Hanza AB (publ) (3GA.F) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and greetings from Augsburg, Germany and thank you for taking the time to join this quickly arranged audiocast because we have concluded a very important acquisition yesterday. And of course, this is a milestone in HANZA's history. And we will walk you through this in a structured way, where we start with a short strategy recap, just to put this deal into perspective. And then we will talk about this outstanding company, BMK. Lars will give you the transaction details and the financial impact, and then we will have a look at the future and with a Q&A session. Please use that. So let's start then with a look at the strategy, our strategy that brought us to this point. If you are a product owning company, you are in the middle of this slide, you have developed, you're marketing, you're selling some kind of product. Most likely you outsource the manufacturing, of course, you'd like to focus on the next generation of your product. Then you use so-called contract manufacturers. The challenge is that they come by technology. So we need one for the electronics, another one for the housing, a third one for the cable harnesses and so forth, it means that you need several contract manufacturers and after globalization are most likely located on different places. So HANZA was founded on the simple but very powerful idea that contract manufacturing works better when it's local and complete. So what we have done is to collect different kind of manufacturing technologies in HANZA. That's why we have our slogan, all you need is one. What we like to do is to offer a better supply chain. So we're not just selling manufacturing but a better supply chain. So we can take the poor guy to the left of this picture and bring him into a much better solution in HANZA where you're going to have the parts produced and the parts assembled, you will have lower cost, less emissions, much more robust supply chain and higher flexibility. So what we do, we offer a better supply chain. How we do it is that we group together these factories in something we call manufacturing clusters. So our business model is different, but so is our expansion model. If you've been following us, you know that we build HANZA step-by-step by putting specific goals and milestones a few years ahead. Now we are into something called HANZA 2025, and this is important, we will talk about this today. After we had created our 5 clusters in Europe, this phase was designed to balance the clusters of Europe, to make sure also that we have full capacity for complex assembly, which is important, and I will come back to this. And if you've been following us the last years, you've seen, we have done this very structured. We have open new facilities. We have acquired companies in Sweden, in Finland, in Baltics, in Central Europe, the final piece, Germany, and that's why we are here today. Let's have a look now at this company, BMK. It's a fantastic company. It was founded in '94 by 3 gentlemen, 3 entrepreneurs, Mr. Baur and Mr. Muller and Mr. Knoferle. You can see them down to the right. This is also interesting because we have been traveling around discussing technologies. And we also had a chance to visit our main owner, Gerald Engström, who started this company, Systemair, a great ventilation company. So this is a picture where we are visiting the company, let's call it, we had a study visit completely on the pleasure account. Today, the BMK is up to EUR 300 million in sales and an operating margin of 7.3%. Lars will give you much more about this and total about 1,500 people. The main plant -- the main plant is in Augsburg. That's where we are right now. You see the picture up to the right. This is a super factory with 1,200 people. But we also have a plant in Czech Republic, partly owned plant in Israel and a sourcing office in China, you can see it on the map to the right. Why is this factories -- so I've probably seen more EMS companies than many others. And why is this so fantastic. And not to be too technical, if you are an electronics company, you either focus on higher volumes, you are producing iPhones or something, then it's low mix and high volumes. Or you do like most companies in Europe, you are trying to get more customers, so a bit more high mix, but more medium, low volume. This company can handle about any mix, any volume. The secret behind this is how you feed the machines, the so-called SMT lines, and it's a logistics system. It takes too long to explain it here. But if you have time, come to Augsburg, you will have a guided tour, that's one of the features. Another feature is the quality. If you have an electronics company, you're glad if you round out to maybe 200 or 100 PPMs. So PPM is defective parts per million produced. This company is running 5 PPM. Also have a fantastic engineering department, logistic department and prototype services. Skilled in complex assembly, and this is important. We are running a project called LYNX, so that is how we allocate the capacity for the defense industry, really important to the assembly. Augsburg happens to be an area where there's also a cluster, cluster defense company. So this was also important. Customer base, I cannot give you so much details. We have to do the closing first. It is solid, good German companies. There's no overlap with the customers we already have in Germany, and they don't have a concentration. So the largest customer is well below 10%. Industrial German companies, I would say. And now what we do is to consolidate. So combine the units we have in Germany with Augsburg, and we will also keep the other units of BMK into this group operationally for a period of time, and then we will integrate it to the rest of HANZA. So Advanced Technologies and solid customer relations, this brings us to the industrial logic, how BMK fits into HANZA. So if -- again, if you've been following us, you have seen the checklist. We have up to the right, the acquisition parameters. And first of all, of course, it must fit into our strategy, as of 2025, all about balancing the clusters. And of course, in Germany, it's the largest market, we like to have largest presence in this place. So it fits really well from a strategic perspective. We will have now also this complex assembly capacity for the LYNX project. It's a unique company, as I said. Culture, when we buy a company, the HR due diligence is the most important. Now I know these gentleman for many, many years. We have been following each other. I think I met them in 2018, the first time, so we know each other and I know the company. But still, having said that, of course, HR is the first to visit the company and go through the next tier of manager, make sure that this company is aligned with our operational entrepreneurial mindset. And it's a really good fit. It will not be an acquisition. It will be a merger of equals. Customer base. I talked about that, but the interesting part here is that there is a growth potential. We are glad to state that the contract manufacturers normally or always performed better inside HANZA than outside HANZA. So even a fantastic company like BMK will have some advantages. We have seen it in the past, probably you remember Orbit One, where we increased the margin. We had Leden where we increased the sales, this is the thing, if you buy this nice company, how can you make it better. So we had to combine the best EMS company of Europe with, what I would say, the best concept of contract manufacturers. So we can actually refine this company further. So you would expect a really clear strategy fit between HANZA and this company, BMK. Now this is how it looks. If you have a look, how HANZA '25, looks in full, you see the map as said, those cluster has been expanded by buildings and acquisitions over the last years now with BMK, we also have what we call customer gateways. So it's not clusters. It's not a group of factories but single factory dedicated for a specific customer need, so we have one in China. We have one in Abu Dhabi and now we got a partly owned unit in Israel. Proud to say that we have a fantastic set of technologies. You see some examples below and with this acquisition, then we will be the largest contract manufacturer in Europe, about 10 -- listed manufacturer in Europe, about SEK 10 billion in annual sales, 5,000 colleagues, looking forward today, I will meet a number of new colleagues for the first time. So that's about the hardware. But of course, the transaction of this size must also have -- make financial sense, and it does. And to explain that, I leave the floor to Lars.

Thank you, Erik. And I will start with going into the transaction, how it's structured and also have how we have valued and BMK. And structured as a share swap, a share exchange and we based it on a relative valuation. And in that valuation, we reflect that the company is on a similar profitability level and the same leverage, that has a narrow scope for BMK as an EMS company and not listed company. So we have agreed on the value of BMK, post merger to be 27% of the combined group. And that gives the 3 sellers 9% each and to reach 27%, we will issue 17 million HANZA shares, and they will be equally divided between the 3 founders. We have also in the transaction set the level of net interest-bearing debt in BMK to EUR 50 million and that is approximately 2x the EBITDA. Looking into the transaction process and also becoming lockup, this transaction is subject to approval on an extraordinary general meeting scheduled to November this year. Shareholders, Farna Invest owned by Gerald Engström, Francesco Franze, our Chairman of the Board and the CEO, Erik Stenfors, they have committed to support the transaction, and they represent 28% of the votes. And we expect to get the regulatory approvals needed by the end of this year, meaning that we can close this deal around new year. And there is a lockup agreement, so 14.5 million out of the received 17 million shares are locked up for a period of 36 months and they are gradually released over that time. And if any shares are sold, they are sold in blocks. So they are committed to sell the shares in blocks if they sell. Financial impact, you see on the graph to the right HANZA's growth over the years and also what it will mean when we include BMK in the figures for pro forma 2025. And as Erik mentioned, the combined group will reach approximately SEK 10 billion in sales. BMK is today operating on approximately a margin of 7.3%. And the acquisition is expected to increase the earnings per share. The balance sheet will, of course, be affected. But since it is a share swap, it will continue to have a strong equity to asset ratio. And as I said previously, we are taking on a company with a net debt of approximately the same level as HANZA has, around 2, so that means that combining these companies, we should have approximately the same level of net debt, well below the target of 2.5x that we have as a financial target. And we expect the combined company to have strong cash and cash flow. And you, that have followed HANZA knows that we've been able to do acquisition and after the acquisition, the merger to free up working capital and get quite strong cash flows from the companies that we acquire. We also expect BMK to increase the margins, also here, we have a history of being able to increase the margin in the companies that we acquired within the year, we have seen historically that Orbit One, for example, has increased the profitability and/or at the level of the HANZA Group. And we also have a financial update and starting with the sales. We are coming back to what we said in the Q2 report that we see that the -- from our existing customers are increasing by the end of this year. So by that, we see good organic growth in Q4. And we are expecting to reach pro forma, adding Leden for the full year 2025 and Milectria for the full year 2025, we expect to reach SEK 6.7 billion in sales for 2025. BMK is expected to reach SEK 3.3 billion in sales in 2025. And that leads to that pro forma will go in with a sales level of SEK 10 billion for the full year 2025, including all the companies that we have acquired. The margin, Leden that we acquired in March. They, as we have said before, faces capacity challenges due to the growth that they have. This has affected the margin. We are today running Leden at approximately 3%, and we expect that level to continue during 2025. And but increase from start of next year at that time, we reached the level of the rest of the HANZA Group, which is 8%. And again, we can compare this to the acquisition of Orbit One, downturn in profitability or lower profitability initially in HANZA and then over time, we have increased the profitability. And today, they are on the same profitability level as the rest of HANZA. So we have a good plan on how to also get Leden up to the level we want to be on. We also had in the Leden acquisition, a clause in the agreement with in the earnout. We estimated the earnout for 2025 [indiscernible] million. Today, we see that we will release that in the Q3, and that will then be accounted for as an extraordinary income. So we expect again BMK to be only percent in margin for the full year 2025 and Leden to be on 8% in 2026. By that, I will leave back to you, Erik, to summarize the deal.

Thank you, Lars. So let's try to make a short summary. First of all, this acquisition then completes the strategy we set out 3 years ago, gives us the right structure for continued profitable growth. And you might recall that 3 years ago, we were at SEK 3.5 billion company. Now we have added SEK 3 billion, so about SEK 1 million is organic and SEK 2 million are by acquisitions. So a little bit more on the acquisitions and organic growth, normally 50-50, but it's been a recession. But we like it to be 50-50 on our growth. We also have now BMK the fantastic company located in Augsburg, Germany and that's about 70 kilometers northwest of Munich. If you are not familiar with Augsburg, a very nice city. We have added a very interesting diversified customer base, which I'm sure will continue to grow in our hands. Also LYNX program, very important. This is important to allocate capacity to the defense industry, still safeguarding capacity for other customers. So this deal will help us with that. We have our proven integration model, so we are sure that we will see more synergies, both in sales but also in margin and cash flow. If we look for the future, as Lars said, we will probably do the closing at year-end. And in combination with that, we will call for a Capital Market Day to present the next step. You have to remember, we have not stopped HANZA, we have just started. So it will be a next step, HANZA 2028, and we will launch that directly after closing on the CMD. I hope you will all join that. And with that, I think it's time to open up for any questions.

[Operator Instructions] The next question comes from Oliver Uusitalo from Aktiespararna.

Hope you can hear me well. First of all, congrats to an exciting acquisition. My first question was regarding the co-owned plant in Israel. How do you think this will fit into the HANZA picture and perhaps especially regarding the current political tension in the area?

Erik speaking. Yes, this is something that came with a deal. It's a partly owned unit. We haven't really investigated that for the HANZA 2028 strategy yet, but we will announce it when we have a strategy. It's a unit not working with anything defense related. It's a really nice unit with really good skilled people. So it's a fantastic unit. But I understand the question, given the geopolitics of today, but the future for that, like all the rest of the units of HANZA, we'll present that by the end of the year.

Fair enough. And regarding the sales in the area, I suppose we can assume that Germany accounts for the great majority. What about sales in the -- for the Israel plant. How -- could you guide us in anyway?

I think no, we haven't given the split.

Well, then -- and my last question was, if you could...

But Oliver, you saw the size of number of people. So maybe you can use some metrics to estimate that.

Yes, for sure. I assume that. My last question was -- I mean, well, what made you go through with this acquisition? I mean for current investors, this gives quite a substantial dilution. How would you justify it?

Well, it gives quite a limited dilution compared to the value add of this company as being, if I put on the hat as a shareholder, I'm really happy about this deal. This is a fantastic unit and that they accepted this low percentage of the whole HANZA. We are talking about a company of SEK 3.3 billion is just because we have these good relations. The most important things for the seller is that somebody will take care about their baby to make sure it can be something more. They were fearing, it will be bought by another electronics company, if an electronics company buys another electronics company comes consolidation sooner or later, something bad will happen. But -- and to be honest, they were also fearing that it will be a buyer from somewhere outside Europe. So being a Scandinavian company with a concept, they have been following us for many years. They really -- they state that -- they think that we are the only company with a clear plan. So I think that was the reason why it was such a low dilution and such a good value-creating acquisition and this will be remembered in the future as one of the big milestones actually.

Best of luck going forward.

Thank you.

The next question comes from Vincent Normant from Daneizo Capital.

Hello, everyone. I have a couple of questions...

We hardly hear you.

Can you come closer to the microphone or something?

Okay. So I have a couple of questions. The first one is about your cluster HANZA cluster concept and the strategic fit of this acquisition within your German cluster because you already have electronics in Germany. So I was wondering how is it fitting in your cluster concept, this electronic acquisition since we -- one would have maybe expected more sheet metal or mechanics acquisition. If you could explain how you will pursue the cluster concept in Germany?

So for us, and now we maybe go into detail, what is important for us is to have local complete manufacturing. So we like to be present in different areas, mainly with complex assembly close to the customers. And then we have a number of technologies. For us, this is not an electronics company. It's a new tool in our toolbox. It's something completely different with the other units we have in HANZA, to start with. Secondly, to have this huge capacity expansion possibility in Germany is really important. So we are now located in a place where there is a good spare area for different reasons, so we can increase complex assembly and also talking about this LYNX project. So for us, it was a new technology almost to get this Augsburg unit into HANZA and the possibility to finally have the size in Germany we need in order to take on new orders. Was that a fair answer, Vincent?

Yes. Okay. Very clear. And now about LYNX program in defense. So how does it fit this acquisition within this program. If you could elaborate a bit on the opportunities you see, are they already selling defense or not? And what's the opportunity you see to German defense industry.

We have -- last week, we had a launch of -- in Finland of another acquisition tailor-made for the defense industry. We've been working with this since March. I think it's also very good business and also very important for Europe. It's about their democracy. We have had an extremely good response on this. So we have many customers on the way in. How does it fit? Well, when you work with the defense industry, what is very important is, of course, the quality. So I mentioned earlier that we have this 5 PPM company, and that's exactly what the defense would like to have. They cannot have any defects in this area. So -- and also, Germany is the largest defense market in Europe. The potential is there. The challenge we have is that we outsource the manufacturing to Asia. So we are lacking manufacturing capacity. That's what the defense industry need, when we raise the hand and say that we will have capacity, we've got a number of requests. And by this acquisition, we will have a fantastic opportunity to grow in Germany with the LYNX program.

Okay. Very clear. I have 2 more questions, if I may. First one is about the auto exposure of this company of BMK. If you could give us a rough estimate?

Sorry, I didn't get that. What exposure?

Automotive exposure.

Yes, the automotive exposure.

No, it's very low. And we tend to not move into certain areas. We have said rather the areas we are avoiding that areas we are seeking, and that's certain telecom and automotive going in large volume. It's interesting because, as you know, there's been a recession and we are in a recession and especially in Germany. And therefore, it was important in our discussion that we saw that now we see an upturn in the economy. That has been really, really important. And if you're not many companies exposed to the automotive has had really challenges. Here is a factory still standing. We're not -- didn't have to fire people. So we have a lot of capacity, and now we see the upturn in the economy. So we think the timing is simply perfect to do this deal.

Okay. And maybe, last question is about profitability. If you could elaborate a bit on the historical profitability of this company. So this year, you are guiding on 7.3%, what was the historical profitability? And if you could elaborate a bit on the synergies you see, do you expect the company to reach 8% quickly or even more? What's your view?

Lars, what can we say?

What we can say is that, as Erik mentioned, we have known this company for many, many years, and it's a company that has always been profitable. We haven't disclosed the exact figures. And as I said, we expect them to increase the profitability running today on 7.3% integration, we expect that to be higher. And if it is from beginning of 2026, or if it takes a couple of months, that's to be seen. But again, we have seen that we are able to increase the profitability in the companies that we acquire.

But you would then say that 7.3% was fairly high point for them. I mean it was not historically a 5%, 6% EBIT margin company, it was already, let's say, above 7%.

7.3% was higher compared to previous figures. I said that we have not disclosed the historical figures.

We can maybe just add that, of course, also BMK have seen a downturn in the economy. So they have also been affected with lower sales and so historically, they should have had a larger -- higher margin than this, of course. So it's not the best of climate right now. But on the other hand, we see now the upturn in the economy.

The next question comes from Forbes Goldman from Pareto Securities.

And congrats on the super interesting acquisition. One question coming back to the margin that you previously just discussed, the 7.3% EBIT margin looks a bit higher than what HANZA is reporting this year, which on the other hand, also is a bit diluted by M&A, but all things equal, do you think this acquisition will be accretive or dilutive to HANZA's margin next year?

No, I would say the other way around. I think that's what Lars has stated also that there is a bit of delay when we bring in a new company to get it to our margin of 8%, and we saw that with Leden and we will see this with BMK as well. But the rest of HANZA is doing the 8%. So I would not say that -- I would say the other way around, but we must make sure that we get all unit up at 8%. If I understood your question correctly.

Yes. But just a clarification on that because when you talk about HANZA, you're talking about the EBITDA, EBITA margin, but BMK appears to report over 7% EBIT, which I assume is even higher on EBITA.

Forbes, the technical question, but the difference between EBIT and EBITA in BMK is none.

And on the trading update, which also sounds very confident and positive. Can you say a bit what you're seeing in terms of demand is the higher guidance based on some of the acquisitions? Or is it mainly the customer forecast that is driving this?

I think that we stated in the Q2 report that we see a good order intake for the end of this year, which should mean that we see a very good organic growth by the end of this year. it takes some time from the orders to then go into invoicing, of course. So -- and the answer is, it's existing customers. So we see the old customer base of HANZA. We've been really lucky, I think that we were the one with the lowest impact of the recession, and we already showed organic growth in Q2. I think we were ahead of the rest of the industry. And I think that the customer base is the key . And so it's an old customer base, giving an organic -- really good organic growth for us. But in addition, we also stated that Leden inside this acquisition we did in March this year, Leden inside HANZA will also grow quicker than it did stand-alone, basically because there is a new larger company and the customers tend to trust that based on the previous relation with Leden, based on the performance of HANZA, they increased orders. But what we mainly stated is that we have a good growth in the existing customer base of HANZA.

The next question comes from Lucas Mattsson from Inderes.

So I was wondering, how do you see the cultural risks and how were they assessed?

You mean integration wise?

Yes, yes.

Now as I said, I've been following and admiring this company for years and met a lot of people inside the organization, and they have also been visiting us. I think it's a full match. We are both the same mindset with this decentralization and how we believe the company should be run. So of course, it's a huge integration. But normally, when you buy a company this size, you will have a number of factories. Now we have one super factory in Augsburg. So it also makes it a bit easier than if you have to run around, of course, we have Czech and Israel and a small sourcing office in China, but the bulk is in Germany. So I would give this a very, very positive forecast.

Right. Right. And maybe you mentioned this before, but what kind of potential synergies do you see? And where do they come from?

Yes. So -- and that's the thing that -- how to improve such a big and beautiful company. Well, first of all, the sales model and our concepts. So we see cross sales, where we then can add technologies to existing customers, what we call all units one and of course, also up sales when we can streamline the customer supply chain, what we call MIG, so on the sales side, we see really good synergies. On the cost side, there is a number of activities, we have, Lars has a handbook how to handle this, and it's always been working. So I will not give any details, probably the secret sauce, but I expect both the margin to go up and most importantly, the cash flow to be extremely strong.

Interesting. And lastly, perhaps could you give us any hints on the strategic direction for the coming period as well.

No. But I hope you will be going to our Capital Market Day?

Yes, yes, I will, for sure.

The next question comes from Anders Akerblom from Nordea.

This is [ Jakob ] from Nordea calling in for Anders. My first question is, could you please elaborate a bit on the customer portfolio? Is there any overlap to your exposure? And where do you see the greatest opportunities for expansion? And if you could precise the defense share in BMK, that would be appreciated.

A lot of questions. So first of all, I cannot give you the names of the customer base until closing, but it is a very well-balanced customer base, which is important. It is the airbag through recession and the engine when the economy is strong. So we -- there is no dominant customer. There are -- all of them are well below 10%, which is our limit. And we also see that there's a low exposure, as I said to automotive, which I think is important. So a well-balanced customer base. Sorry, what was -- more questions you said?

If you could just precise, the defense share, that would be appreciated.

Yes, yes. So very, very low. They have not been working with that. Like many other companies in Germany, the defense share is very low. And that's also where we see the biggest potential because the recipe we have is really well fit with the defense industry. So we expect defense industry to be a large part of the operation in Germany, where is it today, almost 0.

Okay. 1 more question, if I may ask. Looking into the 2025 performance, you stated that earnings level of slightly above 7% for 2025. Could you share anything in terms of what your view was of a normalized profitability for BMK?

Lars, what would you say on that?

Normalized, I don't know. But what we're saying is that we expect the 7.3% in operational margin to increase in '26. So that's what we have said.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Okay. Thank you all for your interest, and thank you for all the questions. Then it is goodbye from us, we will now go out and meet all our new colleagues. So I wish you a great day, and hope to see you soon. Thank you.