing for long term effects on the COVID. And if you adjust for that cost, you have an EBITDA of SEK 73,000,000 Compared to $268,000,000 the year before. And what has been Prioritizing in Hanse has always been the cash flow, and we are proud to say that we have another quarter of really good Cash flow, we have been able to in a year of good cash flow. We have deducted reduced the operating net debt With approximately €80,000,000 down to €271,000,000 and that is 23% of the net debt. That is, of course, strong going into 2021. If we don't 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 share 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. When we have a market value Close to €500,000,000 €475,000,000 approximately. And the Board decided, and you can see that in the report, To propose a dividend of SEK0.25 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. Lee, over to you, it's looking Into the future. Page number 9, please. So looking ahead, what will happen? What will Hansa 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 to 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 For 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 the space on German customers later on. Then we have 2 Global trends, which are actually our friends. Of course, it became obvious last year that the complex global supply chains are Quite fragile. And we see a 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 the priority number 1. Here we had 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. No, we don't buy companies to be bigger, but to be better. And here's a promise. Every time we buy We will clearly state exactly how that acquisition will increase the customer value. So a bit mid term 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 Hansel, like All other manufacturers will struggle with this year, a bit expected after downturn in the economy. But all in all, we see that still some dark 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. Thank Our first comes from Erik Kessel from KBG. Erik from ABG here. You touched upon this, but Sweden has a solid margin of 9%, but that will kind of imply that other regions in main markets are very profitable right now. So I assume it's mainly the German part of the business that is dragging down margins. But could you comment on the profitability in Germany And how you see it developing going forward? Well, we cannot comment on Germany Individually, but you are definitely correct that having a SEK 25,000,000 Decrease in turnover, of course, needs to lower profitability. And we have also seen in Finland, which is the 3rd part of the main market, We have been affected by downturn in some of the customer areas where they are I'll add Ingvra, but the main reason for the lower profitability in the main markets is, of course, the long term of The biggest customer in the group that is in Germany. And I also like to add to that, that The under size is important in Germany. We so far only have a single factory. We had downturn of sales also 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 than they will be able to handle any coming downturn better in the future. Okay. Thank you, Jens. 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? Yes, we have in the setup towards customers, we have normally Possibility or advice or even in the demand to adjust the prices when the metal prices are changing. So it should not affect the margins and we are able to push that out to the customers, yes. So no kind of short term effect here in Q1 in Telia Transfer? It could be, but that is minor. I think that the major impact can come from the Shortage and possibility to buy raw material. That could be probably the biggest problem right now. 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? The simple answer is no. We haven't revealed the number. That's a bit of a challenge we have that Sometimes the customer doesn't want to announce they had switched to Hansa because they are still working with another supplier. Sometimes The market value is secret for their competitors. We have been quite we are not Drowning 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 with the product development and product manufacturing, which is an even more complete concept. But I'm afraid we cannot give any numbers. Okay. Thank you anyway. 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? You're definitely correct In the way of thinking that it is the percentage of sales. So when the sales are growing, of course, 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. 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 here today for 2021? No, it's a long shot. It's a long shot. I promise to share that with you 1 year from now. Okay, perfect. Thank you, guys. That's all for me. Thank you. Our next question comes from Fredrik Nielsen from Redeye. Please go ahead. Our next question comes from Frederic Knudsen. Frederic, can you hear us? Yes, I can hear you. Can you hear me? Yes, we can now. Perfect. Thank you. Okay, nice. I want to get back to the strong margin in the Swedish cluster despite 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 obtain solid margins Despite lower volumes? Again, the answer is simply size. We are 4 times bigger and Marcie, if you talk with you, since in order to have a good margin, you have a number of different ingredients. 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 are a part of your impact, it's a bit of a challenge and I'd like to also add this. Now I have an advantage in terms of last year, So we can actually borrow resources in either different sectors. And that's why we can handle the upturns and downturns more easily than Maybe we just want to acknowledge that. So altogether, I expect you to see some Could increase also the Finnish customers, so in the future, we can post on better margins. Okay. Other markets continue to improve its adjusted margins. Is that mainly due to the restructuring you made through the Turing you made through the years paying off or did the market improve as well? Yes. That's one part of it. It's also that other markets are getting more and more mature And Koffing, the way of The Swedish customers were the 1st cluster and the most successful. And when we see that the other customers Are getting more and more mature. They are also increasing profitability. Okay. 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? I think I said both up and down. Why we are so optimistic is because of our business model. We see that this is really working. It adds value to our customers. We are easily getting new customers. Customers who used to have solution in many places were switching to hands up. But still, this is a company under development. And that means also that while we are building a new justice, since this pandemic really slows us down, Again, we are confident because we feel that it's a temporary slowdown. But To make no mistake, short term, we still have the challenges we had in Q4. They are still here today With the pandemic, it's not over yet. But we understand that in 1 year from now, there will be no 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. We plan to adjust them Okay. That's all from me. Thanks. Thank you. There appears to be no further questions. So I will hand back to the speakers or any other remarks. Okay. We have No more parts of our presentation. So we thank you so much for taking the time to listen in to this order cost, and we hope that you will This is again when we present the next report. Thank you very much for listening.