Hanza AB (publ) (HANZA) Earnings Call Transcript & Summary

Thank you. Good morning, everyone, and welcome to HANZA Third Quarter 2020 Earnings Call. I'm Erik Stenfors, the CEO of the company, and I will together with Lars Åkerblom, our CFO, will present the interim report we released this morning. And the agenda, we will start with the business update, and we will do a financial review. Moving on to -- look at the future and then end with a Q&A session. So next slide, please. So to understand the recent development of HANZA, it's important to understand our business model. And if you look in the middle, we have an exit called customer value. We have worked with ways to increase the customer value. On the bottom level, you will find contact manufacturers, the traditional value. Produce a part according to specification and documentation, we also offer that. But we also have moved up 1 step, we have first development. So we have a design department. We support the R&D team, our customer to help them to -- we don't have any own products. What we produce is for our -- and what we developed is for our customers. But with this, we increased the customer value, you can call us both contract manufacturing and contract developer. On the next level, we have created something we call manufacturing clusters. So we support regional and complete manufacturing. We have grouped together a number of different manufacturing technologies. And by doing that, we can offer production of the parts, but also complex assembly, final test and logistics, a one-stop shop. And on the top level, we have advisory services. We have our own model called MIG, stands for Manufacturing Solutions for Increased Growth & Earnings. A way to analyze our customer supply chain accounting proposal how to streamline it. And not only do we propose how to do that, we are also ready to help to execute. And this business model has led to good growth. If you look at the graph down to the left, you can see that the 11 fiscal years HANZA has been existing, we have had a solid growth of approximately 20%. And we've also been able to show an industry-leading margin. We have in our mature cluster 7 operating margin of close to 10%. So next page, please. And then we move on to the third quarter, and it has been impacted by the COVID-19. If you look at the sales this quarter, it's actually flat compared to the same quarter last year. On a top level, if we go down a bit, we see that some factories have increased sales and some factories has lowered sales. And the result has been that there is a tilt in the sales loads and that has led to an earnings level, which is far below what we expected in the beginning of the year, and Lars will soon give you more details about this. On a positive note, we have in this quarter seen some volume stabilization. We have increased number of sales discussions. It's an increased demand for this region on a complete manufacturing in the wake of the corona pandemic and also good notes. And we have been switching program. We were running, let's say, reactive program, where we are -- we call it, Resistor that was an action program to cope with the virus outbreak and the lowered volume. That was finalized during the third quarter. Now we moved on to a more proactive program, our investment program, which is investment in machinery, but also profitization, optimization, which is quite important for our future growth. During the quarter, we also completed our organization. In the beginning, we acquired a company in Germany a year ago. And in the beginning, that has been run as a separate project. But during this quarter, it was put back in the line organization. So now we have a complete organization, which is both modern and agile and scalable. We have built HANZA in modules, which makes it possible even to acquire a new company put inside the organization without the need to redo the whole organization. And sustainability. For those of you who have read our annual report, you know that sustainability is an important focus area for HANZA. And this quarter, it is something quite interesting. So far, we have been working with KPIs, how to reduce our emissions, how to reduce our consumption. But now we also turn to looking at our customers. We will have a project to measure the impact, the positive impact on the environment when we streamline one of our customer supply chain. Quite exciting, and we will come back with more information about that. Now we take next page, and I leave over to Lars.

Yes. And we divide the group into 2 segments, 2 operating segments. And the first one is the main market and that is the market or the clusters in Sweden, Finland and Germany. And Erik said that the COVID has affected the HANZA, and it has a mix, especially affected the main markets. We can see in Sweden, which is 1/3 of HANZA is decreasing the sales and also the margin and we were a year ago, above 9% and now we are below 6% in EBIT level. We can also see that in Germany and Finland, it is also decreasing in volumes and by that also in profitability. And the largest customer of HANZA is in the textile industry, and it's actually down in a yearly volume of SEK 100 million. But still, we are making money. We have operating margin of a little bit over 5% -- 4%. Of course, a lot lower than last year, where we were on 9%. And we can see that it is approximately the same level as it has been in the quarter 1 and quarter 2 accumulated figures as well. If we move to the next page. We move over to the other markets. And here, I think we have a positive news is that we have said for a long time that we will see an increase of the profitability in other markets. And this quarter, we see an increased profitability. We see that -- again with the corona, we see some customers and some clusters are negatively affected and some are positively affected by the COVID. We have Narva that is affected negatively, and we see a decrease of 40% in volumes and that, of course, results in a significant loss in that side. On the other hand, tied to Estonia is positively affected by the corona and has by that also increased in profitability. The other units are more or less in line with what we expect our normal development. But in total, we see that EBITDA has increased, and we are on the same level today in quarter 3 as for the main market, a little bit over 4%. And that is compared to 1 year ago when we were on a breakeven level. So that's positive. And then we move to the next slide. We'll start to compare with last year. Last year, we acquired RITTER in beginning of quarter 3. So it's less than 1 month in the comparable figures that are not the same. So it was part of the group for more than 3 months in 2019 quarter 3. So it's more or less comparable figures. And we see that the decrease on sales, it's actually lower in quarter 3 than it was in quarter 4. So we are more or less on the same level of sales. We have still continued focus on cash flow and that has been the main focus. I will come back to that, but we see a little bit of decrease in the cash flow due to large investments in this quarter. And as Erik said, the part of the Resistor program to lower the cost of the -- we made an investment of the site in Åtvidaberg MBO, and that was done and finalized in the end of the quarter. We move to next slide. We see that the sales in total dropped by approximately 8% and that is in line with the -- in quarter 2, a little bit less. We were approximately down 10% before. So it has felt stabilized in quarter 3. And we see that the EBIT is increasing compared to last year. We are on SEK 15 million in EBIT compared to SEK 14 million. Last year, we had a little bit of onetime costs for the acquisition of it. So if you compare the figures without the onetime cost, it's SEK 15 million compared to SEK 21 million, and the decrease is, of course, due to the lower EBIT we have in the main markets. We have a little bit decrease or increase of the operating net debt in the quarter, and that is due to the fact that we made a hold on the investments in quarter 2. In quarter 3, we released some of the investments when we felt that the market was more stable. But in one time, in comparison with 1 year, we still have a positive cash flow and been able to reduce the operating net debt. And we have a stable equity to asset ratio, which is in the end of quarter 3 beyond 32%. Let me turn it back to Erik on the future. Yes. So we go to Slide 9.

#9. So we look a bit to the future. We expect demand to continue to be weak. And for how long? It's impossible to say. If you look up to the right, you see the OECD's forecast of the GDP and it's very much depending on what scenario you believe. And if you think there will be a quick recovery or if there will be a new outbreak of the coronavirus, but it will take some time. But I think what we all agree on is that there will be an end to this pandemic. And it means also that in the long term, we feel that we will keep our strategy. We have something called Strategy 2022, which is basically that we will work in our 6 current manufacturing clusters, add new node and also work with more efficiency in those. That is still valid, meaning that we will neither increase nor decrease our footprint. And connected to this is also the financial goals, so they have been reviewed and analyzed by the Board of Directors, and the conclusion is that they are still valid. So we will keep, for instance, our goal to grow more than 10% per year and to reach a margin -- EBIT margin of 6%. Then I talked about the new demand for our model of complete and regional manufacturing. There's also another demand. And it's a larger company who are interested in reshaping the supply chain, and we are now having some interesting discussions with some larger companies regarding this. And we also have some discussions regarding potential acquisitions. Now because there are quite a few companies out for sale after the pandemic. Now we are not buying companies in order to be bigger. We are buying companies in order to be better. So it has to be a clear industrial and financial logic. But if so, we are ready to do more acquisitions. And by that, we can turn to the next page and open up for the Q&A session.

[Operator Instructions] And our first question comes from the line of Erik Cassel of ABG Sundal Collier.

This is Erik Cassel from ABG. So you mentioned that your largest customer in Germany has reduced volumes by 5% on an annual basis. Is this more of a temporary slowdown now in Q3? Or should we consider this as lost volumes for '21 as well?

Right. Erik, good to hear your voice. I cannot answer that. Nobody can answer that. The textile industry has been hurt by the lockdown, first of all, of all the stores. And then secondly because of a lot of work at home. People are not buying clothes as much as they should. And that is multiplying through the value chain, and we are working with the -- and the people who are making the machines for the textiles. And it's impossible to say exactly when it will open up again. We have a close cooperation with that customer. But as I said before, what we know is that it will open up again. They make their own forecast. I'm not allowed to reveal that. But it's like if you have a traffic jam, somebody is hitting the break on the highway, and then there's some -- it may take some time to get the cars moving again. So I'm sorry, I cannot give an answer to that.

Yes, I understand. So -- and then you benefited last quarter from corona-related products as ventilators. Do you have any noteworthy volumes from these contracts now as well? Or has it kind of returned to normal?

We are not commenting on specific customers, but we can say that we, at this point, still have both an increase and a decrease due to the corona. And it's the same thing there for how long it's hard to go.

Okay. Okay. But we can assume that this contract is still in place?

Yes, yes. So I mean we have not lost any contracts. It's volume that is increasing heavily. But we have more decrease than increase as you see from the total.

Yes. And then we also talked about interest in back source back in Q2. And I assume that this has continued. And could we see some contracts, new contracts in the near term as a result of this?

We are constantly signing new contracts, and it's not always we are allowed to make a note of that. And normally, we also start with a rather small volume, so it's not really called for a press release anyway. The dialogues are increasing, meaning that the number of contracts signed will also increase, meaning that eventually the load will also go up. And I just like to refer back to your previous question, I think it's important to restate that we have not lost any customers. We have not lost any products, actually, ever in HANZA's history. So the downturn is completely connected to lower sales from our customers. But on the other hand, we are now gaining new market shares. And I think that is, in general, when it's in low economy, you should focus on getting more market shares. And then when the economy goes up, you have even nicer ride back.

All right. Perfect. And then you have announced some contracts back in Q2, for example, DNA Analyzer, that, I think, was due in Q1 2021. Is this still on track? Or has there been any change in time line?

No changes, and that's a very interesting contract. And we have, as I said, the other contracts also with our design departments, which is really an advantage for us to help our customers to bring out new products.

Yes. And then also the investments you're making now, the Resistor program, do you already have orders that will utilize this capacity? Or is it more of in preparation of increased demand?

So it's a rather long term. When you do investments, you can have a lead time of up to 6 months before you see the machine up and running. So it's important to do these investments. That's part of our strategy 2022. We -- I have a firm belief in our business plan and our way to get more customers in. And that means that we have to prepare also the organization for that. So we are glad to have reopened this investment program. It's really necessary for the future.

All right. And then lastly, I have to ask, given the rise in cases and lockdowns in Germany, for example. Do you have any indication of the potential impact compared to the first wave? I know you mentioned the risk of a second wave in the last report. So I assume you are well prepared for this.