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

Okay. I think we can start now. Still some people joining. Good morning. Really, really nice to see so many people here today. A warm welcome to you all. And of course, a warm welcome to those of you following this through the audiocast. Today, we give the presentation of HANZA's year-end report live from Tocksfors, Varmland, Sweden. And I'm Erik Stenfors. It will be my pleasure. I'm the CEO of the company. A pleasure to give you an update of our company, together with our excellent CFO, Lars Akerblom. And we have an interesting presentation for you today. We have brought HANZA to a whole new level last year, and we will walk through the major events of that year. We have an agenda. Looks like this. First, we will go through this from the operational point of view. Then Lars will walk us through the financial development. Next, we will give our vision of the future, both in general, what we think about the market development and in particular, HANZA 2025 and beyond. And we will, of course, end this with a Q&A session. Please use that. It will be possible both to ask questions in this room and of course, through the web. So let's get started. And to make this easy to understand this presentation, I would like just to take a minute to repeat our business model. So, our vision is manufacturing made easy. It can be quite complicated with outsourced manufacturing due to the fact that you need so many different contract manufacturers and also they might be located on different places. Result might be, as you see on this slide to the left, a very complex supply chain. So, we have created an alternative, local complete manufacturing, grouping together different kind of factories in areas like here in Varmland, where we can do parts production and parts assembly. And by the way, we are now sitting in the new assembly hall. Sometimes still, it can be complicated for the customers, the product owners to do this transformation because it normally includes manufacturing transfer. And that's really a science of its own, something that can be complicated. So therefore, we also have something we call MIG manufacturing solutions for increased growth and earnings, a service where we help our customers to do this transformation. We have quite good knowledge of that. So, this is a theory. This is the idea behind HANZA. If we now move to execution. It's a tiny graph, but it shows the sales development of the 16 years we've been around. And I trust that this will continue to grow. We have a steady growth, both in good times and bad times. Why is that? Because the need to streamline your supply chain is almost the same. When the wheels are spinning, you like to optimize, get better delivery accuracy. When it's a little bit slower economy, you like to lower the costs. And that's also why we've been able to present new orders during 2024, even though it was a recession. Now, we do a development of HANZA in very close cooperation with our customers. What we do is on-demand. Like the hall we are in now, the new factory, on-demand from our customers. The same thing apply when it comes to our acquisitions. So, we are not opportunistic trying to find a good deal. Rather we're looking for companies where we can really increase our customer value. We have long discussions with our customer -- with a potential acquisition, and then we try to find companies where we really can increase customer value. And this is then the reason why we are able to grow so fast. But necessary for this, the key for this is that you have a very well-organized company. The organization we have made is decentralized, modular and scalable, meaning that we have created these kind of manufacturing clusters, pushed out the decisions, decentralizing the decisions because they are much better. If they make decisions here in Tocksfors of a new investment, it's much better than Lars and me trying to find out what kind of machine is needed. And then modular, meaning that the clusters, they are like siblings. So, you have to manage yourself, but you also have to help each other. And this means that HANZA can grow in several places at the same time. We can expand in Germany, Sweden, Finland at the same time, thanks to this organization. Another thing that is needed if you want to be a fast-growing company is some kind of fuel. And for us, the fuel is cash flow. And that's why you hear us talking about this at every presentation. I'm sure that Lars will talk a lot about our cash flow today as well. So these are some, let's say, the features of HANZA, what separates us from the other companies in the industry. And against this background, I think it will be fairly easy to browse through all the activities we have done in '24. We started by ending funding that was already ongoing by the late '23, and I will come back to the reason for that. Then we acquired this large company, Orbit One, one of the best EMS companies in the Nordics, highly skilled, extreme competence, however, lagging a bit behind when it comes to the margin. So, it was downloading the margin of the whole group. Then also, of course, came the recession. So given this fact, the large acquisition, downturn in economy, we had to work a bit with our operational strategy. We have something called HANZA 2025. That's our core strategy. But in addition to this, we had to do, let's say, an appendix to that. We call it ONYX to handle the new circumstances. And then our financial targets, and this is important, our financial targets, they are not something just hanging in the air. We guess the future. Rather, they are a consequence of our operational targets. So, when we review our operational targets, we also have to look at our financial targets. And conclusion was 1 year ago, we made a guidance that we will actually increase the operating margin target. We had said it that we will come back to 8% by the end of 2025. Now the new target is 8% for the full-year 2025, a consequence of the new operational plan. A bit proud that we were able to guide for this already a year ago, and it still remains our target. Okay. Let's look a little bit more at our ONYX program. It was in 3 steps. We will see the financial consequences, but it was, of course, integration of this nice Orbit One. And it also -- of course, we needed rightsizing due to the economy, and we needed a number of other activities, but the result was there. So, we will see now from Lars that Q1 was the lowest margin in 2024 when we were down to 5.3% and then 5.7% in Q2, 6.7% in Q3, now 7.1% in Q4. So, we are on track with our target 8% next year. And then we still have the original strategy, HANZA 2025. Now, we're talking about the appendix, and that embraced a new factory in Estonia. We actually had an opening like this in Estonia before the summer. And that's a fantastic factory. You see it on the picture here. Look up to the left, you see the new extension of the sheet metal factory. You see it's connected to another building. The reason for that is that when you have made a sheet metal box, you like to send it somewhere and fill it with something. The same principle applies here that now we are in the assembly hall close to our sheet metal factory, which is just next door. A few words about sales. As said, we had a rather good year last year. We brought in new customers. Some worth mentioning is Munters. I think you know about this company in Sweden. Also, we had the single largest order from a defense and security company. It says SEK 134 million. It's execution starts now. And I think even that number can be slightly higher. And then also, we brought in some MIGs. Now it's important again. You know now what the MIG is. So it's manufacturing transfer. Germany, they have been holding tight to the manufacturing, and not been as keen on outsourcing like we are in the Nordics. Now the finance situation has changed a bit, and they are more easy to discuss outsourcing. We had a company here, WISI GmbH, had their manufacturing for 100 years, supply chain locally, which we can do with MIG and then move to our cluster in Central Europe. Huge customer value for that company, a large order for us, at least EUR 10 million per year. Then we have something else interesting, really worth mentioning, a Canadian company, Mitel. They are notably asking us to move manufacturing from China back to Sweden. So back sourcing, which is also some kind of trend right now. The 2 interesting MIG contracts right there. Then we realized we need to move forward. We need to look at the next step of HANZA. I will come back to that. We need to strengthen what we call HLT, HANZA Group leadership team. And it's been consisting of myself, Lars Akerblom, Andreas Nordin, here somewhere, our COO. And then we made an expansion of 2 new positions. So, we brought in Diana. She's been around on the HR for a long time. Probably if you've been following us, you have heard about the HR due diligence we are doing. So when you buy a company, not only just check finance and check legal stuff, but also check the company culture, very important. So, Diana has been working with us for a long time now. She's on a C level. Also Mattias, sitting here is our new CSO, will work with our strategy, an important expansion of our group leadership team. Then we ended the year by signing a contract to buy a new company, about the same size as Orbit, but now in mechanics and now originating from Finland. The factory, also we have been discussing with for a long time, that fits our acquisition parameters. This is also something we have shown before. If you look at the box to the left. It's no surprise if you've been following HANZA really. We have been talking about Finland for a long time, and we have been saying that HANZA 2025 is all about increasing in existing geographies, existing technologies, well fit for our strategy. But on top of that, we must check, of course, the company culture. And that was what made the integration of Orbit One so easy. So Diana, also present here today, was tightly involved with looking at the culture, so it will be an easy integration. And also, we have Jukka Haapalainen, the CEO, with his team, which is extremely good. Customer base, we don't like overlap. We haven't done the closing of this deal yet, meaning that we cannot talk so much about the customers, but there is no overlap with HANZA's customer. Financials, listen to this. They also had an opening just a couple of weeks ago in Oulainen in Central Finland of a brand-new factory. That's the one on this slide. So many opening ceremonies. And I think it's really well done. Lars will come back to the financial of this company. But to open a new factory transfer, we are also opening a new factory, but it's adjacent to the existing factory. Here was a full transfer to do that in a year of recession and still keeping good financial numbers. So, that was really well done. So to summarize the year, it's been full of activities, and we are moving into 2025 at a whole new level, really ready for the future. And I will come back to the future in a few minutes, but now I will leave the floor to Lars, who will start to talk about sustainability.

Thank you, Erik. Yes, sustainability, and I will walk you through what we have done on sustainability part and then look into the financials, and finally look into how will HANZA look together with Leden. And the main activities in sustainability has been to prepare for the CSRD reporting that we will do in 2025. So, we have done this DNA, double materiality analysis in 2024. We have also calculated the emission, Scope 1, 2 and 3 for HANZA. And then we have continued to work with other sustainability parts like the hub to be able to communicate and get the information regarding HANZA out to more of the employees in HANZA than we previously have done. The building that Erik mentioned, the new factory in Estonia, we also added sustainability parts, that solar panel on the roof and other smart ESG functions to reduce the emissions. And we also have a leadership program educating the leaders in HANZA in communication. Looking into the financials. To summarize, it is according to plan. It is according to what we have communicated for the last quarters with one exception, and that's a positive exception. We have an extremely strong cash flow, and I will come back to why that is important when we are now entering into Leden and merging together with Leden. We still see a quite weak market. We have an increase due to acquisitions. So the increase of sales is 20% in Q4, but a reduction of 5% if we talk organic growth. And that is, of course, due to the lower market. Erik said that we are on plan to reach the 8% target. So in quarter 4, we reached 7.1% if we exclude the one-time cost. And for comparable units, excluding the Orbit One acquisition, we are on 7.7%. And for the full year, we are on 6.2% in EBITA margin, and that led to earnings per share of SEK 2.5 per share. Looking into the different segments, we see a similar trend that we are increasing the sales due to acquisitions. So in main markets, it's up 24%. In Q4, we have a negative organic growth of 3%. And that is mainly due to the weak market in Germany, that affects the main market. Other markets are up 17%, an organic decrease of only 1%. And what we see is that the main markets are slightly decreasing their margin, but other markets are increasing. That is what we also saw in 2023 and mainly partly due to vacation period in main markets in the end of the year. Coming into the balance sheet. And again, we had a fantastic strong cash flow in Q4, mainly due to the decrease of working capital and that we have seen for several times when we do acquisition that it takes a couple of quarters, and then we can fully utilize our experience on how to decrease working capital. So the cash flow was SEK 289 million in Q4, and that's the highest cash flow we ever had in 1 quarter. And that also been saying a couple of times that we will reduce CapEx. We will come into a period when the CapEx is lower than the previous years, and we see that in Q4. And the main CapEx is actually this building that we are now presenting the Q4 reporting. And we continue to see that the CapEx will continue to be on a lower level compared to previous years. And the positive cash flow led to a decrease of net debt. And if we compare it to the EBITDA, we are now on 1.6x. And that is, of course, extremely important when we are merging and taking in Leden and adding up the net debt to be able to close that company. So, we come in into Leden with a lot stronger balance sheet than we actually had when we signed the agreement. We have also, again, reached over 40% in equity to asset ratio. We are on 41%. And the Board decided to propose to the general -- Annual General Meeting a dividend of SEK 0.80 compared to SEK 1.20 a year ago. And that is according to our policy for dividends that should be 30% of the net profit in HANZA. Shareholdings, we are proud to see that the AP-fonden is continuing to increasing their owning in HANZA, and they are now on 7.4%. And also during the year, Erik has continued to invest in HANZA and is now owning 1.4% of the group. Coming into Leden and the acquisition. And pro forma for 2024, we are on approximately SEK 6 billion in revenue. We have not -- as Erik mentioned, we have not closed the deal. We are waiting for approvals from authorities, but we expect this to be able to be done within a few weeks or so. And together with Leden, then we will be close to our financial goal of SEK 6.5 billion. They are operating on a slightly lower margin than HANZA. So, they are on 7%. We expect that with the concept that we can bring into Leden, the HANZA concept, we expect the margin to be increasing. We also expect that with Leden, we can reduce the CapEx. They are well invested and not in need of any major investments in the coming year. We also expect, again, like with Orbit, that within a couple of quarters, we will be able to reduce the working capital and have a good cash flow from the acquisition of Leden as well. And by that, I leave back to you, Erik.

Thank you, Lars. So, we continue at Tocksfors, Varmland, Sweden and also through the audiocast. And let's talk about the market. This decade has been like nothing else. It started with the pandemic, and we saw that demand went down, then there was a bounce back. Remember, we had some component shortages. It was a quite tricky situation. Then the economy went down again. What do we think about the future? Well, our forecast is that it will not go back to how it was 2 years, 3 years ago when you can have double-digit percentage organic growth from your existing customer base. Rather, we expect it to go back pre-COVID to a more normal situation, meaning that again, the customer base will start to grow, but you also have to add new customers. So, focus is still to get in new orders and to gain new market shares. If we look at HANZA then in particular, 16 years old, we have built the company in a structured expansion way. We put milestones 3, 4 years ahead with operational targets and that leads to the financial targets. We have so far passed and succeeded with 3 milestones. We are heading for milestone #4, HANZA 2025. And then we will launch the next plan. So we have already said that right now, we are working just with the existing technology, the existing geographies, but next step will be geographic expansion. Where do you ask? Well, it's really not up to us. We are on demand. We have a close dialogue with our customers. Our new CSO, Mattias, is working with that. There are a number of options, but I will give this as a cliffhanger. We will not reveal it today. But within a year, we should be able to tell what will be the next expansion step for HANZA. And by that, we open up for questions.

[Operator Instructions] The next question comes from Jakob Soderblom from Carnegie Investment Bank.

I have a super short one actually today. It's more related to customer disclosure. You've been talking a bit before on planning to release something in the coming year regarding this aspect [ wave ] and if I understood you correctly more, talking in a more structured way about customer segments and so on. Do you have any update on this that you can be able to tell us something more about?

Yes and no. We have not come to that point yet, but we have said that I could describe it that we have to give a more detailed specification of our customers. What we can say today is that also after the acquisition of Leden, no customers will come up to this magic 10% of revenue. And if you group together the 10 largest customers, they will still be below 50%. But that's as far as we can come today. I understand the need for this, and we are working on this. Lars?

We are working on it. And also when we are now merging and entering into Leden, we want to make sure that we have stable figures and are able to present it with the new group.

Yes. Okay. Is this something we can expect for '25? Or are you able to say anything about the timing of this?

I will not give any promises, but as soon as possible. Yes. Sorry for that.

Next question comes from Fredrik Nilsson from Redeye.

I want to start with a question regarding your current customers. I mean it's always a tricky question, but I know you have dialogues with them and so on. So, perhaps you could tell us what's your best guess regarding the demand from current customers when you look into 2025? What do they say?

Fredrik, you should be here. But I will give you an answer, of course. And it's the same, I would say. We saw the downturn in the economy a year ago when we saw some segments still growing like defense and energy, and we had other agriculture, forestry going down. Nothing much has changed. We see the same demand now on a new lower level, and that's why we are so eager to compensate with the new orders and new customers. So, I would say no real change, if that's an answer to your question.

Yes, yes, sure, it is. And I suppose that, I mean, looking at your current facilities, you have the capacity for at least SEK 6.5 billion in sales. But I mean, will you need further investments after that? Or what's the capacity in your current facilities approximately?

Thank you. Very good question. And that's also what -- when we work with our operational plan, we say that we have to be able to fulfill what is the financial target plus VAT or something. So, a buffer we have for this SEK 6.5 billion in the existing premises.

Okay. And last question from me. You are at about 7% adjusted EBITDA margin now in HANZA and Leden coming in with about the same. And you have an 8% target for the full-year 2025 and the market might not be that helpful currently, but I suppose you are still confident in reaching that target, but could you elaborate a bit on the way there, considering it's beginning in the next quarter?

Yes. Two comments. First of all, we are not starting from scratch. We have done a number of activities in '24. So, that would help us this year, both with profitability and sales. And then secondly, we saw the strength of our concept into a traditional contract manufacturer when we merged with Orbit One. Actually, the MIGs I was talking about, they came from relations from Orbit One, but was an expanded to MIG in our concept and that could as well happen with Leden. And yes, I think that is -- so that's a fair answer to your question.

Yes, yes, it is. Sure.

Let's see. Are there any more questions from the telephone conference? Otherwise, we have questions in the room. Oliver?

The next question that comes from Lucas Mattsson from Inderes.

A lot of good questions has already been asked, but just a couple of ones, additional questions from my side. What would you say are the main moving parts such as demand, price, costs and so on that will determine if you will reach your sales and operating margin target for the full year of 2025?

I hear it rather poorly. Could you repeat the question little bit higher?

Yes. Sorry. What are the main moving parts such as demand, price, costs and so on that will determine if you will reach your sales and operating margin target for 2025?

We always go in this direction that the cash flow is #1, margin is #2, sales is #3. That is a way to create cash flow and margin. The cost structure, we have really worked with that already. So, we are done in existing. Comes Leden, there will be more synergies, of course, on that side, on the cost side. Also, we expect sales synergy from that. But also, I'd like to again bring in Germany because Germany is a huge opportunity for us. We've been waiting for Germany and their in-source manufacturing for many years, and now it's happening. So, that's also a component that will help us to fulfill our targets this year.

Yes. That's very helpful. And second question, how do you see the pricing environment in the industry right now? Is it -- would you say it's more normal or more challenging or milder as we speak? I don't know. We are not in the industry. We are outside the industry. So, we are trying to offer new kind of supply chains and added increased customer value, meaning that if we look at the deal again with the MIG, then we say this is our margin. We need to have that. We will relocate the manufacturing. We will have huge advantages, but we will keep our margin. We're not -- in that case, we have no competitor to discuss with. So, we are not bidding on that. That's something the service we do. Sometimes for -- of course, for some of the orders we have, we are in the old industry and benchmarking against other contract manufacturers. But it's -- I wouldn't know. Maybe we should bring in our Head of Sales, Veronica. If somebody gives her microphone, what do you think about the pricing situation?

Well, it's just to say with regards to the MIG that we offer a certain service that is worth paying for because it gives us benefits. But if we're looking to the normal contract manufacturing, of course, there is a more benchmark prone market out there. But then we need to, as Erik said, to create this extra value to our customers. Would that be a fair answer to the question?

Yes. That's very helpful.

Thank you. And thank you, Veronica. Sorry for shocking you.

I suppose I take the next.

There are no questions at this time. So, I hand the conference back to the speakers.

Okay. Good. Because we have some questions from the audience that have been waiting now.

Perhaps I could start. Oliver from Aktiespararna. I was wondering if you could elaborate about your integration strategy for Leden Group. How will you consolidate volumes in the factories? And will you be able to reduce the number of staff or..?

Maybe we should bring in our COO, Andreas Nordin, on this since we have them all present now.

The work will, of course, start when we get Leden and when we close the deal, and we are going to work together with them. We're going to look into the factories that we do have today, and then we're going to analyze where is the best place to produce a certain product, and then we're going to look into what is the best organization to serve that factory base and also then, ultimately, create the value for the customer.

Okay. I see. So, we might have to be on the lookout for more information then.

It will be more information as long as we continue and have more access to the company as well.

I see. Well, I guess there is no need for my further questions then.

Anders Roslund from Pareto. I had a question regarding your growth target of SEK 6.5 billion for this year. I assume that you need some organic growth to get to that target. And given your rather cautious view on demand, it means that you expect quite a lot from new business coming on board. Could you elaborate a little bit? Is it possible to reach that target without any market growth?

Yes. Again, we don't expect the market to grow. We must make our own new orders and find a new way to grow at this point. We do expect the market to pick up, but it's nothing that we can base our forecast on. Our forecast is based on this level. Then we have a number of activity. I wish to tell you more details, but we stay firm that we will reach this goal this year.

So it's not only the orders presented here, the MIG orders, the defense that are cooking, there are other orders as well? Or how should we see it?

We will be able to announce more orders. But then remember that today's orders are tomorrow's revenue. So, there is a time between order and revenue. We have already announced some orders last year that will be sales this year.

Yes. Forbes also with Pareto. On the margin target, could you discuss perhaps how you expect to reach there for the full year, what the cost savings will help you with, what the new orders will help you with and then also where you see the highest potential if it's in main markets or other markets?

I'll leave that to you.

As Erik said, the ONYX programs that we launched in 2024 have not yet reached the full effect. So there, you have one cost saving. And then we are also bringing in new customers with better margin, and we are making investments to improve the efficiency and increase the profit as well. So if you see the trend coming from a little bit over 5% in the beginning of the year to a bit over 7%. And still, we have not fully integrated Orbit from a profit margin perspective. So, we are on the right track to reach 8% for the full year in 2025. It doesn't mean that we need to be on 8% in Q1. But for the full year, we are confident that we will reach 8%.

We were -- some comments that we were a bit pessimistic a year ago when we said that we don't believe this is destocking, and we think this is a recession that will take some time. Then there were remarks that we were a bit optimistic on bottom when we said we can still have our sales target. Now Lars has shown that we are on SEK 6 billion. So in the end, I think the history will show that we were quite realistic.

Great. And just a follow-up there on profitability comparing with the previous quarter, Q3 '24, you had a very nice step-up here in other markets. How much is the cost savings helping the margin and how much is ramping up new projects?

We haven't said how much is cost savings. That's something I think I can't comment. You have some season change due to vacations that hits the main markets a little bit more than it hits the other markets. But we have said for a long time that the other markets shall come closer to the main markets in margin. So, this is a trend that we hopefully can continue to see that other markets will reach a margin closer to the main market.

Please use the opportunity. Any questions you might have?

Oliver?

Yes. Oliver, Aktiespararna. I was wondering, perhaps this question could be addressed for Veronica again. Sorry to put you in the spot. Regarding your contracts that's outside of the MIG projects, how common is it with the dual sourcing that your customers are using, well, a competitor from your market really?

Let's see if it's on. Yes. Of course, there is a strategy in many of our customers to have dual sourcing. But what we actually can see with these customers over time is that they start placing orders, for example, only PCBs or only mechanics, for example. And then after time, they see the value that we can bring and start adding electronics, cables, mechanics and put it together in final assemblies. And then all of a sudden, we are all you need is one. So, that is a sort of trend that we see. Anyone wants to ask the last question? Otherwise, I would like to say thank you to Erik and Lars, and we will give them a big applause from Tocksfors.

Thank you, and thank you also all of you attending this and the audiocast. I hope that you keep following HANZA, and we will talk soon. Bye for now.