Earnings Call: Q1 2020

Apr 23, 2020

Ladies and gentlemen, welcome to the HMS Networks AB Q1 Report for 2020. Today, I'm pleased to present Joakim Edepon, the CFO, and Stefan Dahlstrom, the CEO, for the 1st part of this call, all participants will be in listen only mode And afterwards, there will be a question and answer session. Good morning. Stephan Alstrom here. I will start with a short introduction, and then Joaquin will take over and, continue with some deep dive into the q one numbers. So let's just go into a very quick, faceplate for, financial summary of quarter 1. We just published our Q1 report. In summary, quarter 1 has been a mixed bag of things. Our net sales came in slightly lower than, the same quarter 2019, but slightly better than Q4 last year. So I think we are moving sideways in our growth at the moment. We, however, got a fairly good order intake record level but part of this is probably also a bit of, build up of inventory, by our customers. And Joaquin will be back on this. We're increasing our EBIT and we are close to our target of, 20% EBIT margin. This is fine. And we have, good cash flow and EPS is increasing But again, you're working. We'll talk more about Q1 in the details. If we look at the trailing 12 months, we are seeing that most numbers are improving. All numbers are improving, I think. So we have, we are in the right direction, but of course, our target of, high growth and profitability. It's not fully there. We are working with it, but we see some challenges at the moment to keep our 20% growth target. But let's move, into a few pictures of our business, just a a short, very short recap. You know, we have our for main businesses, with our wholly owned, businesses of any bus, EXAT, E 1, and indices. And we have our 5th business leg with the web factory partly owned 75% as we acquired 2019. But it's still a fairly small part of our business. But what's key for us is that we have 2 types of customers. On the right side, we have makers of industrial equipment And here we work with, makers of industrial machines that could be, a variety of different technical things, everything from packaging machines, medical machines, windmills, elevators, etcetera. And we work with manufacturers of industrial devices such as robots or PLCs or circuit breaker, etcetera. This is very important for us. Nakers are more than 75% of our business. But we also are working with users of the automation equipment. And these are users making everything from public paper, food and beverage, cars, automotive and these kind of things. And then we mainly work with different, partners, system integrator solution partners that go to these end customers. So we look on the distribution in 41, we are seeing that the, the big majority of our business is still within makers. In makers, we have two models. We have what we call design win, which is almost a recurring, sales process that they we sell components that are in design in these applications. And then we have machine builders that it's, still good customers, but it's not the same type of business model where we are very, sticky inside their machine on and the bill of material. So SCC makers are the majority. And then on users, we do quite nice business with the routers, switches, gateways, problem solvers for these automation companies. And we're also now publishing what we do in software subscription and services, which is a smaller part for our business, but, we want this to increase in the future. Therefore, we also publishing this data. Just a quick look on our long term targets. We want to grow 20% per year. Historically, there's been almost on par with 18%. And, this is a combination of organic growth and M and As. And we have been, seeing a very good development the last 10 years. Of course, right now, we see some challenges, but we have a long term focus on keep on growing. We want to grow at good profit levels. We have a target of 20% EBIT margin, and we have been on 18%. So we are slightly better than the historical data in quarter 1. And we are normally, distributing. The board is normally deciding to distribute 50 percent of EPS in dividends However, this year, due to the corona circumstances, the board have decided to to cancel the dividend so there are no dividend proposals this year. Short business update and the slide that you will be waiting for, we start with a corona update. So if you look on Corona, we can conclude that you record 1. All our team members are healthy and safe, and We haven't seen so much, impact on the, on the business for HMS in quarter 1. The biggest impacts have been Spain. We are in one of the areas, that is more or less under lockdown outside Barcelona. So we have been closed, really closed, with no transportation and no material and no factory opening for a couple of weeks. But, we also got some slots during Easter when we're allowed to manufacture. So I think most of the customers have received what they need. We are now more or less up and running their We've also been working hard to manage to make sure we, mitigate any problems with our supply chains. We have some smaller disruptions from Chinese suppliers at New Year. But, all in all, we've been, working hard, but been very successful in maintaining a good, a strong supply chain. And as you know, we have, suppliers in China, but also quite much supply from, both Lithuania and, well, in in Vazic state and also even Europe in EMS manufacturers. So we are not fully dependent on only Chinese manufacturing. And of course, we have still a quite, large portion of manufacturing in hamstad in Belgium and in Spain in our own factories. We've seen that we had a good, order intake, but we think that maybe 30,000,000, 40,000,000 sec of the order intake is probably a buildup of inventory at our customer's location. So the good order intake have, it's not a normal situation, we think. Looking forward, if we look on Q2, we can see that, we are feeling a bigger impact on our business for Corona, of course, some are end users. They have closed manufacturing in automotive and others. But on the other hand, we also see that some of our customers in food and beverage and paper, are working at, full speed But we feel that we have around 20% down the 1st couple of weeks here in April compared to the same period in the last year. So we expect a challenging quarter in quarter 2. And, based on this, we also implemented short time, work in Sweden our largest, in Germany, our 2 largest, the 2 largest locations for our employees. And on average, we are on, I think in Sweden, we are on 80% on average. And in Germany, we are slightly below that. So this has started And we keep a very close monitoring of the situation, per our agreement, we can, within 7 days notice, change our short term, percentage to something more or something less. So we have good flexibility. We also have different plans that we can execute to do more cost savings going forward, but we also be careful that since our strategy for Corona is to making sure that, we keep our teams and our capabilities as intact as possible because we see that post corona, we think that the market conditions for increased automation and increased digitalization will increase So when we have this crisis behind us, we see good opportunities for HMS, and we wanna make sure that we are able to take advantage of, better situation when that comes with intact teams and capabilities. But until that will happen, we keep a very close eye on our costs and our cash flow. So finally, business update, we can see that we have, a volatile sales and order intake, and there are some customers who prepare for tougher times. In general, we have seen a fairly good trend in, USA in Asia, in Asia, mainly driven from Japan, whereas if you fall off, you know, we had a quite difficult year in Japan, in beginning of 2019. So this is a pickup again. But Europe, especially Germany is, the big weakness in our business. And we saw, a slowdown was coming already last year. But of course, the corona effect is increasing that slowdown. So we are more or less rolling forward from the Q4 numbers, going forward here. For, our EVO business, we still see a good, development there, quite good development, I would say. One reason for that is that big part of E-one business is remote access of machines. And of course, this is a very interesting value proposition for service engineers when it's difficult to travel. So we see a good, good potential, a good business we want at the moment. But any bus and XAT are down, but, I would say sideways from, second half twenty nineteen. With indices, indices is working with building automation. We have had some supply chain disruption, but we also see that there's some challenges in the market where, some of the customers there are in, hotel business and, for air conditioning and things like this. So for emphasis, we are seeing some, challenging in the near, in the near future. Alright. That was a very quick update of quarter 1 and our forecast for the future. And I would like to leave over to Joakim to talk more about the financial numbers. Right. Thank you, Stefan. And as always, we're gonna start with the order intake. And as you can see, this is actually a record, record high order intake for us with a 401,000,000 compared to 387 in Q1 2019. So we are looking at the reported figures. We're up 4%. Organically, however, we're down 4%. And then the main reasons behind this, this improvement is, of course, the, the currency effects and also this stocking, talking up orders from, from some of our main customer so book to bill is still 1.11, which we think is positive. And across brands, we can say it's tough on touch to point already. It's pretty much an even distribution between the different brands. All of them are down a little bit, except for E1, it is up slightly. On the positive side, we can also mention that Web factory that we acquired last year is, had a very good quarter with 9,000,000 order intake. And received a a record order of 4,000,000 from from a big customer. That was very positive. Looking at these stocking orders, we can also say that it follows the normal pattern. If we look at our order book, so 75% of the order book will be delivered in, in the 2nd quarter, which is normally the indicator that we have. So it's not that we have these really long stocking orders. It will be delivered pretty much short term. And looking at the, rolling 12 months, were at, $1404,004,000,000 compared to to 14.70, so slightly up. In the reported figure. However, organically a decrease of of 6%. And this is then, of course, an impact from the last second half in 2019. Okay. Going over to to the sales, obviously, we're down from, from Q1 2019. We knew that already when we saw the order intake in Q4 last year. So we're we're ending up at, uh,361,000,000 packet 380. So a decrease of 5% reported and organically 8% down. And here, we have a pretty, pretty big difference looking at the different markets, we're still seeing in, Europe and especially Germany. It's still really tough. It's, is pretty much across the line where factory automation is down. Automotive is still very challenging and the machine building is at very low levels. However, we see a little bit of, a pickup in, in Asia, especially Japan that we've been having some tough quarters are coming back with some improvements already in Q4. Now, Q1 is even better. So that we think is, is positive. Also, America is, is doing okay, but we know, as Stephan said, there will be challenging times ahead of the Q1. It's looking quite okay. For the rolling 12 months, we're at 1,500,000,000 exactly in in sales compared to 1425. Previous period of around 12 months. So here we see a slight increase of 5%. Organically, it's pretty much flat compared to the previous period. And here, we also see a small growth in in in all markets in reported figures. We are looking at sales per, per geography, you can see that we're now having a little bit more than we normally have in, in America, and a little bit less than we have in, in EMEA and also in Asia's slightly up. But it's pretty much the the same picture with with 2020, 60, 20, America, Samaya, and, and Asia. And as you know, where USA is the is the big market in America, and Germany is by far the largest market in in Europe. In Asia, Japan represents more than half of our sales. So to try to understand how to sell a little bit more. I'm gonna give you some, some guidance here. We have, recorded 67,000,000 EBIT compared to 60. So despite the lower sales, we're managing to, to improve the, the EBIT. And of course, we think that is very positive. One very big, contributing factor is the gross margin. That is substantially better. 3 percentage points up compared to the Q1 2019. And, the, the main factor behind increased gross margins are, of course, manufacturers, but the product mix is good, especially within any bus. Where we now have integrated the acquisition of Beck that we made in 2018. Here we can see 2 things. One is that the margins in BEC is substantially up compared to a year ago. And even if it's up, we're still a bit lower than the rest of the business. Also the volumes of the Beck business is a bit lower than the previous period. So this all in all helps see, the margin to, to be much better within the Anabas business. And then we also see small improvements in in the other brands. So we're happy to see that the work we're doing given effect on on the gross margin side. Trying to understand the OpEx, you can see we're reporting 6,000,000 lower OpEx. Organic, that would would mean a decrease of 14,000,000. And the main reasons behind this is the, of course, restructuring program that we did last year. We have some, corona related savings, you could say, due to the fact that we can't travel as much as we normally do, and we also have to to cancel some customer events. So, of course, this is not positive in the loan perspective, but in the short perspective, we're getting some some wins from this. We're also having higher I, you know, capitalized the R and D. We have something projects going on, and, therefore, the capitalization is, it's up a little bit compared to, the same period last year. For for the rolling 12 months, we're pretty much at the same level, and the EBIT. We're doing 16.7%. So shortly, a little bit shorter on the target, but still on a decent level. And the gross margin is very close to 62%. Compared to just about 60. So we've seen, a bit of an improvement the last quarters, and we were happy to see that on the on the gross margin. That will definitely help us through these times. CPS, I don't have a lot of, comments on this. Just want to show you that we're we're up from ATA 0.88.6to1.01. And, net financials is pretty much in line with expectations of 4,000,000 And I think the same, if you look at the rolling 12 period, it's, pretty much as expected. Cash flow from operations, we're doing 55,000,000 despite working capital build up of, of 29,000,000. So we think That's quite positive. They will still manage to get out 55,000,000 from this. And the main reason behind, the working capital build up is, increase receivables of $41,000,000. This is a factor of 2 things. One that we had pretty high sales in March, which is, increasing their receivables, of course. But also, we're seeing some effects that it takes a little bit longer for our customers to pay us. And, of course, we don't like that, and we keep very close eye on the situation to make sure that we, we don't get any credit losses from, from this situation. We also strengths in our internal rules, how to to handle customers not paying in time. So we minimize the effect of credit losses. We have seen an inventory reduction of 6,000,000 in the quarter. However, we think that we might, might build up some inventory of components for the coming months. We follow this closely. It's not an easy call because on one hand, we need to relate to the, to the demand. And then we also need to see that we can deliver to get the things in. There are some disruptions in, in transportation, some longer lead times. Of course, we wanna make sure that we get, get the goods in. So a bit difficult to guide. We're now at, if we look working capital sales, We're at 10.3 on average for the quarter, and we might see a slightly higher level than that for, for Q2, I think. But it's, as I said, it's a bit difficult, and we follow the situation closely to try to make the best, calls that we can on this. Also, for only 12 months, we can see that the cash flow is is up some 30,000,000, so positive. And despite some, some high working capital And finally, the talking about the debt situation, and as you can see from from the graph, where we're taking down our our net debt further now at 390,000,000, and, and a big part of that comes from IFRS 16. Looking at net debt to EBITDA, we're, we're 1.13 compared to 1.33. So we've taken down the leverage a little bit And of course, the fact that we're now not going to pay a dividend will help this situation further. So we think that we have a pretty strong balance sheet going to this crisis. And that's also what we wanted to achieve to make sure that we, we won't get into, to financial problems. And based on the situation today, I think we're quite satisfied with how how things looked on this side. I think that was what we intended to cover. So if we now can hand over to the operator for some questions. Thank you. And our first question comes from the line of Joakim Gunell of DNB Markets. Please go ahead. Your line is open. Thank you, operator. Good morning, Stefan and Joachim. You mentioned that Q2 started with a 20% order decline. Can you perhaps comment a bit on the trend there? Has it improved in, say, the past week? And can you comment on the development for each brand? Is E 1, for instance, closer to positive territory? Difficult to really give a good it's it's a short period of time. It's very volatile week by week. But, I think some weeks are better and some days are better and some are worse. But in general, I think, the E1 business, stand up better in general. But, I I think at this moment, we can't give you any detailed numbers, but, I think the trend is clear that core 2 will be, will be down but it's very difficult to say how much. But what we see right now, it's down 20. The majority of that is probably on, any bus. Inthesis except, I think, and not so much on the e one. That'd be my my general guess here. Alright. And can you perhaps talk a bit on the proactive cost measures in 2019 and the temporary layoffs now? How should that impact your, your margin profile as compared to the previous downturn? I mean, we have seen, I think you're in the margin trough that 13% in in the financial crisis. And what are the levers here to protect margin? I think where the mornings can end up is, of course, very difficult because it's, to a very large extent, will be dependent on the top line. But with the temporary layoffs or or the short time work that we're implementing, we expect to save around SEK 4,000,000 from And, this is like the first measure that we do. We hope that that will be enough. If the situation becomes significantly worse, we will, of course, see if we can do more. But, the measures we're not putting in place will give 4,000,000 per month in, in, for the saving. And then, of course, given the situation, where we can't travel, we, we can't have a lot of customer visits and events. We expect to save from, from the previous plan about 2,000,000 per month And that is also what you saw in in Q1 with the $5,000,000 that we saved in Q1. Alright. And, also, if you could elaborate a bit on the growth rates for each of your to revenue models, which you you highlighted here in the presentation. I mean, the the design win versus system level in in Q1, what are the growth rates for this to, to, model and once again, can you just remind us of the margin profile for this? So, organically, the the growth rates of both of them have been about the same. Down a few percentage points. And the margin profile is quite similar. The, the, in the embedded business, we have some, some custom products that will have slightly lower margin. So we've had It depends a bit on, on what customer mix we have, if you put it like that. All in all, it's pretty much similar, but we can have some more changes within the embedded listing. This is depending on the customer mix good like that. Yes. Sure. Sure. I mean, with full understanding here, that's, I mean, impossible to have, a full picture, but can you give us just some context here? When you talk, I mean, what assumptions do you make here in your analysis when you've decided to entirely revoke the dividend proposal here about what will happen in the coming quarters. And is is there a chance that the the the the dividend could come back to the table? Well, I think this is a, a board question that we we don't take active part of that. So I think that we need to leave that for the board. But what I heard for the board was that they feel it's, it's important to per serve our cash in this turbulent times, but, of course, we also see, maybe a couple of months down the road that this may also be opening up potential for M and As and things like this. So I think there's a mixed picture from, the board that they wanna preserve cash, but they also wanna make sure that the management team here also have some jump to, take some bold initiatives going forward. But, I think that's, the mix I heard, but it's not a management decision. Very clear, Stefan. Final question, just curious to go to, to hear if you could provide some color on on what do you think the inventory levels are at distributors today? I think for the distributors, it hasn't been stocking up a lot. It's more of some of our main, our main, embedded customers that have been stocking up. So I think for the for the distributors, it's pretty much as, as usual. Thank you very much. That's all for me. Thank you. Our next question comes from the line of Victor Homai of Danske Bank. Please go ahead. Your line is now open. Good morning. So, yes, a follow-up on that question that the distributors not stocking up its team better customers. Yeah. I'm I'm trying to figure out here if a 20% decline in order intake here for for April. And I guess you're you're talking about the total order intake, not the organic. If that's the trough or not. What would you see if you posted 30 to 40,000,000 sec in Q1, or, yeah, on the order intake, this stocking up effect what what do you see? Or what would be normal for for May June then for, for your customers that did not stock up? Sorry, Victor. Can I just, can I clarify one thing? The minus 20% that is actually organic decline. Okay. It was. Okay. Yeah. Sorry. Can you just repeat the question? Yeah. So so, what to expect here, if if we see 20 percent declining in April, would you expect this to have been the trough in, in the declines, or I'm trying just to to figure out the the effect on q 2 from the 30 to 40,000,000 stocking up effect in q 1. Yeah. If you could elaborate a bit on that. I guess we can speculate. I think it's likely that, that will mean that we'll get a bit of a lower order intake in, in Q2 since many customers have placed orders in q 1 already that they would normally place in q 2. But that's that's just speculation. And, also, what did you say you came on? You had a comment with the slides on the Q1 order intake and the deliveries, did you say something on what you did expect, for the for the deliveries in in, in Q2, or did I misunderstand that? Yeah. I'm sorry, ma'am, that was not clear. So what we were thinking, when we see this, this boosted order intake, the first, thought it comes to mind. Okay. Do we see customers that are placing all of the orders for the full year already now? And, we deliveries later out in time. But what I said was that we see that it's forepoles the normal pattern. So normally, we would see If you look at their order book at a given time, 75% is normally, delivered within the 3, coming 3 months. And we have the same situation now. So that's where the conclusion from from that would be the main effect of these stocking orders, the 30,000,000, 40,000,000 will come in Q2 and deliveries in Q2. I think that's that's what I meant. Okay. Okay. I get it. So with the improvements, you've made, and you've seen, and and putting the the mix of exercise in, in the gross margin, sounds like 62%. You you you earlier, you talked about 60, maybe 62% the range over time in in gross margin. Sounds like 62% for the the top part of that, that range would be more relevant in a long term or what do you see if we lift price beyond this year in terms of gross margin improvement given the the current products that you have. I think we wanna be careful to give any promises, but But I think the work we've done and with the the mix that we currently have, I think, yeah, around 62% seems, seems quite likely. I think it's a pretty clean number in Q1. Thing that stands out to locks. So right now, I can't see, big reason for why we shouldn't be able to maintain that. Okay. So that was it for me now. Thank you. Thank you. Just to remind everyone, And there are no further questions at this time. Please go ahead speakers. Alright. Thank you very much. Thanks for attending, this quarter 1 call here. And, Let's stay tuned for the the coming months and quarters here. We expect some turbulent times for our business. But, as I mentioned, I think when this is that when the corona fog is clearing up, I see some good opportunities for automation, digitalization. So our strategy is to really maintain our team and keep on working with the things we can do such as gross profits and these kind of things that we can control. But top line is unpredictable for us in this, this circumstances. So I think we keep on focusing on, the things we can do something about ourselves. And plan for the worst and hope for the best. So we, we stay agile for the coming months and, are very close to our customers, but it's really difficult customers to make any predictions as well. So we live in times of high uncertainty. But in the long run, we are quite positive, but we just need to be careful in the short time. So I would like to thank you, and thanks Joakim as well. And, be careful out there, wash hands, and, look forward to keep in contact with you. Thank you. This now concludes our call. Thank you for attending participants. You may disconnect your lines.