Earnings Call: Q2 2021

Jul 14, 2021

Quarterly report

Welcome to the HMS Networks Audiocast Retali Conference Q2 2021. Today, I am pleased to present Stefan Dahlstrom, CEO. For the first part of this call, all participants will be on listen only mode and afterwards there will be a question and answer session. Stefan. Please begin. Thanks, Marc. Good morning, everybody. Welcome to this quarter 2 session by myself, Stefan Dahlstrom and Joakim Nierborn, our CFO. And the agenda for today is just a quick summary and introduction. I I will continue with a short business update, and Joakim will then dive into the financial numbers, and we'll finish up with a Q and A. So let's take a look at the numbers. Many of you have seen the reports an hour ago, and we have a very good quarter 2. Record level on net sales, up 33%, fantastic order intake. We have a strong demand in the market, that there's also one component that is more of safe buffering from our customers. And Joakim will talk a little bit more about this because this is important to a very good profit level, CHF 121,000,000 for the quarter, good EBIT margin, good cash flow, good EPS. So we have a fantastic quarter. We're very happy with quarter 2. And when we combine this good quarter 2 with a good previous quarter 1, we get a very good first come out for the year. So we are approaching SEK 1,000,000,000 on the first half year here, €929,000,000 on the net sales and a very good order intake. This also gives us a fantastic backlog for the remainder of the year and also some of it actually into 2022. And same thing here, we accumulate 2 good quarters, and this means that we have very good numbers. EBIT margin north of 25%, much higher than we have expected actually. Good cash flow and good EPS. So let's move a little bit into the details. But before that, let me spend a couple of minutes just describing our business for you on the call who are quite new to our business. HMS, hardware meets software, we do industrial connectivity, connecting devices. So this is a combination of hardware and software, and we allow our customers to connect different machines to interchange information or also the machines to different subsystems or IT systems. Our 4 major brands that is divided into our business units, Ennebus, Evon, Indices and IXACT have different connectivity and communication and information products. They're all sold through our common sales channel through our 4 different market units. We have 2 quite recent fairly recent acquisitions, German Web Factory Software Company. And last fall, we acquired the Dutch Presenter Company. And Presenter goes very well, and I'm sure Joakim will talk about this a little bit more. So this is our business and our brands. And if you look on where we a part of that. We are well established. We have more than 7,000,000 products connected in automation. We have more than 300,000 machines connected into our cloud system so we can help our customers to do remote diagnostics and remote access to these machines. That we are a technology company. One third of our employees is in R and D. One another one third is in sales and marketing. So this is R and D and sales and marketing, of course, are 2 major activities. But we focus on new things such as 5 gs, IoT, wireless and this kind of things. And as a company size, we are slightly more than 700 employees around the world. We have operations with subsidiaries in 16 countries and partners in over 50 countries. And we are headquartered here on the southwest coast of Sweden. Sunshine also outside, not only on our numbers, a fantastic summer day here, sunny, 30 degrees outside. So let's take a look on how we go to market. We have 2 types of customers. We have users, so automation system. This is the smaller part, maybe 25% of our business, the system integrators end users. And here, we normally go to market through our partners and distributors. The larger portion is the makers of industrial equipment, could be machine builders or device makers. And here, we mainly go direct with our own sales force to these customers. We set a new strategy for the coming 5 years. Last fall, I think we presented this in December Well, maybe it was November with 2025 targets in 3 different areas. We have environmental targets. We have staff and customers and growth and profitability. And on the left side, the environment, we have bold goals here. We want to be net positive by 2025. So we for the stake in the ground, this is important for us, but it's also important for our customers. We want to be net positive on our own internal operations, of course, that the major difference we can make is actually helping our customers to help them with their sustainability and their environmental targets. We have very good target numbers for staff and customers. We measure net promoter scores. We have high scores there. And we are approaching to our growth and profitability targets. 2025, we're going to have revenue of the SEK 5,000,000,000 more than SEK 3,400,000,000. We want to maintain an EBIT margin of 20%. And as you noted, we are much higher right now, and we keep a dividend policy of 30% to 50%. So these are our targets, and we work hard to fulfill all these 3. And we think with these 3 targets together, we'll become a very good company. Short business update. If you look at quarter 2, we can see that we have growth everywhere. All our brands is growing with an order intake more than 50%. We see a very exceptional strong market at the moment. Couple of drivers is the machine building and robot manufacturing, new record levels goes very well. We also see this on industrial PMIs. That is also very high. After a couple of weak years for us in Automotive, we see also that the investments in e cars is helping our Anybus business in Germany and U. S. Of course, the combustion engine is now moved to an electrical drivetrain, that there's a lot of pieces in the car that is still assembled and automated and things like this. So our customers in that market see very good the situation at the moment. We also find some new businesses in the renewable energy, in wind, but recently also more in battery manufacturing where we see a lot of investment Then they need more automation here as well. But second, the point here is that we need to keep in mind that there's also a boost effect in our orders. We expect this to be SEK 100,000,000 in the second quarter. We have component issues, both HMS, but it's a market problem in general. And we see that some of our customers are placing more orders just to make sure they have secure their shipments to Chroma. So we estimate that there's extra orders. But without this, we still see a good very good market. And we think this will continue for 2021. We see the good investment climate, but we have challenges in the component situations. And we believe that we will see more problems in quarter 3. Some of these orders will be probably pushed out to quarter 4. But all in all, we hope and we hope and expect that the end of the year, we should be more in balance. So what is kicked out of quarter 3 will probably be delivered out in quarter 4. We made a new acquisition 1st July, small acquisition in Spanish Bilbao. It's we bought 60 the results from the founders of this company. So the 4 founders, they keep 10% each and remain very committed to the business. Oasis is doing wireless gateways and platforms for what we call mobile machines. This could be utility vehicles. It could be ATVs and this kind of transportation, things that is moving that need local control, but also wireless technology cellular for short range wireless here. It's a small company, revenues around 6,000,000 a good EBIT level and also a good growth good customers, good growth and good technology. And with Syniti here to also take some of our software component and put that on top of the Oasis product there. So nice, it's small, but it's a nice the area for us, and we believe that this is opening a new door for HNS into the interesting area of mobile machines. I'm sure you're very curious to hear more about the financial numbers. That looks good. Joakim? Thank you, Stefan. And as always, we're going to start out with talking about order intake. And then if you start by taking a look at the graph on the upper left, we really like how this start to look like. As Rafael already mentioned, we're €606,000,000 in order intake, up 100%, nice round figure compared to obviously weak Q2 last year, but still very nice comparable. 8%, 8% of that is organic. So we can see that all our businesses are going very well indeed the same number for the first half of the year is €1170,000,000 compared to €703,000,000 so 67% up, organic 60% up. So I just wanted to mention and talk a bit more about the destocking effects that we see. We have €100,000,000 in Q2 roughly and €170,000,000 year to date. And of course, that will come back sometime to impact the future order intake because what it really means is that we have orders that should be placed in Q3, Q4 that are being placed now. I think the reason is that we see sort of a ripple effect through the wholesale supply chain, starting with the semi foundry saying that instead of placing forecast, we need to place orders. And that message is escalating through the supply chain and also impacting us, of course, and our customers as well. So this €170,000,000 is our best judgment of what we think is sort of out of period orders. And given the situation that is still quite strong in the market, we see very good GDP growth numbers, we see strong PMIs and Macro experts say that this will continue in a good way. We don't really know where we will see this SEK 170,000,000 impacting us in a negative way. It might actually be that it will not even be this year, but we guess that it will be a slow process when the market is stabilizing and the component availability becomes better. That is difficult to say exactly. Looking at the different markets, I think everything is good. Europe, obviously, very strong and more than 100% up. We had also tough quarter in Q2 last year in Germany, France, Italy and so on, when we see really good comeback in those markets. I also wanted to highlight E1, which is also performing extremely well. This is our remote access offering. What we see is a bit changed behavior from some customers that used to have like an optional remote access feature and more of them are not standardizing to remote access and that is obviously a very positive trend for us because that will be with us for the coming time as well. So going over to the net sales situation. Also here, we have a good development of €474,000,000 compared to 355,000,000 still 33% up, out of which 28% is organic. For the first half, we have 929%, 30% up or 33% organic. I think also here we have a good development in all brands. I wanted to point out Procentec that is doing extremely well. The double sales in Procentec, and I think we have to say that the brand has reached to a new level. And it's a combination of a strong development of existing customers, especially in the U. S. It's doing very well. But we also have some really interesting new numerous global customers that are choosing Procentec and that will have it. Also, we expect to have a good development going forward with this business. E1 as well, doing well, 45% up. And it's also good to note that Intesis, our brand within building automation, is doing well growing 26%. This has been a few challenging quarters in the building automation space, and we haven't seen the rebound as we have in the industrial automation space, but now we're doing okay also in the building space, which is good to see. I also wanted to comment a bit about the sourcing situation and with the availability of components. It is difficult for us to forecast exactly how this will happen. We know that we have an impact in Q2 of about SEK 30,000,000 that we couldn't deliver and we had to push out those orders into Q3 and Q4. And then we will have some components coming in the end of Q3. So it's a bit uncertain how much we'll be able to get out in Q3. It might be that we will have a spillover into Q4. So I guess what we say is that it's likely that Q3 will be a bit weaker and Q4 a bit stronger. And I don't want to speculate on exactly how much because we simply don't know. I think the main point we want to make though is that the order book is very strong. It's the best order book we've had ever, more than doubled back to the average order book last year. And even if we have to push out some deliveries, we have the orders and the customers don't really have any alternatives. So we're not that afraid of losing business, but it might be a bit of a timing issue when we can deliver. Sales per region overview. It looks about the same as the door always does. We have the EMEA region being the biggest one with 61% our sales up a little bit from last year, where that was heavily impacted. The U. S. Or Americas is up 22% sorry, it's 22% of the total and then APAC 17%. Going over to look at our results. Also here, we have a record quarter with EUR 121,000,000 EBIT, a good margin of 25.5 percent, up versus 19.4%. And the main driver here is the high volume, of course. We also have continued good gross margins of 63.7%. So we're quite happy with that number. We see that the price increases and the work we did last year is paying off. We see full effect from the price increases. So even if we have a slight hit on from current increases. We have that impact about 1% negatively. We still managed to have a solid level on the gross margins and of course also the volumes in itself helped a little bit to get better utilization on our fixed costs. So that's also working in our favor. The OpEx is under control. We must say we're up I guess the relevant comparison is up €19,000,000 compared to Q2, taking up some non recurring items in Q2 2020, 12% up in the OpEx. So I think we're about in line with what we had in Q1, which we expected. What we can say going forward is that we have launched some interesting growth initiatives during the quarter that will impact slightly in Q3, but primarily in Q4. So I think Q4 will definitely be some 10% up from the OpEx levels that we see right now. So let's just have a look at EPS. I don't have a lot of comments. There's not a lot of interesting things happening here. I think we see good development, which is just a result of a solid business. First time over SEK 2.02 EPS and compared to SEK 1.24, that is a good increase of some 63%. And also for the 1st 6 months, we have a nice 3.94% compared to 2.26 Then having a quick look at the cash flow, I think we continue to have a good cash conversion. What we believe is positive is that we keep the working capital in good levels in these kind of difficult times. So we have just small effects from €5,000,000 negative working capital impact in the quarter. So all in all, €126,000,000 compared to a very strong €115,000,000 that we had in Q2 2020, but there we had the working capital working in a favor a bit more. So for the first half of the year, euros 257,000,000 also a very good number and you see on the bars that we have a good trend on the also on the cash flow, which brings us to our last slide looking at the debt situation. And I think if you take away the leasing debt of SEK 75,000,000, we're almost debt free, only SEK 3,000,000 in debt. Also very positive that despite that we paid a dividend of CHF 93,000,000 in Q2, we managed to decrease the debt level. And then as you probably have seen all the stuff I've talked about, we made Oasis acquisition 1st July, which will, of course, impact the debt the situation slightly, but it's on the margin, I'd say. So I think all in all, we can look back in Q2 with a strong balance sheet and about our M and A agenda. We're quite optimistic that we have the means we need to fulfill that. So I think with that, we will leave over to operator for some questions. Thank you. Your question. If you find it's answered before it's your turn to speak, you can dial 2 to cancel. And our first question comes from the line of Jurgen Gunnell of DNB Markets. Please go ahead. Your line is open. Thank you. Good morning. So just one follow-up on the stocking effect here. Can you comment a bit about the nature of this, whether it's broad based or whether what relates to, call it, the larger orders from fewer customers being put and also perhaps any comment on how, I mean, the trends you alluded to, how they have progressed throughout the 1st 2 weeks of Q3? Sure. I can give it a shot. Joachim, thanks for the question. Or do you want to take it, Safa? No, please go ahead. So I think your analysis is kind of right what you imply. The main effects come from our larger customers that I have our products embedded. So it's mostly impacting the Anybody's brand, but we also see it, I mean, across all brands, but Anybody's has the biggest impact. That they are taking some precautions and putting some extra orders in place to make sure that they'll get the volumes going out. For the smaller customers, we don't see the same effect. Then also, we don't have the same effect on gateways and those kind of products. There will be more I need right now type of business. The second part of your question, sorry, I missed the yes, the 1st 2 weeks, sorry, of July. Right. So I think it's continued in a good way. It's pretty much the same business that we saw in Q2 that this continuing. So good to see that the market is still there. Understood. And perhaps also some comments here. I mean, with regards to the Oasis here acquisition. The balance sheet grows stronger by the day as you continue to deliver excellent results here. That any color here on M and A pipeline with regards to that, okay, you just completed the OVASYS acquisitions. You have made some recruitment with regards to your M and A organization. So what can we expect to be here for, call it, the coming 6 months? And also, call it, what types of the targets are you evaluating? Because it seems like the OVOSYS acquisition is slightly a step outside of your core the automation verticals. So are there perhaps any specific verticals where you see, call it, larger opportunities to complement your existing business? Maybe I can start mentioning something and Joakim can fill in. I think what we do with overseas is You're right. It's not maybe factory automation, but it's industrial automation. And we see more and more of this mobile machine tools, Like AGVs in a plant with logistics and these things. So we see a combination of mobile machine, battery powered machines and communication is a quite strong combination for new things. So we believe that This is a market that is we'll have more and more of telematics and communications. So we believe that this is a very close and adjacent market for us. And actually, we have a couple of customers already before Orbisys. So we think this is close to us and interesting opportunity. That this is an example that we try to make decisions that is closed our business but open some new doors. We also look on, for example, areas in water, wastewater and this kind of things where we can take a step into a vertical. That's one part of our acquisition Gladly. Maybe Joakim, you can talk a little bit more about the acquisition pipeline. Yes, sure. I'm happy to do that. So what we've done. We had the shortlist that we've had before with the capital companies that we monitor. And then what we managed to do now in, I guess, with with expansion of the team is that we've built we're starting to build a much longer long list. So we're just in the process of getting that down to a short list. So I think what we'll see now going forward though is that we'll have more companies that we will be talking to and having on the shortlist to monitor daily. So of course, this will take some time for conversion for these new prospects, but it's I think it's very good that we do this work and that we're getting a strong pipeline because we need it to meet the target for 2025. And I think I don't have a lot to add on what type of companies that we're after. I think Stefan a very good job there. Understood. And just one final one for me. With regards to that, okay, you commented that, Okay. We should see an OpEx step up of 10% going into Q4 from when we stand now. But still, I mean, with the demand backdrop, I mean, you will, I mean materially outperform your profitability target in the medium term, and I know that that could be diluted from acquisitions going forward. But how should we think about the OpEx space for, let's call it, the next year? And what investments needs to be taken to continue to I mean, deliver a stellar growth. Yes. So I think the first step we're doing now is with these initiatives that we're starting up now. And I think we'll do some more, of course, next year. Can't say exactly since we haven't made the plans. That we did some expansion into China this year, opened a second office. That will certainly be interesting to look more in that market that we will see good growth a lot of nice opportunities, but that will definitely be on the initiative list going forward. And I think we need to look in the product portfolio and say that there is something that we Should escalate and I'll try to do a bit quicker. But I think you'll probably see a slight increase for next year as well. I think that's pretty given. And I think we need to do that in order to be able to deliver the organic growth targets that we have in place. And now we're going to have also a quite strong 2021 that we will, of course, going to beat in 2022. So we need to do some new things there. And regards to the EBIT target, I think we also see that it's that we're going to perform quite well in relation to that target at the moment. But I think we need to wait until the situation is back to more normal business before we make any comments on that target. And I think you also pointed out that we given the pipeline that we have, we know that most targets will have a dilutive effect to the EBIT level. So I think we'll have to wait and see. Understood. Very clear. Thank you both and have a lovely summer. Thank you. Thank you. Maggie. And our next question comes from the line of Victor Ekberg of Danske Bank. Please go ahead. Your line is open. Good morning. So checking on the cost side, the acquisition related cost SEK 6,000,000 in Q2. Was that due to the OVOSYS acquisition? It was done in Q3. So will that mean anything for Q3 then? That's the first question. I'm not sure if I fully caught the question, if you can. Did you mean if we had an acquisition related cost in Q2? Was that the question? Yes. In the 10,000,000,000 backroom report, it's the acquisition EBIT excluding acquisition related costs is €127,000,000 I don't know if that was a mistake Or if there were any adjustments. No, no. Now I understand what you're after. So what that shows is without the amortization on the order value. So it's also the acquisition cost for Oasis, but that was minor. So that's not a lot to talk about. Okay. Okeydoke. And in the cost guidance, you said 10% In Q4, what was that for the full Q4 level or the run rate going out of Q4? Traffic for both, both for the impact in Q4 in comparison to the current level we are at, but that will also be affecting run rate going forward. Okay. And you had some comments on it, but I wonder if you could elaborate a bit further on the order intake. 2 quarters now with very strong order intake, SEK 170,000,000 together in nonrecurring, if we could call it that, orders. So could you maybe try to quantify, I don't know, not a specific number, but maybe a range of what to expect for Q3 and Q4 H2 orders. The underlying order level seems to be around SEK 500,000,000 in both Q1 and Q2. Is that to be expected underlying as well in Q3 and Q4? Or will that be hard to reach these €500,000,000 levels given the default loading on the orders due to destocking issues or component issues in the first half. This is difficult to to speculate about, but I think you're right that the level beneath the stocking effect is probably around the 500,000,000. That we don't really see that this kind of adjusted back from this a little bit not normal stocking situation will go away. So we think it will continue maybe to not to the same level, but there will even be some stock effects also in Q3. People are concerned about component deliveries and when we talk to foundries, Specialty TSMC and other big suppliers, They are investing a lot, but it will take time until this is back to normal. So we believe that orders will the stock mix will continue for the coming quarter as well. Okay. And you had some that you I respect, I don't know when it will have a backlash or if it will, but the prospects for Q4 2022 orders and deliveries with H1 and potentially part of Q3 then being very high orders. Do you have any comments on the 2020 to order potential and deliveries and what we expect. Will it be possible to grow or be Next year? Give me what you know now. Yes. We will focus on our 2025 targets, and we don't really have a 2022 target right now. We don't know. It's too far out, I think. And the market we see right now, it's very strong, surprisingly strong, I would say. We see Normally, this market, customers do more CapEx investment when they are at full utilization of their capacity. That now we see a lot of CapEx investments, and we also see investments in more in energy savings, sustainability. Maybe there's a post COVID effect that many automation industry companies also invest more in automation and digitalization. So I think there are several strong trends that is helping us right now. These trends are not just for this current quarter. I think this continued for quite some time here. Okay. Thank you very much. Thank you. And our next question comes from the line of Frederic Stanislakkiel of Nordea. Please go ahead. Your line is open. Hi, good morning guys. So I have a question on OVASYS. Is it fair to assume that the majority of sales is in Europe or perhaps even in Spain? I did see a British bus on the picture, though. So I guess the sum in England is full. And also on that, kind of the plan around geographic expansion for them going into the U. S. Perhaps? That's my slide. The business we have today, I would say it's mainly towards European OEMs, not so much in Spain. There's domestic sales, but I would say that Continental Europe is the big market for Oasis today. We see a potential in America. And one of our ambitions together with Oasis is that they will use our infrastructure and hire some salespeople, overseas salespeople in U. S. That will sit at our offices and use our back office system and things like this because we see potential for this market in U. S, but they've been too small to really target that. So you're right that U. S. Is a target market for us. Okay. And that's prioritized ahead of Asia then or will you do both? Yes. It's a small company. We see a lot of opportunities also in Europe here. So I think that Western Europe and U. S. Is the 2 targets we focus on with OIBDA. Okay, great. And then both previous analysts have tried to gauge the phasing due to the component shortage. But I'll just try one additional angle, if that's okay. So in terms of sales, you did say that Q3 is likely to be weaker than Q4. But I wonder if you could say anything about Q3 relative to Q2 because I'm thinking that demand is not the kind of what's holding you back here. It is the supply of components. So sort of if you could comment on how the kind of sourcing has been or how it's looking for Q3 compared to Q2. Let me just start and Joakim can fill up with more details. I think we see a very high volatility at the moment. We have I have one example from one orders from 1 of the major semiconductor companies that have been Changed 24 times one order the last quarter. So it's a very high volatility, and we see changes day by day and week by week. So I think this will continue. We have a good relationship, and we are seeing some improvements with these suppliers. That it's if it comes in what goes out in Q3 or Q4, it's very, very difficult at this time to say. We feel confident that we will not lose the orders from our customers because we are, in many cases, specified into their bill of materials. So we feel quite good, but it's very difficult to comment about Q3 deliveries. But Joakim, you can give maybe a bit more detailed picture of this. No, I don't have a lot more to add. I think it's the span will be rather big if we were to give a span, so we wouldn't do it. Well, we maybe can say that we think that Q3, it will be difficult to reach the Q2 levels. I think that's then everybody can say. And it's not because we don't have the demand, it's because we just can't get the components in the pace that we need. But I think we'll probably leave it at that. Excellent. Okay. Thank you. Thank you. Once again, if there are any further questions, Okay. So it seems to be no further questions on the line. I'll hand back to our speakers for the closing comments. Thank you. And let's just say that we are super happy about the continued good progress. After a strong quarter 1, it feels really good to have this strong quarter 2. So we see that the trends are It's continuing to be favorable for us, so we look forward to the coming quarters here. We have issues with components, we know that. But in the long run, we are quite sure we will manage this, but there will be some volatility between the coming quarters. But we are not really super concerned about it. We are working close with our customers to try to mitigate what we can about this. So I would like to thank you for joining this call, and thank you for following HMS. I know that some of you need to look on other reports the coming days weeks, And Sam was going to go for a couple of weeks vacation now. So I would like to wish you all a very nice summer. Thanks for attending.