Welcome to the HMS Networks' Q1 presentation for 2023. For the first part of the conference call, the participants will be in listen only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. I will hand the conference over to CEO Staffan Dahlström and CFO Joakim Nideborn. Please go ahead.
Thank you. Good morning, everybody. Welcome to this Q1 update. I'm Staffan Dahlström. Greetings from sunny Stockholm, and Joakim Nideborn is sitting down south part of Sweden. I hope you also have a sunshine. At least we have sunshine in the reports.
The agenda for today is that I will start with a short summary for you who are new here and a small business update, and then Joakim Nideborn will make a deep dive into the financial results of this quarter. Let's start with a few highlights. We're really happy to note that we have a record level of net sales, up 49% from Q1 last year, and also a little bit better than the strong Q4 we had here in ending of last year.
A weaker point, expected is more moderate order intake. We see a decline after really, really strong levels 2022. We will discuss this in detail a bit later. Profit-wise, very good development, record level SEK 211 million. EBIT margins looks good. Cash flow, okay. Joakim will also go back into these details here. A good solid EPS. We're really happy with this quarter.
Let's move into just a short business update before we go into more numbers. For you who are new on the call, HMS, we work with industrial ICT, information and communication technology. We're quite well established after 30 years in this specialized niche of industrial automation and communication. We have soon 10 million devices connected in our customer system.
We have over 400,000 machines connected to our cloud solutions for remote access and IoT. We are a technology company, focusing quite much on new technology. Right now, we're busy with 5G, smart grid, AI, IoT, and these things. Most of our customers are traditional manufacturing companies who love to talk about technology but really like to have established technologies.
We stand with one foot in new technology, with one foot in the existing and also legacy technology that is very important for our customers. We're headquartered in the beautiful city of Halmstad, Sweden, on the Swedish southwest coast. Most of our business, I guess 97%, is outside Sweden.
As a company, we are a little bit more than 750 employees around the world, operating in 17 countries with subsidiaries and over 50 countries with partners and distributors. Last year was good, SEK 2.5 billion in revenue, and we are on an important journey until 2025 with our top three goals. Goal 1 is to become net positive in our own CO2 emissions, not because we are a big emitter of CO2, but we wanna show the customers and our industry that it's possible to have aggressive goals here, and we can do much more.
We also work a lot with our customers to help them reducing their CO2 emissions as part of their automation and energy-saving ambitions. Secondly, we believe that happy and high-performing employees generate loyal customers, and we love loyal customers.
Let's start focusing on having great teams. We measure Net Promoter Scores on our employees, but also our customers. Target is +30, and we are at the moment, and hopefully for the long run, way over this target. We are approaching our long-term goal of being more than SEK 5 billion in 2025. For you who are quick in math, you note that Q1 revenue times four is approaching this. We are getting there as well. What we do is to help our customers enable valuable data and give them insights from machines and systems in their production processes.
We actually make the products. Our products make their machine communicate to make sure they can have a more efficient and more sustainable manufacturing.
We work with two main segments, industrial automation, where we have three sub-subsegments, manufacturing, which is more traditional factory automation and process automation. We have customers in transport and infrastructure. Could be anything from harbors to logistics centers and warehousing. We have also business in power and energy with both wind, solar communication, but also more and more in battery systems and energy storage and this kind of things. We have a separate group working with building automation.
This is not home automation. It's large commercial buildings like airports, shopping malls, hotels, where we primarily work with communication around HVAC, heating, ventilation, air conditioning, which normally is a very costly expense for building owners. The common denominator for all these things is the communication technology, where we provide the communication technology and making sure the system works well.
We have two types of customers in general. We have makers of industrial equipment, and we have users of automation systems. If we look into the details of this on the next slide, we can take a closer look on our go-to-market. On the left side with the makers, there we have device manufacturers, where we sell technology that they embed inside their devices to communicate. This is where we started over 30 years ago, and it's today 44% of our revenue.
We have a sticky but quite time-consuming, complicated sales process with design win, where we help these customers embed our technology inside their devices. Since this is both complicated and time-consuming, we only work with direct sales here. We have also machine builders. Our dream is that we should be included in every machine. We are not there yet.
We are more specified as an option in the bill of materials. If the owner of this new machine would like to have remote access or integration to certain systems, the machine builder offer us as an option for the selection in their configurations. Here we work with both direct sales to large customers and distributions of many smaller machine builders.
Finally, the users. Users for us could be Volkswagen and Amazon and these kind of builders of cars or logistic systems and things like this that using the automation system. 29% of our revenue, either we work here with project sales and system integrators or just plain product sales, either through traditional distributors, but to a more and more growing extent, e-commerce distributors.
If you look on the business update before going to numbers, we are super happy with continued strong invoicing, good start of the year, both for delivery capacity that have been improved, but we will see that availability of material and the semiconductors that have been difficult to acquire before, it's getting easier. It's not perfect yet, but it's getting easier.
We think this is a solid start of the year, but also customers see that component situation is better. Of course, they also de-destock a bit because they expect our lead times to be better and better. Not only our lead times, in lead times in general in the industry are slowly improving. In Europe and Asia, we see some destocking, but in U.S. we see good business and expansion.
We also see a very good business in the building automation field. That is also quite strong. As I mentioned, improved delivery situation for critical components in the semiconductor field helps us. This also mean that we spend less money on this spot market, very expensive purchasing of critical components.
This is also helping our own gross margin. Joakim will talk more about this in more detail. Finally, we are, as we speak, in Hanover, Germany, presenting our new integrated business where the acquired Procentec, which we acquired two years ago, is now fully integrated into a business line of Anybus, and we now have this fully together with our sales force and our systems. We see that this will probably give a boost to the Procentec growth going forward. Joakim, we are keen to look on the details.
Yes. Let's start with the order intake then. You saw it's SEK 682 million that was shown in the quarter, a 20% decline from our record quarter in Q1 2022. The quarter is a bit bumpy. We're starting off with a very strong January, a lot of long orders, as we've seen during 2022. February, March has been showing a lot of destocking from some of our larger customers when, as Staffan explained, the whole situation in supply chain is getting much better, and then there is no need to have these high safety stock levels that many customers have been building up. We had a good ending to March with some good orders the last week of March, giving us a rather solid order intake given the situation.
We knew that we were gonna have a massive decline compared to that Q1 2022. With the SEK 682, we're still rather happy to be able to close the quarter in that way. Looking at the different markets with the destocking has been pretty clear in Europe and Asia, where we have some of the large machine builders. It's good to note that Americas, that we've been seeing a bit of a decline throughout the end of 2022, is holding up really well.
We show the second-best quarter ever in terms of order intake in the U.S. Maybe we're starting to see a little bit coming back after this decline. We saw that early in the U.S. and maybe we're already through the worst. Let's see what the future will bring.
about the different offers, we see that building automation is performing very well. We have not seen the same build-up as we've seen in the industrial automation business throughout 2022 in terms of ordering. Now we see a very solid demand on the building automation business. At the same time, we see this destocking within Information Centric, where we have the specialist Ewon brand, where some of our big distributors are starting to lower their inventory levels.
We hope that that will turn around for the coming quarters. All in all, we close with a book-to-bill of 0.88, which we think is a rather healthy pace of taking down this big order backlog. I'll show you that in a few slides how that looks.
Maybe first, let's have a look on this slide that we've been showing now for a couple of quarters with those long boost orders. What we can see now in Q1 is for the first time in a very long time, we see that we don't really have any boost orders. I guess 682 should be seen as the net because we do get some long orders, but there are also some destocking from those previous boost orders. All in all, we think 682 is pretty good reflection of the underlying demand in the business.
If you were to adjust Q1 2022 for those SEK 250 million in boost orders, you would see a 12% increase in the underlying market development, which we think is rather healthy. Going over to our net sales, good to see as Staffan said, we're managing to beat a strong Q4 and set another record level in terms of net sales with SEK 773 million and a 40% organic growth.
This is good work by our supply chain to manage to push this out. We see a rather much better situation in terms of capacity of components, still some issues, but not impacting the sales too much, I say.
This puts us in a good position to also then capitalize on this solid backlog that we have. We note that we have record level of sales in Americas and Asia, which are taking a lot of share of the overall group sales. That's fine to see. If we go over to the next slide, looking at the backlog and putting this into relation, we see that we are taking down some SEK 91 million of our backlog and closing about SEK 1.3 billion. Still a very strong backlog, and this puts us in a good situation to continue to show growth throughout 2023.
Looking on the right-hand side, also a graph that we've been showing for some time now, the amount of our orders that we get for delivery more than a quarter out, we don't see a big change to this. If we were to see this book-to-bill becoming lower than this 0.88, then I think we also should be starting to see a change in the delivery times to our customers.
We hope that we should be able to take this down over the coming quarters, but we think it will be a slow process. Looking at the sales per region, as I said, Americas, APAC, now together 40% of sales, and the EMEIA region represents 60% of sales. We think this is a healthy evening out.
We were happy to see the Americas and APAC region taking a larger share of the group to stand on more legs for our side. If we go over to the profitability, a pretty good graph on the left-hand side, continued increase on profits, closing with an EBIT of SEK 211 million and very healthy margins of 27.4% compared to the adjusted margins of 21.7% a year ago.
We're very happy with this development. The main drivers behind this is, of course, the volume in itself, the gross margin, and that we're increasing OpEx quite a bit, but not as much as the sales growth.
Just commenting on the gross margin, we're happy to present 64.8%, up 3 percentage points compared to a year ago and continuing to improve the margins from the second half of 2022. The main drivers behind the development is of course the price adjustments we made towards our customers. That's been going pretty much as planned. We've been seeing the results that we expected to see. The spot market purchases have been fewer.
We still have a few million on that, but it's significantly lower than a year ago. I think that's been declining throughout 2022 as well with the component availability becoming better and better. We also have a favorable currency situation. The Swedish crown is rather weak in relation to only big currencies.
Euros and dollars would be our main ones. That is also helping us. Finally, the scale that we're getting into production, so we get better utilization on our fixed cost in manufacturing. All in all, I think the price adjustments, the currency situation, and the increase in production volumes represent roughly equal parts in comparison to the Q1 2022 margins of 61.8.
Final note I wanted to make just on the OpEx side. We know we have a dramatic increase with 33% to SEK 290 million. Two main areas is, we continue to invest in the sales and marketing organization to make sure we can continue to keep the growth pace.
We're also just in the process of changing ERP system, which is always a big project. We're gonna go live in a couple of weeks with a new system, and that's been driving some costs for us, especially now in Q1. Looking at our EPS, SEK 3.7, the solid EPS.
The net financials are a positive revaluation of cash in foreign currencies behind that. Still on a rather small level. Rather clean financial, net financial, I must say. And a solid EPS as a result of the strong deliveries. A few notes on the cash flow performance. We do SEK 155 million, which is almost twice in comparison to a year ago. That's good.
We could have seen a little bit better here. We still have some inventory that we're building up. We're making this merge with the Procentec business, which has been causing some short-term buildup. Also with the high growth we're seeing, we need to make sure that we have components in place to meet that. It's also an effect of the high growth pace. The good deliveries in March is also ending us with a high account receivable, which is hitting the working capital a little bit. We see small signs that some customers are waiting a few extra days to pay, so we're trying to chase them on this.
I guess this is also an effect, the fact that money starts to cost something again with the interest rates going up, so we need to chase that as always. All in all, a rather solid situation on the cash flows. Cash conversion of 64%.
We would like to see a little bit higher there. I'm sure we'll see that in the coming quarters when we don't have such a high inventory buildup. Just a final note on the balance sheet. We see a bit of an increase in leasing debt due to some new offices. That's nothing to worry about. Otherwise we can see that we have. Actually, our cash is larger than our interest-bearing debt for the first time in many quarters.
That puts us in a good position also to look for M&As, which is an ongoing topic of course for us. Just to summarize the 1st quarter before we let the participants ask questions. We said that we see this destocking is starting to happen in some areas, and order intake is not at the same level as it was a year ago with the boost effects. Still, we must say that talking to our customers, they are adjusting the inventory levels, but they're still quite positive on the outlook and the demand from some of their customers in their turn. That's rather good. In terms of the deliveries, we have a very good quarter, another record with record sales, gross margins, EBIT margins.
I think we're quite happy the way, so far at least, we managed to navigate this rather challenging macro environment with high inflation, and hope we can continue to deliver in a good pace. With that, let's open up the line for questions.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Simon Granath from ABG. Please go ahead.
Thank you, operator. Hi, Staffan and Joakim. Congratulations on the very robust results here this morning. A couple of questions from me. Certainly one large area to discuss is about the boosted orders which come in largely neutral here. Is it possible to add some more color on how this progressed through the quarter? Was it a material change towards the end? Would you expect a neutral boost in Q2 as well, or is it more likely to be negative? Thank you
Joakim, would you like? You take it? Yeah. I think I had put some light on it, but let's take it again. I think we started out in January with we also saw some of these long orders that we've been seeing in 2022. I think February and March, pretty much throughout the months, we've been seeing this destocking from many of our customers. We ended up the last week of March was really solid with some long orders again. That's why we said all in all, we think there was pretty much flat in terms of the boost effect or destocking or whatever you want to call it. It was pretty much flat.
Speculating for Q2, I think it's probably more likely that we would have a slightly re-reversed boost effect. More destocking than long orders, for the coming quarter at least. That would be our best guess.
Thank you so much. That's very helpful. On the regions, you sound relatively upbeat on North America in the quarter. Was the performance relatively in line with your own expectations? From history, how has North America performed versus other markets in terms of this so-called time period for when the region recovers after a softer period, et cetera? Thank you.
I guess, yes, from the what we've seen recently, North America seems to be rather quick. They've been earlier to come into a decline phase, but also earlier to recover. So it's been going quick over there. I think what we saw in end of 2022, where we saw a bit of a wear-off in order intake in North America, we were a bit positively surprised that it came back quite well in Q1 here. As, as I said, it was the second-best quarter we've seen in terms of order intake in North America. Maybe we didn't expect to see that. It's a little bit better than what we had expected for North America. Let's see what the future will bring.
Hopefully, we've been through the worst in terms of decline in second half of 2022 for North America.
Sounds encouraging. On OpEx, you as you point out, it's growing well in Q1. I've asked this question before, I know, but how do you view your own investments in light of the current environment? Were there any non-recurring items in Q1, primarily relating to the, your mentioning of the implementation of the new ERP system, et cetera? Was it a rather clean OpEx quarter?
There are some non-recurring in terms of the ERP system. That's probably been going on for almost a year, but in a lower pace, and now it's really high pace, and we do have some consulting help in Q1 that is costing a couple of extra SEK million. I think there were a few extra SEK million that I would say is non-recurring. I think that the investments we're doing in the sales and marketing organization is of course here to stay. We're also building up some backend functions a little bit. I think we've been growing quickly the last two years, and we also need to support that with backend functions that is with some more capacity.
That's also part of the build-up that will of course stay there.
Great. I also find it interesting about both reading and hearing about your, you reaping the synergies, between your recent acquisitions.
How much are you pushing here? Could we see more of these types of syn.rgies being found? In the longer term, could you have even fewer brands than you currently have?
Maybe I can talk a little bit about that. I think when we've done acquisitions in the past, we've been quite slow or at least careful in doing integration because we want to make sure that we do the right things right. I think now after seven, eight acquisitions through the years, I think we have a little bit more self-confidence in what is working, what is not working. I think this time period of one, two year after the acquisition that we are integrating, when we see synergies, I think we will see more of that. We see good effects on supply chain, we see potentially good effects on sales.
However, sometimes, it's easy to overestimate how quick it should be, because it looks great in PowerPoint, then we need to do changes in real life that takes longer time. I think what we found now with Procentec is it's a good mix of making sure we have a high tempo, making sure also that we don't act too fast and, you know, do things that is not productive for the business. I think this is what we do right now is good. I think every acquisition is different. We don't really have a blueprint how to do this on the detail level. We need to adopt to each situation.
Thank you so much for addressing my questions. Congrats once again to the strong results.
Thanks, Simon.
The next question comes from Joachim Gunell from DNB. Please go ahead.
Thank you, and good morning. Obviously, very impressive margins in light of this inflationary environment. Can you just talk a bit about the moving parts here and what you want to see before revisiting your 20% plus EBIT margin target, especially as the gross margin always has come up considerably since you committed to that midterm ambitions?
Good question. I think we have a 2025 target of being more than 20% EBIT margin. We've been talking about this several times, that this may be on the shy side. Right now, this is the target we're having. Maybe we should change it, but let's see how this discussion is going, the board going forward. Right now, we have no other targets, but I agree with you that it looks to be on the low side.
Great. Perhaps just a final one for me. Can you just talk a bit about Procentec being a part of Anybus, how that will increase its growth prospects?
Yeah. I think if you look on the sales side, what we're doing right now is to integrate the European side of Procentec, where they had a German office, an Italian office. We integrate this fully into our, what we call market unit Continental Europe. We see that that will give us a little bit more customer access, we think. In addition, we're also now doing quite big efforts in United States, where Procentec have not had its own presence. We're using both HMS own staff here, but also some of our partners to really push Procentec. We're taking some attempts in Japan as well to be more successful.
I think it's a combination of better penetration where they have been, but also open up some new key markets for them. It's from a sales point of view, more market access. From a margin point of view, I think we can see some improvements going forward in logistics, purchasing of components and manufacturing and things like this. We hope that will also be a potential cost synergy or gross margin improvement for them going forward.
Just a final one, actually. When it comes to what you quantified as boost orders throughout 2021, 2022, are there any sort of conclusions that we can draw with regards to that there are very specific verticals or end markets where this boost effects were accentuated, or is it more broad-based?
I think in general, we have seen that, especially in Japan, we have had a higher portion of boost effect. Maybe they are used not so used to high interest rate there, so they don't care so much about how much they put in inventory, but they also have a different attitude about supply precision and lead time. I think there we've seen a better build-up. Joakim, can you Any other. Do you see any other things related to this?
I think it's difficult to say, Joakim, because the main area where we see this is the embedded business where our product is a part of the bill of materials. Obviously the customer will not be able to deliver if they don't have goods on stock. That will go into many different end verticals. I guess what we saw a little bit now, trying to mention something in Q1, was that the automotive business, especially the electrical vehicle business, was maybe a bit weaker than expected. That's what we heard from our market units. That's maybe one vertical.
Otherwise, I think it's rather broad-based in terms of, you know, taking down the inventory levels if they feel that the deliveries are more precise and components are easier to obtain.
Perfect. Thank you.
The next question comes from Viktor Högberg from Danske Bank. Please go ahead.
Yeah, good morning. First question is on the gross margin. You divided up the drivers for the increase here, but how much was the FX effect and how much is sustainable? What would you see a sustainable level when the FX effect tails off?
What I said was going from that 61.8 to the 64.8, that it was about similar parts from FX volume and price increases, basically. What's sustainable? Of course, it depends on the, what the FX rates will be. If we were to go back to the FX rates that we had in Q1 2022, I think we would be seeing, roughly then a percentage point drop in margins. That's basically what we said.
Okay. If we would remain at these levels, the 65% would be more representative.
Correct.
Okay. What kind of gives and takes do you see to that, to the gross margin? I'm thinking, and this is on growth as well. The price hikes you have made, that is driving part of growth now in Q1. Now that the situation seems to be working again, do you see any risk for price cuts in any parts of the business that would affect growth or the gross margin in this year?
Not what we see right now. I think if anything, we feel it's still a bit of a push upwards from our suppliers, and we do see some cost increases on components also in Q1. Maybe not so much driven on material itself, but more in terms of labor increase at our EMS sites. That's the discussions we're in at the moment. I think there is maybe there will be a turning point, but it's nothing that we see so far.
What is the level of certainty on the order book? Also, what is the part of the order book that is to be delivered in this year and any part of it that will be delivered in 2024?
I think we have somewhere around SEK 100 million for 2024, if I recall correctly. Majority for 2023.
Okay, great. In terms of customers, we know that you haven't seen that historically, customers pulling parts of the order book. What do you see given the rather uncertain outlook on a macro level? Do you see that kind of discussions with your customers that they might do something with the orders they have already put in or are there firm on the orders that I've put in?
The discussions we're seeing are some customers are asking to push out orders a month or two also to navigate their inventory levels. I think that we're probably going to see for the rest of the year as well, some discussions where we will end up in those situations. Cancellations, we haven't seen any so far.
Okay.
You know, as we said before, we don't accept cancellations. These are firm orders, and then maybe we can discuss timing a little bit.
I think just to add on this, Viktor, I think also we are coming from a situation where most of our markets used to deploy some kind of just-in-time philosophies, especially in the automotive. I mean, they really burned their fingers last couple of years. We believe that it will take some years before it moves back. That's cost efficient when all the systems are working, but when they're not working, it's very expensive. I think also customers will not only think about this from a financial and inventory point of view, they will also think about this from a risk point of view. They will still remember these difficult days. We think it will take longer time than just logic and financial discussions.
I think there'll be a feeling that it's better to, better have a little bit of extra inventory than the, what they used to have, too little inventory.
Yeah. Some kind of new normal.
Yeah.
In terms of sourcing then and delivery capacity, 'cause Q1 deliveries were better than Q4, in connection with Q4, you were a bit hesitant on the actual delivery capacity for this quarter. What kind of visibility do you have for Q2? Do you have the capacity to deliver on the same pace as you did now in Q1 or any color on the delivery capacity or what customers want to have delivered for the next quarter?
I think what we can say... You want to go, Staffan?
You.
Okay. I think what we can say is in terms of delivery capacity, I think there will be no problem to match the levels we saw in Q1. Now, I think we're coming into a different situation as you point out in your question. Now it's more down to what does the customer want. I think in terms of capacity, we're there. Now it's more of timing of the volumes. I think this is difficult to say because we know we also get a lot of book and turn orders, and now we can handle that in a good way. Yeah, I think we will have a so-solid Q2, maybe not as good as Q1.
In terms of deliveries in absolute numbers, that is?
Yes, correct.
Okay. And in terms of M&A, you were quite forward-leaning in connection with the last quarter on you taking a step up in the targets you're looking at in terms of size. Do you have any progress here? Also on the financing side, how far would you be willing to go or comfortable to go in terms of financing? I would assume that would be mainly debt financing then in terms of gearing.
I think you're correct that we'll go for as long as we can, debt financing. I think a net debt EBITDA of some 2.5, I think would not be a problem. We could go a bit higher than that as well, but maybe for a longer period of time, 2.5 would be sort of a level that's sounds okay. In terms of targets, not a lot new to report. We do have some early discussions, but nothing too hot.
Is that thinking the discussions that you're having? 'Cause parties you're discussing with would probably be seeing the same outlook as you do. Would you say that something has changed in terms of pricing and the expectations in terms of multiples recently there is?
I think we haven't really gotten to that phase. I think it's probably less fluctuation in the private market than what you see in the stock market. As you know, we've been doing the last couple of deals around valuation of 9-10x EBITDA, enterprise value. I think that's where we would expect to end up in most cases.
Okay. That's it for me. Thank you very much.
Thank you, Viktor.
There are no more questions at this time. I hand the conference back to the speakers for any closing comments.
Thank you, operator. Thanks all participants. Thanks for joining us this morning to look on our Q1. We think it's a good report. We need to keep a close eye on the order intake, of course, but right now it's also focus for us to reduce our order book and making sure we give world-class service to our customers. Right now, we're not too worried about a little bit shorter order intake. It actually can help us be improving our service level instead. With that, I would like to wish you a nice day and look forward to talk more with you all after Q2. Thank you. Goodbye.