Earnings Call: Q1 2021

Apr 23, 2021

Thank you. Good morning, everybody. I found Awesome here. So the agenda for today is a short summary and introduction of HMS. I will take a small business update and then leave over to Joachim for more detailed financial update, and we end the call today with a Q and A. So let's take a quick look on the financial summary for quarter 1. We are super happy. It's springtime outside, but also springtime for HMS, good growth. Net sales growth at 26% despite some headwind from currency. But we had a fantastic order intake, growing 41% compared to quarter 1 last year, which was a quite okay quarter for us before the pandemic hits us in 2020. So with this, we also have a stable gross margin. We keep on improvement on the we keep on improving our margins. We have a good stable OpEx control. We have partly lower cost due to continued lower activities in trade shows, limited levels, etcetera. And this gives us a fantastic EBIT of EUR 114,000,000 new record level for HMS and EBIT margin of 25%, way over our target of 20%. Of course, this is driven by a very good revenue and stable gross margin. It's also very nice to see that we have a very good cash flow, which is Noteworthy when we have a good growth. At the same time, we managed to get a cash flow for operations of SEK 132,000,000, more than doubling from last year. And EPS lands at $1.93 So a very good quarter. We are super happy with this. And I think I'll leave the 12 months you see on the right side and move over to other things, and Joaquin will come back on the numbers. For you who are new to HMS, we are connecting devices. We work with industrial ICT, industrial information and communication technology. We have 4 major brands: Anybus, E1, Intesis, Ixas. They are all market leaders in their verticals and their niches in the industrial communication business. We have also 2 recent acquisitions or fairly recent acquisitions, German Web Factory and Dutch Procentec, which is not fully integrated, and we run this as separate businesses, also contributing to our growth in a good way. And looking on the company, we have been in business for quite many years. We are well established in our industry. We have more than 7,000,000 devices installed around the world. And we are quite proud to have over 300,000 machines connected in our cloud systems. So we are the clear leader of this industrial IoT business, and we are well positioned there. We are a technology company. We work a lot with new technology, 5 gs, wireless, AI and these kind of things. But we also work with fairly conservative customers, industrial applications such as steel plants and paper mills and this kind of things. And of course, they like technology, but they also want to have a long life cycle of the existing technology. So this is our we are used to handling this kind of new technology but also very long product life cycles. We are over 700 great employees around the world in our 16 countries where we have subsidiaries that we operate through partners. So in total, we have business in over 50 countries. And we are headquartered here in Hamsgaard, Sweden, maybe not the center of the universe, but a very crisp a very nice place to be in a crisp spring day like this. And if you have the opportunity to be in the neighborhood, let us know and stop by here. It's a great place. Our target, 2025, I'll be back on them. And so I'll move over to our 2 major customer groups. We work with users of automation systems. There, we normally target that market through distributors, system integrators. So it's an indirect go to market. This is 25% of our revenue. The larger portion is our makers of industrial equipment, makers of devices and machines. There, we normally go to market directly or in some cases through selected partners, and this is 75% of our business. We just released end of last year, we released our 25 goals. We have 3 major focus areas. The environment where we have high ambition. We would like to become a net positive company when it comes to CO2 emissions by already by 2025. We believe that happy and high performing employees generate loyal customers. So this is how we work with our teams and our customers. And we would like to continue our growth and profitability in the coming years. The details of these targets are focusing on environmental aspects through the internal operations we do, what kind of energy we use, how we can become more sustainable, but we also focus on external impact through our suppliers, but also how we help our customers to minimize their impact on the environment. When it comes to our static customers, we focus on Net Promoter Scores, and our target is to be beyond 25, both from entry, NPS and customer NPS. And as in Gindesh, we are saying that our revenue should keep on growing beyond SEK 5,000,000,000 more than SEK 3,140,000,000 in 2025. We would like to maintain our good EBIT margin of 20%. As I mentioned, we are way over this target, quarter 1 here. And we have a dividend policy of 30% to 50% of EPS. So with this, let me move into a short business update. I know you're all keen on hearing more about this interesting quarter. We see a broad recovery in the market, and it's really broad. All our main brands grow on order intake more than 35%. So everything is growing in a fantastic pace. The main driver for this is continue well, come back, I would say, of investments in manufacturing industry. We see a strong automotive sector after a couple of weak years. I guess this is driven by that they have now formed their plans for the future when it comes to electric cars and more sustainable approaches. So they invest again in their supply chains and manufacturing. We have seen very good business through our robot manufacturers in Europe and Japan mainly, also partly related to automotive, but we also see a strong pickup of the robotic use in other industries. And we have been a bit concerned about the development in building automation. We work is there with our emphasis plans in large scaling implementations in airports, shopping malls, hotels. And of course, these are industries that are in a tough time at the moment. But actually, this market has been quite good, same level as last year, and this is driven by energy focus and the way how we help our customers to reduce their OpEx and any disaities in their buildings. Part of this broad recovery is also some smaller onetime effects, stocking effects. We estimate this to be SEK 60,000,000 SEK 70,000,000 quarter 1. It's a combination of customers stocking up due to risk of component shortages in the industry. So people are concerned about this. Our customers stock more than normal. But also, there's increased demand. So customers are increasing their stock level to cope with the rapid changes in the industry we see from being contraction last year to expansion here. This is giving us some short term effect as well. But we believe that this will continue. So our outlook for the rest of the year is positive. Of course, there are some onetime effects here in quarter 1, but we see a good investment climate if we continue for the coming quarters here. To go back and look on our 2025 goals, how is that going and just a few snapshots of activities we do on the environmental side, where we have the ambition to be net positive on CO2 emissions. We have just hired a new sustainability manager. It's Very important that we get more structure around this. And we have a lot of ideas and initiatives, but we need to drive this in a more structured way going forward. Already our biggest sites are on green energy, and we're taking now the remaining sites. We just converted our French office to green energy. And we are now looking also more on our transportation to HMS but also to our customers. Our biggest partner here is DHL, And we just signed up their go green initiative, which is a way to, I would say, limit or reduce the CO2 impact, but it's not the final solution here. We need to work on this, but it's an initiative we are starting to start a reduction here, but we need to do more things when it comes to the transportation. For staff and customers, we are doing some changes or improvements in China. We are starting a new office in In Shanghai area in China, we are doing some changes and improvements and expansions in Singapore. So we're doing things there. And we are also continuing the work from home policy here. We're not sure how the pandemic will look for the next a couple of months quarters, but we are sure that we will continue to part time at least work from home. We've been working better than we expected. For growth and profitability, we have an ambition that half of the growth to reach the SEK 5,000,000,000 in 2025 will come from organic growth and half from M and A. So we just recruited our new M and A manager. Same thing here, we need more structure, we need a bigger pipeline and we do more activities here. So the former team of myself and Giovanni, who worked in the M and A team, is now also improved by a new M and A manager. This will help us. It's also interesting to note that we see good effects from the gross margin improvement projects we did last year. So we see that this is now in full swing, helping us on the profitability side. So with this, I would like to hand over to Joachim for financial update. All right. Thank you, Stefan. And we will start with order intake. And as you already seen, it's a very nice number with the SEK565,000,000 plus 41% or 38% organics. And it's really a combination of all markets being strong. Very good to see that, that our biggest market, Europe, really important, with more than 60% of the sales, is up 37% organically. And this is a must for us to be able Form strong on the order intake side. And we can also note that Asia continues on a very good track, plus 67% And Danvers is a pretty nice comparable actually in Q1 last year. And we can also see that China continues to a new level for us. In 2019, our Chinese business was about CHF 50,000,000 Swedish krones. Last year, it improved a lot. And I think this year, we might heading towards the 150. So it's we're taking us to a new level, and that's also why we are expanding with a new office in China to take care of that potential. On the product side and offering side, as already seen, all our brands are performing strongly. And what's worth mentioning That's Ennebaz and IXF that's been having, I guess, a period of some lower growth are now really coming back with the investments that are being made Across the industries, we see more or less all verticals are being strong for us, and we see good growth in all of them for Endobas and IXA. I think E1 is tracking on more on the same track as before. We've been seeing a steady growth within E1 for a long time, and that just continues. And then for Entasis, we are moving sideways from the last part of 2020, but Q1 was A. Weak quarter parenthesis, and that's why you see a high growth number. So Stefan already comment on the situation in Building Automation, which is a bit more challenging than in the industry as such. We also want to mention Procentec. That's been also continuing on a very good track. And L. The main drivers of the growth in percent, because we've managed to close some new key accounts during last part of 2020. That helped us a bit in Q4 and now even more in Q1. So the pace is scaling up very good there. There is a bit of stocking effect also in Procentec. But even so, the SEK 61,000,000 in percent is much better than we had expected, and I think we have to revise expectations a bit upwards for as well. Also, when I mentioned that the you probably see that already in the bridge down to the left that the FX situation was a bit special in Q1 2020. So that's why we have minus 13% from the currency effects. Where the Swedish crown in the early corona pandemic days were traded very low against the euro and the dollar. Let's go over to the sales. Also this SEK 455,000,000, a very nice number. Of course, it's not converting assets to order intake when business is now going upwards, but we're very positive how this will develop going forward given the fact that we're now building also our backlog with a nice order intake. So we're up 26%, organically 19%. The picture looks a bit differently across the brands. I guess that will even out in Q2 and going forward. All brands will be on a higher number. Now the main driver in terms of money will be the remote access, remote data offering with E1 that is growing by 22%. So That's, of course, a very nice number for that business. We also want to mention that we see we write this in the report as well. We see that the component lead times are getting longer. They are already very long. And for some components, we're talking more than a year lead time. And so far, we've been able to deliver as planned more or less. S. We guess there might be some disturbance going forward, difficult to say exactly how much. We see that for some price, we will have to prolong our lead time a little bit. But we're working hard in the supply team and software. I think they've been doing a great job in offsetting the impact. There are a lot of firefighting and daily operational challenges that I've been dealing with, but so far in a very good way. So we're not too concerned going forward, but we want to flag that It is a tough situation out there. Then we have to have a look at the sales per region, pretty much As it normally looks, we have Americas by 21%, where the U. S. Is by far the main part EMEA, 62%, where Germany is 35% and then you have APAC, 17% that we think will grow going forward as well, where China is now becoming really big part of the APAC business, which is fun to see. And then let's move over to our EBIT order results, which is, as you know, already very strong with SEK 140,000,000. First time for us been over SEK 100,000,000, so that's a bit of a milestone. Good to see. And the margin of 25% is, of course, an effect of the really good volume in combination with the gross margin that I think is also on a record level with 64% and then low OpEx given the situation in large. What's the impact in the gross margin? We're up about 2 percentage points in relation to the full year 2020. And the main thing is the gross margin project work that we did last year with the price increases across our range in some for some parts of the offering a bit more, for some a bit less and also with the good improvements we made in our supply chain. So we're now, for the first time, I think, seeing the full impact of this. We saw some improvements already in Q4, but this is now the full impact. I think Even if we have them a bit of FX downside, for us now this evens out by the volume that's on a nice level. So given the situation with this volume and the currency levels as it is right now, we don't really see why we shouldn't be able to meet those 64%, at least in the short range going forward. What I want to flag also by having that said is that we're starting to see also Slightly price increases on the component side. The picture varies a lot on some components. We see big price increases and others, they are smaller. I think all in all, this could do somewhere between 0.5 to 1 percentage points going forward. I guess that is the main risk factor that Challenge to 64% going forward. But I think we've taken a step from the 62% that we've been on now for 2020, for sure. So somewhere between that $62,000,000 to $64,000,000 we think will be feasible going forward. Then talking about our OpEx, not a lot to say. It's Pretty much the same level as Q1 last year. We have an organic increase by SEK 11,000,000, but then we also have some net R and D effects. And what I mean by that is that we are capitalizing a bit less than we did last year. We have some projects that were finalized by end of 2020. And also we amortized a little bit more than we did last year. So the net effect of R and D of SEK 10,000,000 is pretty much behind the organic OpEx increase. What I also want to mention regarding OpEx going forward is that we are now on a low level. We don't do a lot of traveling. We don't do any trade shows. We don't have any short time work anymore. So that's out of the picture, but it's still on a low level. And we are now ramping up with a lot of growth initiatives, and we expect that Maybe Q2 and Q3 will be slightly up in relation to the current levels and Q4 will be, I guess, more substantially up, maybe 10% to 15% up compared to the current level. And Well, I guess, in Q3, it's a bit of an effect that we have the vacation impact that is that makes that we only have a small increase because we're starting to add more resources now, which, of course, also will put pressure on the EBIT margins. So I don't think we can expect these high margins going forward. Earnings per share, SEK 1.93 billion. I don't have a lot of comments Given that we basically don't have any debt, the net financials are low. We actually even have a positive impact from some revaluation of internal loans. But otherwise, this looks very promising with a nice Growth of 91% on the earnings per share. Let's then also have a look at the cash flow. And Also this point, of course, the record level for us was SEK 132,000,000 despite the fact that we have a working capital impact of minus SEK 19,000,000, which in itself is not very strange. We're ramping up our receivables a lot given the higher sales growth. Even so, we're keeping the working capital in relation to sales S on a decent level, 9.5%. I normally say that we expect to be around 10%. I don't see a difference this time. That's where we expect to be S. Plus minus a little bit. Maybe what we were mistaken a bit in Q4, we said that we expected higher inventory since we're taking on some more components. And I guess we expected that, but what we didn't put into the equation is that the demand has been so high. So we are Making our safety stocks becoming smaller and smaller and our finished goods stocks are getting smaller as well. So I think all in all, we pretty much expect to roll forward on the levels around SEK 150,000,000 in inventory. But it's very nice to see that we are able to convert this nice with cash flow SEK 132,000,000 given that we have such a strong growth. S. So final slide, that is not so interesting anymore, the net debt because we basically don't have anything left. S. I guess that puts a bit of a pressure on us on the M and A side. We have a very strong balance sheet now to grasp the targets we like. We've been working out with Our strength and M and A team to get an even better pipeline. So we think we have a better long list, a better short list, and I hope there will be an interesting time ahead on the M and A side for us. And with that, I think we can Open up for questions. So I leave over to operator. Thank you. HMMs. We have a question from the line of Rami Coria from SEB. Please go ahead. Your line is open. Thank you, operator. Good morning, Stefan, you or Kim. Congrats on a Great report. A few questions from my side. First off, I think you've touched upon most of my questions, but S. Perhaps to iterate and go a bit dig a bit deeper into basically all of them. But starting off on the Backside, I mean you've been somewhat restrictive with certain investments in the last, let's say, 18 months. And now you're indicating a slight step up, especially Q4 versus Q1. Could you shed some light as to How much of the OpEx step up comes from, call it, back to the old way of doing business, I. E, pre pandemic? And how much is Sort of new forward leaning investments and perhaps what the latter group relates to more specifically? All right. Let's take that one first, I mean. So the first part of your question, how much is step up Ron, well, I guess, before the pandemic, that's not a lot. I think that might be a few percentage points of it. Maybe, let's say, 1 third of the step up we will see. And that is related to going back to more traveling, some trade shows and so on. And then we're having a bunch of growth initiatives. We are going to speed up the investment pace in some of our business units to shorten time to market on newer investments, new developments. We're doing a lot of things in Asia. As we commented on China, for instance, we're going to strengthen the team in Singapore to cover Southeast Asia. I think there will also be selective add ons on all the other markets, maybe not as broad as we've done before, but we will have selected verticals that we'll go after. We're doing some initiatives now where we're looking at some specific verticals that we think that we can have a stronger position going forward. So some of those selected initiatives, it will be. It's very clear. Thank you, Hakim. And then the potential impact from more expensive semiconductors, you're indicating L. 50 to 100 basis points negative impact on the gross margin potentially. Does that entail any component wherein you push out Price increases to your customers? Or do you assume you'll take full charge of the price hikes here? I think what we did going into this year and that's why also you see the nice impact in Q1 is many of the initiatives we did last year Went live, so to say, 1st January. So we've been doing quite aggressive price increases towards our customers. So I think we feel at the moment it would be a bit difficult to come again and push this out to them as well. I think we'll probably be maybe built into the yearly revisions for next year since we think that this will be here for some time. And I guess, will be visible first when going to 2022 in that way. So very clear. And on the Constanti performance, I mean, Stellar performance as you also indicate. Could you perhaps Provide us with some additional flavor as to how much of this is revenue synergies, I. E, upselling On the existing customer base, on the HMS customer base and how much is sort of new external customers that perhaps were in the pipe going into the Cution of the acquisition? I think it's good question, Romila. I think we what we see so far is that We are starting a cooperation of some HMS sales areas with Cosentyx, but that hasn't really materialized yet. So I think all this growth here It's something they've done themselves and through negotiations and new contracts with existing customer base. So we can't really take any HMS credit for it. We just were a bit lucky when we bought them. They had a fantastic pipeline that they've been able to materialize. Yes. Luck is deserved. Finally, on the M and A pipe, perhaps if you I mean, it seems like it's strong. And now with M and A manager in place, I take a cadence Will increase or sort of you will be more forward leaning. Could you shed some flavor as to what the most imminent targets would mean? Which verticals are you adding bolt on acquisitions to? Which regions? Is it Southeast Asia and China, etcetera, etcetera? Maybe I can I think what we see here is that, on one hand, we would like to do we would like to be more acting in both U? S. And Asia. This we haven't done acquisitions there before. But we also did We see very high marketables, and we have looked at some deals there where we walked away due to that. We felt it was Insane, I'm going to ask for. So I think we have a solid base in Europe. I think we can do more there. But we are We would love to do more in Asia and the U. S, but we haven't really found the right target there yet. So I think it will take more time, but we need to expand these market M and As, but it's been more difficult than we expected. And maybe this was we have more also relationships on the European market. This is our home ground and where we have a lot of contacts. So we are working on it, but it's much more work to do before we can present a lot of hot things for in Asia and U. S, I think. We are looking on the structure on some verticals like a little bit of water, wastewater and some of these verticals where we believe there's a nice future business that comes more of quality concerns. And water is also a scarce resource going forward in many countries. We also believe that there are more things to do. And we also have some good markets in Europe like Netherlands, who are quite far ahead when it comes to water treatment and this kind of water regulation. So we need to work on that. That's an interesting topic. I think we'll also look on how we can develop something more related to when we talk about 5 gs and mobile machines and these kind of things. So we have a quite broad viewpoint when we look on these companies. It's very clear. Thank you both. Thanks, Aure. Good to hear good to be back. Our next question comes from the line of Joakim Gmel from DNB Markets. Please go ahead. Thank you, operator. Glad that you are enjoying the spring in Halsted, Jorgen Ostafam. So two questions from me. Just in terms of I mean, if you can discuss a bit of the growth drivers here going forward in terms of your Visibility, which segment? I mean, it was very broad based here in Q1 and obviously, stellar results. But Which segments will be the most important here to drive the bulk of the growth for going into 2021? And perhaps you can elaborate a bit on what Revenue mix effect that could pose to profitability in 2021. Okay. Let's start to talk a little bit about the verticals. I think, first of all, it's we've been trying To understand it's better when we've been talking to our business managers as well. And I guess the challenge is that everything is going really well. I think that the main drivers, if we have to say something, is the fact that automotive is back, which is maybe our largest vertical. We think that we are pretty spread across many verticals, but maybe automotive is the largest one with some 15%, 20% of revenues. So the fact that, that is back investing in electric car plants is It's been great for Anybus and Ixad. That's certainly one driver. And we also commented, I think, in Q4, the fact that we won Some nice customers in wind power in China that is continuing to developing in a nice way. I guess those are maybe the most outstanding that we'd like to mention. As you know, we don't have full transparency exactly what verticals our components will go into in all the cases Since we sell to the OEMs, so if we sell to robot manufacturer, for instance, we don't necessarily know exactly where that business will go to. So that makes it a bit of a difficult question for us to answer. But I think what I just said is probably the best estimate. When it comes to the mix and profitability going forward, we think that the mix as such will not necessarily impact the profitability too much. I think we have about the same margins on all our offerings. What we do see in the short term is, of course, that we will have high EBIT margins because we even if we have a high High activity level now in ramping up our resources that will take some time. So that's also why I said that we won't see a big difference in Q2, Q3. It will be slightly higher than Q1 in terms of cost. And with the nice backlog that we have, we will have nice sales levels in at least in Q2, and we also expect that Q3 will be decent. So I think that the margins will be I wouldn't be surprised if we are above our target for 2021, I mean, about 20%. Going forward, I think we are aiming to make the initial investments, meaning that we think in the longer run, 20% is still the realistic target given the growth ambition that we have. Very clear, Joakim. And just a follow-up then on I mean, the stellar order intake. And if we can just talk a bit about given That you highlight, I mean, aluminum risk here for increased delivery times. Will that in any way affect or impact how you expect orders To translate into sales going into Q2 or should it follow, call it, normal patterns? So I think what we've seen so far when we're looking at our order book, it still keeps the same pattern as It normally presents, but it's not no big deviation in that sense. But what I guess my point was that There might be some delays in deliveries, meaning that there might be some disturbances in between the quarters. So the sales should be a bit lower in 1 quarter and a bit higher in another one. We don't really know how that will hit. We just want to flag the fact that it could be a bit bumpy on how the sales to convert. But the way the order book presents itself is pretty much as normal. That's clear. That's the yes. And Joakim, just one comment from me. We talked about the EBIT margin for the year here. Just want to note also that keep in mind that on 2025, our ambition is 20% EBIT, but the growth is coming from half organic and half M and A. And we know that M and As we look at, they should be profitable, but we don't see that all of them have 20% EBIT. So when we do more M and As, that can be a little bit of pressure on the margins as well. Just we keep that in mind going forward. Definitely. No, that's clear. Thank you both. Thank you. Our next question comes from the line of Fjerdik Stianti from Nordea. Please go ahead. Good morning, guys. I think there's been plenty of questions. So I personally have one nitty gritty one. But On this €60,000,000 to €70,000,000 boost in order intake, that's a bit temporary. You talked in the positive profit warning about partly inventory buildup after having had very lean inventory at the customers, But also safety stocking to protect themselves against component shortage. So I was just wondering, those SEK 60,000,000 to SEK 70,000,000, Is that both of those? Or is it only kind of the safety stocking part? And I understand it's very tough for you to know which is which. Well, yes, I guess, you're right. In fact, it's difficult to know. I think we it's a combination of the 2, exactly what percentage is which, We don't really know, to be quite honest. But it's yes, it's certainly a combination of both. Okay. That's all from me. Thanks. HMF. We have a question from the line of Victor Hoeghtaj from Danske Please go ahead. Hi, good morning. Just one question. So in terms of your own safety stocks in terms of On equipment and inventory, how long is that now in terms of months? How much can you cover, yes, so we get a feeling for The potential delivery hiccups during the year. Yes. So I think it varies depending on components. Also, the lead times varies a lot. So it's Difficult to give a straight answer. I think we are eating at it, that's for sure. And but on the other hand, we also placed orders in Q4 that we will be seeing coming in gradually now going forward. So I think the only thing we can say is that when we do the math, We don't right now see any big hiccups in Q2. But in the same way, the demand is still on a high level. So it's There might we can't exclude the fact that there might be hiccups going forward. But right now, we're rather comfortable that we managed to deliver as planned. Okay. Yes, a final question on the order intake in Q1. I would assume it was mainly driven in March. So did you convert any of the extraordinary order intake into revenues already in Q1? And just to Make sure that I understood your comments earlier correctly on the duration of the order book. Were there any orders that are planned for delivery after Q2? Or would this be mainly a Q2 order book? I think the of course, there are some deliveries being made in Q1 already of the order intake. Maybe I can answer it like this to Victor to make it easier for you. If we say that we stand the 1st January and looking at our full order book. We will have 65% of the sales that we expect to do in January in the backlog, 1st January. We will have 40% for February and we will have 20% for March. And all in all, the order book has value approximately equal to 2 months of sales. So it means that I mean, outside of 3 months, there are just, I mean, a few million per month longer than 3 months. So most of it will be delivered in the coming quarter. Okay. Thank you. There are no further questions registered. So I hand back to the speakers for any closing remarks. All right. Thank you. Thanks for good questions, and thanks for joining on this call. We are, as you hear, quite happy with quarter 1, And we also feel that this momentum will continue for quarter 2 as well. Things look very good. And we are just focused now on making sure that we can mitigate any supply problems, but also have a look on the future. So we need to do the things we need to come to our 2025 goals. So we are not relaxing and enjoying the nice order book right now. We need to work hard to make sure we reach our 2025 targets, but it's very nice to get a good start here. So with this, I would like to say goodbye, and thanks You are team as well. Very good presentations here. And thanks for joining, and have a fantastic spring day today. Thank you.