Earnings Call: Q4 2020

Feb 3, 2021

Afternoon. Good morning, everybody. Thanks for joining our Q4 call here. Myself, Stefan Dahlstrom, will start with some business updates and then Joakim Miedeborn, our CFO, will guide you through the numbers. So the agenda for today is just a summary introduction. I'll do a business update and then Joakim will continue with what you all are waiting for, the financial results and then Q and A at the end. So let me just take a very quick look on quarter 4. Joakim will dive into the numbers. So I will not really go into the details here, but We are quite happy with Q4. We see a solid bounce back of the business. We do see a good growth in net sales, good growth in order intake. We are improving our EBIT despite the fact that there's still been some challenges in this pandemic situations. So all in all, I think we are going in the right direction. But I leave the numbers to Joakim to browse a little bit more into the details. Just an overview for you who are quite new to the company. We have a couple of different brands, but they all unite themselves in our vision to connect devices. We have hardware. We have software. And we help our customers to make sure that we can help enable and liberate the data inside their machines and inside their devices. We have our 4 main brands, Ennebus, E1, Indusys, Nixa and 2 smaller recently acquired business, Web Factory from Germany and Procenta from Netherlands. But if we take a look on HMS as a company, we have more than 7,000,000 devices connected. We have over 300 machines in our cloud based Talk2M system. And our field is really industrial ICT, information and communication technology. We are a technology company. Right now, a big focus is for the future regarding 5 gs, wireless, IoT and this kind of technologies that our main business is quite, I would say, conservative or long term industrial customers. So we are one foot in more of IT and High-tech and one foot in more to industrial automation and industrial systems. As a company, we have 700 great employees around the world. We have offices in 16 countries. And our head office is here on the southwest coast of Sweden. Today, actually, in a winter landscape, we are not too spoiled by that. We just released or 2 months ago, we released our new long term goals, our 2025 goals. We want to be at 2025 with annual revenue beyond SEK 5,000,000,000, beyond SEK3.14 billion, we would like to stay on our operating goal of 20% EBIT. And as Joakim will explain, we have today, 2020, we have EBIT per share sorry, earnings per share of SEK4.79. Our business is primarily focusing on, let's see here, on 2 different types of customers. We work with users of Automation System, helping them to get data from machines and do the right decisions for their operations. This is around 25% of our revenue. Then our larger part is to help makers of industrial equipment, machine builders, device manufacturers to enable connectivity to their devices and their machines. This is around 75% of our business. If we look on our goals, we have 3 focus areas for 2025. We focus on environment. We do have an impact on CEO 2, and we want to be becoming a net positive contributor to this, both internally but also externally with the help of our products. We'll focus on staffing customers. We strongly believe that happy and high performing employees generate loyal customers. So let's start with making sure that we have a great staff here. And we are a growth company. We love the combination of growth and profitability. So this is an important part of our history, but also for the future. So target for 2025, net positive internal CO2 impact, here we work with our internal footprint, Green Energy really is making sure we are sustainable in our operations, but we also work with external impact things that is done through our supply chain, but also things we improve together with our customers in reducing their energy consumption and reducing their initiatives, etcetera. There's a lot of things we can do on the environmental side. Our targets for customer employees is measured by net promoter scores, we want to be beyond 25 both from employees and our customers. And as I mentioned before, our revenue target for 2025 is beyond SEK 3,400,000,000 with 20% EBIT margin. And we also have an updated dividend policy of distributing 30% to 50% of EPS to our shareholders. So this is the company, a short business update. We are seeing a recovery in the market. It's not on one market. It's all over our key markets in EMEA, in Americas, in APAC. And we are feeling that customers are back on a more positive outlook. I think they have adopted to the pandemic situation. And I think we and many of our customers also see that things are improving for the future. We have two notes as well. We are seeing that our customers have been really reducing their inventory levels through the difficult times 2020. We see partly that they are expanding again to be ready for the future. We also know, especially for the automotive industry, that electronics industry is suffering from component shortages and things like this. This also means that some of our customers is putting some extra orders in to make sure they get deliveries. So this is also partly helping. But I think the main thing here is customers are changing from being quite pessimistic to become more forward looking, looking into a brighter future. And we also see here in the 1st month of 2021 in January, things continue to do well and improve here. Europe back on double digit growth. That's very important for us. It's our biggest market. And this is all where we have seen challenges in 2020. America has been quite steady through the pandemic. They are still steady. But we have a fantastic development in Asia, primarily China, where we see growth in segments like wind power with a lot of new investments there. Part of our business with makers is what we call design wins. This means that our customers has signed in our component, our technology inside their devices. And then when they start selling their devices, we become included in it by this component or this module from HMS. And this is a business that was 10 years ago, 75%, 76% of our revenue 10 years ago. And today, it's 46%. It is still growing, but other parts and other acquisitions have been growing faster than this design win model. So this is a cash cow for us. We are growing In this pandemic situation where it's been difficult to reach customers, we still improve 1.3% in total design wins. We have 165 new customers here, but we're also seeing that the life cycle can be over 10 years, that some old customers are also dropping off. So we have minus 142,000,000,000 still a net positive. And considering the situation in the market, we are quite okay with this. I briefly talked about the 2 acquisitions. We have informed about this last call and Procentec looks fantastic. We are we were very happy to be able to acquire 70% of them here after October in October. And we all see a very good performance in Procentec, the first time together here. WebFactory, we acquired the remaining minority here back in the end of last year. And this is also now becoming more integrated into our offer. And our strategy with both these companies is to move closer to users, but also increase our percentage of software sales. Web Factory is pure software company and this helps to add software on top of our hardware product. All right. This, I would like to hand over to Joakim, talking about the financial results for quarter 4. All right. Thank you, Stefan. And we're going to kick it off with the order intake. Maybe before we dig into the numbers, I just want to take you through the journey referring to the upper left graph on this slide, where we saw a Q1 that was quite good for us in 2020, Driven by a very strong March where a lot of customers were stocking up to avoid ending up into problems in the difficult future to come. Then Q2, obviously, very weak, impacted by lockdowns and rate uncertainty in the market. And We started to see in Q3 still a slow market, but some recovery and some more positive signs, which has then continued into Q4, where we see that more and more customers are adapting with the vaccine starting to be rolled out. They also are now investing more in the future. And as Stefan said, also building up to more normal inventory levels. And this goes across all markets and actually all offerings as well. We do see growth in organic growth in order intake in all our offerings. So then to go into the numbers, this ends And topping CHF 408,000,000 order intake in Q4 versus CHF 337,000,000. So an organic growth of 13%, Also 30% help from Procentec. And then we have some headwind from currency effects giving minus 5. So in total, a growth of 21% reported. Some highlights, looking at the EMEA market, Doug, you know it's very important for us. We have 62% of our sales in this market and without Growth in EMEA is difficult for us to grow with any big numbers as a group. So very positive to see that that is actually back now with 30 Present organic growth in the market. Another big growth driver is China, which is Performing very well. It's been doing that throughout the year, 79% order intake growth in Q4 and year to date, 56%. So this is actually growing to become a quite important market for H and S, starting from low levels. 3rd item I want to mention is E1, We will see growth of 22% for the quarter and 2% for the year. So we're actually managing to switch back to actually grow for the full year as well in I mean, we see, as we've been talking about before, we've been discussing that this should result in a higher demand for remote access. And I think more and more customers see the benefit in that type of offering with a thing like this happening as we see it around the world. And Persson, the guest often also commented has started out very good and performed better than our expectations in the Q4. Looking at the year to date number, we are at 14.47% compared to 14.70%. So not fully managing to get up the growth to a minus 2% reported, Organically minus 4%. But as you saw, it's going in the right direction. Going over to the sales Summary, as you can see in the upper left graph, we don't have exactly the same variations between quarters, but still it's pretty clear that the trend is Pointing upwards with the SEK 4,000,000 or SEK 5,000,000 in Q4 'nineteen. So a 17% growth reported and 8% organic growth on that side. And also here, EMEA is the big driver. We are up 15%. The main reason for that is, of course, that we have the percentic business that were the main markets in EMEA, Organic plus 3. And in Americas, we also see some percentage impact of plus 8 and organic plus 3. Otherwise, the big growth driver is also Asia, where we now see the benefits of a strong order intake throughout the year. And as I said before, China is starting to become a more important market, going also from now representing 4% of the group sales to 6% of the group sales. And we believe that we have a very good potential for future growth with a big exposure to the Empower Industry, For instance, which is an important investment for China to reach the goal in 2,060 to be climate neutral. Full year, we're at 14.67% compared to 15.19%, so minus 3% or minus 5% organic. Yes. I'll make 2 quick comments on the sales distribution per region. What you can see is that EMEA is maintaining a high level, 62% of the group split. And the main reason for this is then, of course, it's a big company. What's also worth noticing is Germany that is now representing 35% of EMEA and 22% of the growth. This has earlier been more than 30% of group sales. So it's good to see that we're becoming less dependent in one single market. The other thing worth commenting is APAC. That is despite the fact that there is no M and A impact in APAC, we are Taking a larger share of the group sales. And then also you can see China is now 34% of APAC sales. Japan has before been by far the largest market In APAC, we think that maybe in a year or 2, there will be 2 equal markets. Then I think the result might need some explanation and especially the comparison with 2019. And what we can see here is that we, of course, have a significant improvement reporting €75,000,000 EBIT corresponding to margin of 18.5%. And I think the fair comparison is actually 33,000,000 in Q4 'nineteen, representing 9.5% Adjusted margin. The reason for this adjustment is that we had an earn out That we didn't have to pay to BEC that we acquired in 2018 that we resolved in Q4 'nineteen. And we also could lay back A provision for the restructuring costs from the program that we initiated in Q3 2019. So we had a bit of a doped result by some EUR 22,000,000 in Q4 2019. Otherwise, I think it's a combination of the fact that we see now growth again. We had good progress on the gross margin, and we have some help from lower OpEx. And just to explain that I have a separate side on the OpEx, so we'll get to that In a second. It's also good to see when we now look at the full year, we reached EUR 288,000,000 18.sorry, EUR 19.6 Percent margin, very close to our target of 20%. And the fact that we are dropping €50,000,000 of sales or more than that And still managed to improve EBIT by SEK40 1,000,000 is, of course, very positive for us. I talked about the gross margin. For the year, we see an improvement of about 1% to 62%. And the main reasons is that we've been running a internal program Focusing both on pricing and on our supply chain costs, which has proven quite successful and very happy with the Improvements we managed to do there. We've also had a positive product mix throughout the year with the fact that the main offering that's been suffering is the And the Busk Custom business, where is where it has a bit of a lower margin than the rest of the offerings. Let me switch slide and we'll talk a bit about OpEx development. Let's start with Q4 And the square that you can see there, we have what I call nonrecurring saving. We have still some short term work effects, I mean, if it's not much, in Q4, euros 3,000,000 related to Germany. Then we have another €17,000,000 that We call here other corona related savings, basically the fact that we are not having the trade shows and fares that we normally have in Q4. And as most of you know, we have a pretty tough cost situation in Q4 normally. While we normally have a bit of a lower margin, this is not happening in this year. And of course, the caveat that some of that might be a saving, but for the main part, we think that, that will be back for the future. There might be a small saving in this, but it's probably on the marginal side. Looking forward, I just want to say that we have finished most of the short term work going into 'twenty one. We have one of our entities in Germany. We're still having some of it left. I think that will be soon ended. So there will not be a big impact from short term work in 2021. And on the acquisition OpEx, the €22,000,000 that you see related to Procentec, this is a bit above The normal run rate, one reason today is the fact that we also have some costs related to the acquisition itself in that number. Otherwise, there's not a lot of things worth mentioning on Q4. Going over to the full year, If I just take the items 1 by 1, we have acquisitions effect of 29%. We have write down of the goodwill Related to wealth factor that we made earlier this year, given another €40,000,000 burden. On the other hand, we have then no restructuring costs From the restructuring program in 2019, we have the effect from the restructuring program of SEK 35,000,000 net in the year. In total, it was SEK 45,000,000 But we saw CHF 10,000,000 upside already in Q4 'nineteen. And then we have CHF 48,000,000 in total that we call non recurring savings. We have €30,000,000 in total for the year related to short term work. Out of €6,000,000 is governmental support And then another €35,000,000 on traveling, fair trade shows and those type of activities, Where again, we think most of it will be back when everything is back to normal, but maybe not everything. I think we have managed to Turn some of these interaction over to digital events. I think we've done a lot of that this year and we think that will also continue in the future. And then some other post of €5,000,000 and some currency effects of €4,000,000 Okay. So then let me go over to the earnings per share. When we talk about Q4 and the full year 2020, there's no big surprises. We have 1.21 in Q4. What is worth noticing though is the comparable of 1.46 reported in Q4 'nineteen is very drove by some different things. So the right comparison is maybe more €0.68 Graeme. And yes, to take you through some of those items, we talked about the €22,000,000 effect on EBIT before, But we also showed a positive tax of CHF 20,000,000 in Q4 'nineteen. This was driven by CHF 28,000,000, majority of that related to a positive tax decision in Belgium that was also giving us an upside for, I mean, both 2018 2019 came in, in Q4 last year and some other earnout related tax positive tax effects. For the full year, we're at 4.79, an improvement then with a fair comparison of 4.06. And earlier today, the Board decided to propose a dividend of SEK 2 to the AGM. Then we have our cash flow, which has been very strong, especially in Q2 and Q3. It's we still think this is quite good in Q4 with SEK 83,000,000. We don't have all the things work in our favor as we did in Q2 and Q3. But Even so, quite all right. We have some positive working capital effects of some €5,000,000 also helping us. And if you just look at the working capital effect in relation to sales, we're at 10.5%. Last year, we were at 9.5%. I think the main reason for the small uptick there is that we have an up percent stake also in the business, which is running with a bit of a higher working capital level. I think we've been around about 10%, and we expect to be somewhere there 10%, 11% going forward as well. For the full year, euros 370,000,000 in cash flow Compared to 254, obviously, a huge improvement. I must say that I think everything is really working to our favor. This year we have the working capital effects going our way. We have lower net tax payments since we got some returns from last year due to the items I discussed before. And I think a fair cash flow going forward is probably more in line with our operating results and this is really not sustainable. But again, fun to see that we managed to perform this strong in 2020. Okay. Then we have the net debt situation where we can see, of course, this isn't it's on a low level. We managed to reduce the net debt by SEK 200,000,000 during the year, Driven by the strong cash flow and the fact that we didn't pay a dividend in 2020. The ratios, Net debt EBITDA now at €0.49 with the reported number, including the IFRS 16 effects, must be seen as It's quite low. We feel, of course, very comfortable on these levels and see that we have a very strong balance sheet and in good shape to continue to execute our a new strategy with a higher M and A focus. Then my final slide. Yesterday, Stefan told me, Joakim, it's been a nice support. Why don't you say something funny before we hand over to the questions? And my problem is I'm just a dry CFO. I couldn't come up with a lot of funny things. But at least I managed to put in this nice picture of the light in the towel to the right. So you have to stick with that and I go through my conclusions of 2020. I think we can say 2020 for us as for everyone else, it was a year like no other. We had to manage a quick turnaround to digital interaction with Customers, which we think we did in a good way. We had more leads than ever and a lot of digital meetings with our customers. That in relation to a quite careful approach to OpEx has been the foundation to maintain on decent levels and protect our EBIT margin. Then on the order intake, as I commented on before, we had actually really 2 challenging quarters, Q2 and Q3. Otherwise, Q1 was quite good and Q4 is starting to get back on track. The increased footprint in China has been good and will be a good growth driver also for the future. That's good to see. Very happy with the gross margin improvements with 1 percentage point, despite the fact that we had the currencies and volumes working against us. And then, of course, Q4, where the trend is now pointing upwards again, followed by also continued good start in January. And I think in general, bright outlook in the market, especially in relation to the last half of the month. And finally, as I just said, we think that we have a very solid financial position and that is excellent to continue to execute our M and A strategy. So thank you for that. Let's hand over to operator and see if we have any questions. Thank you. 2 to counsel. And our first question comes from the line of Frederic Stenkiel of Nordea. Please go ahead. Your line is open. Hey, guys. Congrats on a good report. Hi, Erik. I have a few questions. You mentioned the large investments in China into wind power and that accounts for a large part of the growth. I was wondering if you could describe a bit more what kind of Products they're using, is it E1? And also maybe if you could give some background on kind of how you got into serving these customers would be interesting to hear. All right. Maybe I can start here to fill in Joakim. Actually, it's not so much Yiwon. We don't have such a big Yiwon business in China. There's always been difficulty with the Chinese firewalls and this kind of remote access out of the country. I would say that the major business we have in China. It's partly related to Ixat, where we have some infrastructure component inside wind towers. We have some Enibus business with pitch control of the blades and things like that. It's several different design wins, and it's several different brands for us. So we're well positioned, but it's the manufacturers of the equipment that is inside the wind towers that is our customers. We are not working with the users or the wing parts themselves. All right. Cool. And then just a question on the inventory buildup among customers that you mentioned. Have you had any issues with inventory or sorry, in sourcing components? I mean gross margin is Strong despite FX headwinds. So it seems that you have been able to get the components you need. Yes, maybe I should take this one, Stefan. Yes, sure. So I think just to answer the second question first maybe. No. So far, we didn't have any problems. What we have been doing, we are now building some extra component inventory at our e mail address site. So we're taking that upfront investment now to make sure that we don't get into problems later on. We see that lead times are Getting longer and longer. And right now, we're on the 3 months longer lead times than we normally see. So that is what's causing us to make this buildup. And then on the I didn't quite catch the question on the customer side. What's your question? Maybe I heard something that wasn't there. Now I've thrown into it, but I mean you say that the customers are building up inventory to make sure they don't stand without components. And I mean, if there's issues, I would think that you might have issues in finding components as well, but you pretty much answered that one. So I have one last question. And it's about Procentec. You said that you were happy with it, how it's developing. And you're right that they contribute SEK40 1,000,000 in the quarter. So I'm just thinking, if I take this times 4, it looks like very strong Year over year growth for Placentec, but maybe there is some seasonality in that business. But do you have a number of what those sales was in Q4 2019 or kind of the growth numbers for Plocenteck? I must say, I can't remember that number straight up. I think it was They did 18 sorry, €11,800,000 for the full year 2019 And they are slightly above that in 2020. But then they have the same as we've had. They had a tough Q2 and Q3 and then a good Q4. I don't want to give a guess on exactly how much growth you're seeing in Q4, but it's I remember from the due diligence that I didn't react on the seasonality. With that said, it might not be as easy to just take 40x4 and that that's the way they're going to perform in the future. I would love it to be that case, but I'm not sure if that is the right way to look at it. All right. Thanks very much. That was all from me. Thank you. Thank you. Our next question comes from the line of Victor Hogbei of Okay. So just a follow on on Fredrik's question there on what to expect in terms of seasonality. €40,000,000 would you say is that a baseline going into Q1 or Q4 strongest quarter for them as well? I think the only thing that we have at the data point is they normally have a very strong October. Other than that, I don't think there's any specific amount. I don't know why that is the case, but that's still the same in the past. So maybe I wouldn't take 40 times 4. But I think that we expect, of course, to see growth from this level of, well, about €1,000,000 per month, As you could say, it's 11.8%. We expect it to be a bit better than that going forward. But I want to be a bit careful since we don't know the business that well Yes, to give a more clear indication on that. Okay. I think we can we are Victor, we are a little bit joking with the management team at Serntech, they really made a good first impression in the Q1 here. But I think they also feel that they are performing better than they actually expected themselves. So I think we had a strong quarter. So they also feel that this is better than their own internal plan. Okay. And on the cost side, in Q4, you said a lot of money are not being present globally, credit wise and such. What about for this year? Of course, it's going to come back when things normalize. But are we in a world where things are normalized now? Or what to expect for the first half and second half of this year. What is your pipeline? Are you planning to do physical trade fairs? Or what is happening in your world? Shall I take a start with a little bit? I can start with a little bit of speculation. I think we are Long term, maybe we can say that maybe onethree of these savings could be maintained over time, maybe in the more digital things, maybe twothree it will come back. When will it come back? We believe that the first half year this year, 2021, will be on a low activity level when it comes to traveling. And we expect that after summer, it will ramp up again. So we are As we stand right now, we are thinking about doing this kind of more physical trade shows next fall. So I think the cost will increase. Okay. Thank you very much. And maybe just add a little bit to what Stefan said. I think it's fully correct that we will not be spending as much traveling and trade show costs in the first half. But when we see now that the business is picking up, I think we've been holding back on some investments internally, adding some positions. So there might be that we're going to add some costs already now compared to where we stand. So we've been very careful during 2020, and we think that there might be some investments needed. Okay. And so just a bit more color on the comments there on the Supply chain bottlenecks that some of your customers have seen, which have resulted in them stocking up. Did you book any sales? What was that late in quarter, yes, Affecting order intake. What do you expect for Q1 in this regard? Should I go to that, thanks? Yes, please. So I think it's a very good question and it's very difficult to answer. I think we definitely have Some effects of it in both order intake, probably more in the order intake, but also some in the sales already. We don't really see that they're placing longer orders than normal. So they are taking the volume. And I think that we've seen also going into 2021 that they've been taking the volume. So I mean, what we suspect is that, I mean, they see what we see and everyone else sees. So they will prefer to have a little bit on hand themselves to not miss out on deliveries in the future. And exactly to what percentage is driven by this is we can only speculate. So is the difficult to say. Okay. But in your discussions, does it seem like they're front loading now and might be taking more easy in ordering in the next Couple of quarters due to this or do you think it on an overall basis would have marginal effect on the yearly Order intake for the full 'twenty one? I think what we yes, you go on. Yes. Let me start. We think the major as I mentioned in my business update, I think the major thing is a more positive outlook. So they are more positive. And I think a side note is that they're also building up more inventory to I think to see less risks going forward. But I think the main driver is that It's a more positive outlook. So the fact that they are increasing inventory is, I would say, a smaller part of that. I see. Thank you very much. Thank you. Okay. There seems to be no further questions coming through. So I'll hand back to our speakers for the closing comments. Thank you. Thanks a lot for attending this meeting. And I must say we are, as you hear, quite back on a more optimistic track after rush for at least eventful 2020. Of course, there are still uncertainties in the market. But I think in general, we feel we and our customers feel that we have the worst behind us. And I think Joakim's picture with this nice light in the tunnel that is really light we see there, that's how we feel as well. So Thanks for this call here. Thanks for joining and stay tuned with HMS and we look forward to interesting 2021. Thank you.