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

Hello, and welcome to the HANZA audio cast with teleconference Q4 2021. [Operator Instructions] Today, I am pleased to present CEO, Erik Stenfors; and CFO, Lars Åkerblom. Please begin your meeting.

Thank you, operator. Good morning, everyone, and a warm welcome to HANZA's year-end report 2021, which we released this morning. We will present this, I'm Erik Stenfors, the CEO of HANZA; and I will do this presentation together with our CFO, Lars Åkerblom. And we do have some exciting development of our company right now, and I think we should get right to it and move to Page #2. So the agenda. First, a short introduction to HANZA. Then we will talk about the highlights last year. I will pass you on to Lars, who will give you the financial development. And finally, we will have a few words about the future. And of course, also we will end with a Q&A session. So we move to Page 3. We offer complete manufacturing services. That is we have a unique combination between offering parts production and parts assembly, as is illustrated to the right on this slide. We are proud to have customers from industry leaders such as defense companies, Saab; the mining company, Sandvik; energy company, ABB; metal company Epiroc; recycling company, Tomra to name a few. And we are up now to an annual sales of EUR 250 million. And I have about 2,000 colleagues distributed in 6 geographic areas, as you can see on this map, areas which we call manufacturing clusters. We move on to Page #4. This graph shows the exceptional growth we have had since we started also, we've been running around 17% in annual growth rate. And the reason for this quick growth has been the 4 building blocks of our business model. And I'd like just to quickly walk you through with these. So first of all, we don't have our own products. We are a contract manufacturer, meaning that the success of our customer is the success of HANZA. And that's why we have been focusing on customer value and also why we have created this cluster concept that helps to lower cost for our customers and also increase flexibility and given a number of other advantages. So we are -- we have mainly grown organically in this way. but we also add acquisitions; number two, selected acquisitions. We don't buy a company to be bigger, but to be better. So we choose companies that are going from technology, geography, maybe capacity. And as we then constantly are recruiting people to HANZA and also we add colleagues to these acquisitions. The corporate culture is really important, so we spent a lot of energy on that. And we've also created an organization which is modular, that is it's scalable, which makes it more easier than to grow. And number four, we have kept a long-term perspective. If you want to keep your balance, you need to keep your eyes on the horizon. And we have tried to make long-term decisions. It helps us a lot, example is the pandemic. We saw during 2020 how some of our customers, their sales were plummeting, and we had to discuss whether we should maybe lower the expansion rate. Maybe we should postpone some investments, but our decision was to accelerate. And that was just because we do have the long-term perspective. We realize that, of course, the pandemic will end one day, but also that these have shown the weaknesses of the global supply chain, and that will drive sales to HANZA. So that's why we instead launched the largest expansion program that we have had in HANZA since we started the company. We turn to Page 5. And here you see some of the highlights from last year. We've done a total upgrade of our operations. In Sweden, we did a number of investments. We opened up a new area for coating of electronics. In Finland, also, we did some good investments, and we acquired a contract manufacturer of mechanics. In China, we decided to move into new and larger premises and we also added technology. In Estonia, we have been building a new plant for complex assembly, which will open just next month in March this year. And in Germany, when the restrictions were lifted last summer, we could continue with our expansion plan. and we acquired a new company, a contract manufacturer of electronics. And the last move of this 2021 was actually last month, when we decided to expand also our Central Europe cluster. So we are increasing our existing building, but we have also bought an adjacent building in total, it's 2,000 square meter expansion in Central Europe. And of course, all this gives a very strong and good platform for the future. But before I come back and talk about the future, I will pass you on to Lars and the financial development and Page #6.

Thank you, Erik. And I will present a solid growth and profitability and a strong and good balance sheet that the short part. Looking into the P&L, we have still a reduction of both sales and earnings due to the material shortage that we see in the market. The roadmap 2021 that Erik just told you about, gives us a really good platform for 2022 to continue to have increased sales and good profitability. And what we see in the sales side is that we have quite good growth in both quarter 4 and in 2021 result. The organic growth in 2021 is approximately 12% and increasing during the year. So in quarter 4, we had an organic growth of 30%. The earnings is also a lot higher compared to last year. We are running in 2021 of approximately 5.7% or 5.8%, depending if you include or exclude the onetime cost. And in quarter 4, we are on 6% including onetime costs, 5.5% excluding the onetime cost. And the onetime cost is a repayment of AFA insurance and also the integration and transaction costs for our latest acquisition buyers in Germany. At the time for the acquisition, we actually expected this to be EUR 1 million and the main part to be taken in quarter 4. But fortunately, we see increased demand in Germany. So we see that this cost will be -- instead of coming in quarter 4 2021, we see that it will be -- hit the P&L in 2022. And it might also be lower than the EUR 1 million that we estimated at the time for the acquisition. We move to Page 7. And to the right on the map, you see how we split HANZA into main markets and other markets. And we still see this temporary imbalance between the profitability in the main market and in other markets. And the main reasons for this imbalance is a combination of the fact that we are moving into new premises also going back to what Erik said in the roadmap 2021, and that has a temporary negative impact on both sales and earnings, but also the fact that we have very strong organic growth in other markets. And that together in combination with the material shortage, gives temporary lower margin in other markets. And what you see is that in other markets, we are running at the margin of 3.6%, and in the main markets, we are on 8.3% in 2021 and actually on over 10% in quarter 4. We can move to Slide 8. In quarter 3, we had a temporary slowdown of the cash flow HANZA has during the years have had a quite strong cash flow. In quarter 3, we saw a downturn in the cash flow, but we're glad to see that the cash flow has increased in quarter 4. We are on SEK 60 million in operating cash flow and SEK 126 million for the full year. The net debt is increasing during the year. That is mainly due to the big new building in Estonia but also the fact that we have made 2 acquisitions. So the total increase of the net debt due to an acquisition is approximately SEK 180 million and SEK 100 million in quarter 4. But if we compare the net debt to the EBITDA, we are more or less on the same level. We are approximately 2x the EBITDA and a year ago, we were on 1.9. So there is still quite okay net debt if you compare it to the EBITDA. Also positive when we reach the profitability and the net result is the earnings per share. that has increased a lot, and we are now in the full year on SEK 2.25 and in quarter 4 at SEK 0.70 in the EPS. And in the press release, in the quarter, we see -- we've seen that the Board of Directors, they will propose to the AGM dividend of SEK 0.5, and that is the double amount per share compared to last year, and that will lead to dividends based on today's number of shares, so almost SEK 18 million. Move to Page 9. HANZA have today approximately a market share of SEK 1.7 billion. And among the owners, we have board members, the CEO and other top management and they own approximately 3.7% of HANZA. You can see down to the left that the last year has been extremely good development of the share price in HANZA. Otherwise, the main shareholders are more or less the same as they've been for quite a while. The main owner is Gerald Engström, also member of the Board and the Chairman of the Board, Francesco Franzé and Håkan Halén also is board member is among the main owners. By that, I'll leave back to Erik on the page 10, and the future outlook for 2022.

Thank you, Lars. And yes, a few words about the future. First of all, we can see that the trend is our friend. Our analysis in a year ago that this pandemic would actually drive sales in our direction is correct. We have a number of customers trying to relocate the manufacturing. We see a back sourcing trend from Asia to Europe, which is really helping our sales. And in addition, now we have finally started to explore a new customer market, Germany after restrictions were lifted. And we already have sales to Finland, Estonia and China from Germany. So that is really positive. And also, as I explained, we have done a total upgrade of all our 6 clusters. And Lars also mentioned that we have a solid financial situation. So all this together, gives that our assessment is that 2022 will be another successful year with profitable growth. And then at the end, may be a cliff hanger, but an important reminder. We have developed HANZA in steps, we call them phases. And now we are in the end of Phase #3. And the aim of that phase was to establish HANZA in Germany, that is done now. And it means that eventually, we will open the Phase #4. And these special phases, these activities are done in order to further accelerate the development of HANZA. So that will be announced eventually. But I will come back to that. And now we end this part of the presentation and we open up for any questions on Page #11.

[Operator Instructions] Our first question comes from the line of Adrian Gilani of ABG.

It's Adrian here at ABG. I'd like to start off asking a question on the Q1 effects of where you mentioned you've seen high sick leave on Omicron cases. And I was just wondering if this primarily what you expect higher personnel expenses? Or have there been instances where you've also lost sales due to sort of not having enough staff present in your facilities.

Will you start, Lars?

I can start. You asked about the personnel costs. And it can be that we see some slight increase of personnel costs, but that is not the main issue. The main issue is temporarily the sales it's not like we are losing any sales. It's a delay of sales due to capacity reasons. So that is the main effect we see on the pandemic that we have absence in the factory leads to lower sales temporarily, but we're not losing any sale.

I can add to that also. And Adrian, thank you for calling in. Yes, it -- actually, we never lost the customer since we started HANZA, that's part of our concept that we are more married to our customers. But what we are seeing here are the wages of the pandemic where we can have 40 to 50 people away from the factory, which lower our capacity and the same thing with the components, but we have had heroic efforts from our colleagues. So we've been able to solve our customers' challenges. Sometimes, it has been extra costs involved with that. But the main thing is to get the delivery to our customer. And this is also a transient. This will end not so far from now.

Okay. Is it fair to assume if you've had some delays here and there that the sort of irregular capacity utilization might pressure margins a bit in Q1?

Yes. That's what I'm trying to describe in other words, we have to do extra efforts in order to secure the deliveries and the customer first. And sometimes, yes, you have to walk the extra mile. But again, this is a very, very special situation we have with both growing, having component shortages expanding and then having also COVID cases in the factories. And it will not be for so much longer now.

Okay. That clarifies it. Regarding buyers, we saw in the notes that the acquisition contributed negatively to Q4 earnings, which was expected. But do you expect buyers to be profitable from Q1 already? Or will it take more time for this?

Now you ask something that we cannot answer, I think. But of course, we have not given that forecast. Correct, Lars?

No. We have not given any details on when we expect buyers to be profitable, but also buyers as individual company or site is not of the highest importance. It is the cluster in Germany that we are focusing on and developing the offering to the German market and increasing the -- both the sales and the profitability in that cluster, and that is the main reason for the acquisition.

I'd also like to add to that, that it could even be an advantage that the profitability was low because that reveals that there is extra capacity and as Lars also mentioned, we were clear when we bought this company that we do it in order to get more confidence in electronics, but also more capacity, meaning that most likely we will increase the sales and with sales then comes profitability.

Okay. Moving on to the main market segment. If -- I mean you had over 10% operating margin already. But if we make sort of a rough adjustments for [indiscernible] and SOP, I calculate that the remaining segment has almost 13% operating margin. Would you say that the rest of the segment, including the new acquisitions, is currently at sort of mature profitability? Or is there even room to expand margins in the remaining segments as well, excluding the acquisitions?

I can give you the mysterious answer. So we have been clear that the mature clusters have a much higher margin than the one we are building. And eventually, we expect all the clusters to reach some similar margin. But then we have to add the next step, and that's what we'll talk about in the next phase. Of course, will be a fourth phase and then we expect to be even more profitable and maybe even grow faster. So it should be that in this phase, we are with this roadmap, and bringing up the other clusters up to speed and then comes next step. So I think that we have the plan for continuous growth and profitable growth.

Okay. And in the other market segment, you talked a bit about the expansion programs currently running and how that's affected profitability. Is it possible to quantify this effect? What would sort of a normalized margin be here if you hadn't had the expansion programs running?

You asked a delicate questions, Adrian. I don't know if Lars would like to comment on that.

If you could give a rough -- obviously, you can't say the exact figure.

I can give you some range. We have talked about the Swedish cluster, which was the first one. We're well above 10%. And then if we -- that cluster saw the quickest drop during the pandemic. We had a huge drop in sales, and then we announced that we were down to 6%. So maybe there may be some scope or margin for mature clusters. Lars, would you help me to clarify this?

No. What we have said there is that -- just the fact that cluster is based in what we call other markets or in the main markets should not have that big of an effect in the long-term profitability. And we know our financial goal is 6% in the group as total on the EBIT level, meaning that, that is what the combination should to be able to achieve at least. So I think if that gives you any sort of information that we really don't see that in the long term that the other markets should be less profitable than mature market.

And then this EBIT margin of 6% is inclusive of all the activities we do. So we have the Business Development segment also. So we should fall down, let's say, to 6% EBIT, meaning that the customer had higher margin, of course.

Our next question comes from the line of Fredrik Nilsson of Redeye.

Regarding the strong organic sales growth in the quarter, could you give us some rough estimations about how much do you believe is related to a peak gap from the depressed levels in Q4 in 2020 due to COVID and how much is related to an underlying increase in demand due to back-sourcing and such change as you mentioned.

Yes. Fredrik, thank you for being on the call. I don't know, Lars, would you like to dig into that? Or should we -- again, we will not be able to give numbers more words about this.

You start, I can fill in later on.

So again, the politician answer is the combination. We do see a strong growth of our existing customers. We do see a very strong order intake from new customers. And on top of that, we have a backlog. We are fighting with -- where we, as said, have the challenges both with COVID and the material shortages. So it's that combination. But if you can apply the long-term perspective, it's clear that maybe even we were a bit ahead of a lot of time in our business concept. We created HANZA in order to have an alternative to a contract manufacturer where there are a number of advantages that have a complete manufacturing close to the market and then we were mainly thinking about them. There's a cost reduction and the flexibility increase and helping the environment with less and shorter shipments. But now the pandemic added a new argument, and that is how fragile the complex supply chains are. So I think we will see new landscape and HANZA will be an important part of that.

Okay. Also the organic growth was strong in both segments. However, the shortages are negatively affecting the margin in other markets, but not in main markets. I know you mentioned the expansions as a reason as well. But -- could you tell us why there's a difference between other markets and main markets regarding the shortages despite both having very strong organic sales growth?

I don't think we highlighted shortages specifically for the other markets. But what we have said is that they are later out in our program, Roadmap 2021, and we have some capacity issues. That's why we are also doing this. And next month, then we will open a new production holding in Estonia and all these other -- I think I talked about new holding in China and additional space in Central Europe. And all that is needed in order to keep up the organic growth. So I think we haven't really pointed out where the component shortages is more a general problem where it's a specific problem. But it's -- the other markets were later into our development program and in the main markets, and that's -- we're in the midst of that right now. And that's why we've not been able to -- in full do all deliveries.

Okay. So could you give us any rough number regarding when you expect the expansions in other markets to be finished? Are we talking like 1 year or 2 years or any rough number?

I think we've been clear on that on the press releases that we are talking in the first half year this year. So Central Europe, we said would be Q2 this year; and Baltics, we said it will come sooner. Even next month, we'll have a ceremony for that. So all in all, this should be done rather in the beginning of this year.

Okay. I understand that the expansion in itself are finished at that point, but I suppose there also might be some time before you can go at full production run rate in those expand factories, am I right or would you see that quite immediately?

Yes, you're right. Of course, there is always some initial challenges that you need to handle. But we call it Roadmap 2021, and we -- now we did the last quarter in January 2022 with under Central Europe expansion. And all in all, we are about 1 year delayed with Phase #3. Actually, we were supposed to launch Phase #4 in 2022, but we couldn't handle this because of the pandemic, but of course, there will be activities all year regarding this, but the majority will happen in the beginning of this year.

Okay. I see. One last question from me. Could you comment on the shortages on materials and components? Or is it getting worse? Or do you see any improvement?

I can talk for hours about this, Fredrik. Now you see the components now you don't. It's -- we expect constantly that it would improve, but then there is some setback, so that's out of our scope really to tell how this will be handled in the future. I don't know, Lars, do we have anything more to say about that?

No. I think that is -- yes, no.

[Operator Instructions] And that next question is from the line of [indiscernible].

Most of my questions have been answered, I guess. But I was wondering a little bit about the impressive growth, organic growth in the quarter. Do you see Germany is back on track sort of in the risk operations or there still room to improve?

There is a lot of room to improve. And I think we stated that -- yes, we stated that in the report that in the beginning when we did the acquisition in Germany, we had a provision to do the restructuring, and then we realized that it will be more over time. So it will not be a onetime cost in the Q4, but rather something we will go -- do when we go forward. But I think that Germany has a huge market. There are so many opportunities there, we just scratched the surface. And our aim now is to substantially increase the capacity in Germany for Germany, but also in our other sites, it's good that we have this capacity increase because we -- as I stated also earlier, we already see orders to several clusters from Germany. But to answer your question, yes, Germany will -- there will be much happening this year, and we expect it to be a positive development.

Okay. And maybe if you -- I don't know if you had mentioned it before, but what kind of capacity expansion, are you seeing from the expansions in other markets? If you have any sort of ballpark guidance?

Lars, can you help me with that?

No. I mean, no. What we see is that we see a continuously strong market in both other markets and the main markets. And as we say, we expect to continue to grow with good or strong profitability. So we sort of don't put out other markets, specifically or main markets specifically. But we are quite okay with the market development right now and the order backlogs and order status is still good.

Okay. And just a question regarding the gross margins. They are down compared to last year. Maybe it's difficult to judge just from a single quarter. But is it more challenging to transfer material costs customers, do you think?

No, I think that's part of our business model is that our customers pay for the material and components. So could be lagging behind a bit sometimes in both directions, but over time, it's clear that material should be paid by our customers, no more, no less. Lars, would you comment on this?

No, I think you are clear on that one that what we see is that the material prices have increased, and that has led to slightly higher sales and higher value in inventories. But otherwise, we are buying for the customers and just sort of pushing that out from the customers. So and temporarily can have a positive or negative effect. But in the long term, it's no big thing.

As there are no further questions in the queue at this time, I'll hand back to our speakers for the closing comments.

Okay. Thank you all for listening to this call, and I hope you will keep following our company, we do have, as I said in the beginning, a quite exciting future, many more things to happen. So do follow us, and we will talk to you soon. Thank you, and bye.