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

Welcome to HANZA Q3 Report 2025 presentation. [Operator Instructions] Now I will hand the conference over to the speakers: CEO, Erik Stenfors; and CFO, Lars Åkerblom. Please go ahead.

Good morning. A warm welcome to HANZA's third quarter presentation. This is a quarter in which we entered the final phase of HANZA 2025. And I'm Erik Stenfors, the CEO of the company. I will do this presentation with our CFO, Lars Åkerblom. We are in different places today; I'm in Germany, Lars is in Sweden; but I trust we will be able to calibrate our efforts. Follow our usual path; progress, sustainability, financial delivery and what comes next. And as you know, we truly value your questions so please use the Q&A session at the end. Let's then start with the progress across our manufacturing clusters. In Sweden, we opened a factory in the beginning of the year in February in Töcksfors and now we are expanding another factory in Årjäng so that's 20 kilometers from Töcksfors, 1,000 square meters that will be [ inaugurated ] in the beginning of next year. In Finland and Estonia, we are working with the Leden units. They are now integrated. We do see that sales is increasing, which is very positive, but it has also put some constraints on our capacity as we have reported earlier. Still believe that this will be handled by the end of the year. And it was great to see the attention we got at the Subcontracting Fair in Tampere in September. You see the picture to the right. On a group level, we are working with the LYNX program. So this is our program for the defense industry. We announced an order to manufacture drones the other week so initial value about SEK 40 million and the target value is SEK 300 million. We also coordinate our activities with the Estonian government down to the right. I had the privilege to meet them a couple of times. They are building a defense park close to Parnu where we have our factories. But the most important milestone is of course that we closed the deal with Milectria on October 1 and with BMK on October 15, 2 weeks later. I will go through this in the coming slides. But in summary, we see a strong finish then to HANZA 2025. So that's the strategy we announced almost exactly 3 years ago, I think it was in November 8, 2022, and the idea was to create 5 well-balanced manufacturing clusters in Europe. Let's now move on then and put this Milectria deal into context. I think we all woke up in the beginning of this year and realized it was not a good idea for Europe to outsource the defense to the U.S. and the manufacturing to Asia. We need local defense, and we need local manufacturing and as a response to this, we started this LYNX program in March this year with the aim then to allocate some capacity for the defense industry. This fits HANZA well as our offer is a combination of mechanics, electronics, cable harnesses, complex assembly. So it's a good match with the need for the defense industry. And that's why we, a few months later, signed the deal to acquire Milectria. It's a company contract manufacturing for electrical systems for the defense industry. They have sites in Finland, 2 in Estonia, we see 1 on the picture here and 1 in Abu Dhabi. This then gives us this platform which we need to increase with the defense industry. It's important that we keep the capacity of course for other customers. So that's why we are building this platform. And maybe curiosity, you see to the right we were having an opening ceremony when we finalized the deal. We had Mr. Paasikivi, well-known military expert in Sweden for that opening ceremony in Finland, and his great grandfather was actually the President of Finland. So we were having this close to the Paasikivi bridge. But to summarize, we launched LYNX in March, and we equipped it with this manufacturing platform Milectria and all within 7 months. I think this is a very rapid execution in this market where demand clearly exceeds capacity. Now let's turn to the landmark acquisition we announced a few weeks ago, which is the HANZA 2025 puzzle as we will show later in this presentation. I would rank this as Europe's most powerful provider of electronic manufacturing services. They have a leading flexibility. They have a leading quality. If you like contract manufacturing, you would love BMK. So just to give you 1 feature. If you have a contract manufacturer of EMS in this range around SEK 3.5 billion in annual sales, typically, you would have, let's say, 10 factories. Here we have 1 master plant and it's outside Munich and 70,000 square meters, 1,200 people. And therefore, this is both a large but also a rather simple deal as it mainly involves 1 main factory. But let's have a closer look at this. Founded in '94, they had their 30 years anniversary last year. The main site 80 kilometers northwest of Munich in Augsburg. Sales about EUR 300 million, a margin of 7.3%. Total 1,500 people were then in Augsburg. There’s also a very nice factory in the Czech Republic; in Israel, it's partly owned; and a sourcing office in China that by chance is just 1 hour drive from our operations in China. So they are in Changzhou, we are in Suzhou. A good fit for our strategy. It completes then the '25 strategy I will show on the next slide. It's a fantastic company with this leading quality not to be too technical. But if you have an EMS company, you measure a number of defect units per million units produced and if you have good company, you run down to maybe 200 or 100 PPMs. This company is around 5 ppm. Also very good flexibility. You can run EUR 0.5 million or EUR 20 million volumes in this same factory without a challenge. Also very good customer base and almost no overlap from HANZA. This is good. And speaking about clusters: around Augsburg, this is defense clusters you might know with defense companies of Germany. So we see that there are new LYNX opportunities within range, and we will work with this also in Germany. Most importantly, the culture. I've known these people who owns the company for many years now. I know that the culture was good. But having said that, of course we send in our HR manager to check and do HR due diligence before we do any deal. She was really happy about the people we see, some of the good people down. So therefore, we went ahead and signed this deal, and it's supposed to be then closed by the end of the year after the standard approvals from the authorities and this means that we come to an end to the HANZA 2025 strategy. If we visualize how we will look after closing, you see it on this map and it's great. You see the balance: in Sweden, 700 people; Finland, 700; Baltics, 1,200; Central Europe, 700; and Germany, 1,400. Perfect balance, exactly where we would like to be right now. And we also have 3 gateways so there are single units not clusters: 1 in China, 1 in Abu Dhabi and this partly owned unit in Israel, by the way also a really nice factory. So that's where we are right now. With that, I will leave the floor to you, Lars, and talk about sustainability.

Thank you, Erik. And I will start with informing a little bit our sustainability work, I will come into the financial figures and also come back to the acquisition of BMK and the impact that will have and how it will be closed. Starting with the sustainability. We are preparing for the sustainability report for 2025, which will be according to CSRD. So we are working with the double materiality assessment, we are working with the greenhouse gas reporting to be able to provide a sustainability report in the beginning of next year. You can see to the right; the energy use is slightly up compared to previous years and that is due to the acquisition of Leden with more heavy sheet metal mechanic work that requires more energy. We're also glad to see that we have a slight decrease in the lost time injury frequency rate on a stable level. And we also, as always, once a year do an entire employee survey and see that we are improving parts and the parts that we are not improving, we have a plan on how to work with to be able to develop that in the coming years. Looking into the financials, it's a stable quarter. It is in line with the previous quarters with a positive development of the profitability. We have an organic growth of 2%. We have a growth of 27% of course due to the acquisition of Leden. Q3 is the weakest quarter due to the vacation period. So both from a sales and profitability perspective, it is normally a weak quarter. We see to the right the development during the HANZA 2025 phase of the development of HANZA. So you can see the increase of sales during that period, and we have increased approximately SEK 2.2 billion on a yearly basis in sales or SEK 3 billion increase and SEK 2.2 billion is from acquisition and approximately SEK 1 billion comes from organic growth. We are running the old HANZA, so to say, the comparable units on 8% and remember, that is also our financial goal for HANZA 2025. We have a development that is positive. So we are on 8% and in Q2 we were on 7.8% and a year ago we were 6.7%. So we have continued the positive development on the underlying profitability in HANZA. We have informed you earlier that we have delivery challenges due to rapid growth in Leden. So the Leden part of HANZA is decreasing the profitability within the HANZA Group and that also leads to that we, in this quarter, released the earn-out of EUR 5 million, SEK 53 million over the P&L with a positive onetime cost. But we expect improvement in Leden when we are back and have capacity early in 2026. And the profitability development is due to the higher gross margin. We see an increase of approximately 4% in gross margin in Q3 this year compared to Q3 a year ago. We have more or less unchanged financial debt. We have tax rate only on 8.5% due to the release of the earn-out is not taxable and that leads to that we have an earnings per share of SEK 1.69 for Q3 and SEK 3.73 for the full 9-month period. Cash flow and again, Q3 is normally weak from a cash flow perspective and the fact that we are seeing increase of volumes in Q4 leads to that we need to increase the working capital in Q3 to be ready to be able to deliver in Q4. We have several times said that we did quite a few investments in 2024 and 2023 and now we see a decrease of the investments. You can see to the table to the right that we are decreasing the investment, the CapEx in 2025. We decreased the net debt with SEK 69 million down to SEK 1.067 billion. And what is really positive is that we have a net debt towards EBITDA of 1.8 and you can see on the table to the right that we increased it in Q1 2025 when we did the acquisition of Leden and then we over time decreased the net debt towards EBITDA and that's the way we work with acquiring companies, be able to release working capital and with a positive cash flow have a stronger balance sheet. And the equity ratio is 36%, increased 2% since the end of Q2. Looking into the segments. What we see as a general comment is that the other markets are over time quarter-by-quarter coming closer to the profitability of the main markets. For comparable units, we have in main markets reached 8.4%. The Leden part in Finland and Oulainen, which has the capacity issues, is decreasing the profitability within main markets. Also Germany, the low market in Germany is also affecting both sales and the profitability in main markets. Other markets, as I said, is increasing profitability and reach for comparable units 7.6%, which is quite a lot higher compared to where other markets were a couple of years ago. Coming back to the BMK acquisition and we had a separate call for the acquisition, but I anyhow come back to how the deal is structured. It is a share change based on relative valuation and the owners of BMK, they will get 9% each. They are 3 persons so that leads to 27% of the combined company they will get as a share change. We have called for an extraordinary general meeting on November 21 when we expect to get the approval to do this deal and shareholders of 28% have expressed that they will support the transaction. We will have -- part of the deal is that BMK have the right or will not have a net interest-bearing debt exceeding EUR 50 million. And we also have started and expect to get the regulatory approvals before year-end and be able to close the deal around new year. The financial impact, you can see to the graph to the right that it will of course have a major impact on the size of HANZA. We expect to go into 2026 with the size above SEK 10 billion. BMK is today running at 7.3% in EBITA. We expect that to increase in 2026 and we expect this acquisition to increase the earnings per share. And the net debt towards the EBITDA, we expect to be on the same level as today since BMK is having a net debt, which is in line with the net debt towards EBITDA that HANZA has that I previously said was 1.8. And also since it is a share swap, the equity to asset ratio will continue to be on the same level or even higher so well above the financial target of 30%. We expect the new group to continue to have and generate strong cash flow. And we’re also in discussions with the banks and expecting to be able to lower the interest rate margin post-closing. And by that, I leave back to you, Erik, for a conclusion of the quarter.

Thank you, Lars. So let's end this presentation with some conclusions and look towards the future. As said, we are entering the final phase of '25, and we have created a really balanced manufacturing platform as you saw on the slide previously. If we look at the targets so 3 years ago, we were running a SEK 3.2 billion company in November '22. And then if you look at the graph, you saw that we put our first goal on becoming a SEK 5 billion company and then in the beginning of '24 we like many others in our industry increased the target due to a strong '23. So we said SEK 6.5 billion and now we see we're entering '26 as a SEK 10 billion company. So also being the largest listed contract manufacturer in Europe, that's fantastic. We've also shown during this period that we can create healthy margins also with the acquisitions we make. So the companies we buy becomes stronger inside HANZA than outside. And as Lars mentioned also, we are ending this 3 years period with a very strong financial position due to then the strong cash flows along the way. And if we look then to the near future, Lars also said that we had a strong order intake so the organic growth will increase as of Q4 and then we are into the next phase. We have now a very solid foundation for the next step. We said that we're going to have a Capital Market Day as soon as we have got the authority approval closing of the BMK deal. And then we really look forward to present our new plan to you, including our new targets for '28. And by that, I think we are ready to take your questions.

[Operator Instructions] The next question comes from Anders Akerblom from Nordea.

Firstly, I wanted to ask Erik and Lars on Leden. I mean it continues to weigh somewhat on profitability. Could you elaborate and discuss a bit more on your expectations for when this should be resolved apart from just beginning of 2026 and particularly what main points you need to address in order to improve profitability here?

I can start and of course customers first so we need to make sure that we do deliveries on time where we use a lot of different capacity with overtime and splitting manufacturing over several units, et cetera. Not the best setup, but the main thing is that we're increasing the capacity of the main building in Oulainen and it's going really well. So we should be able to fulfill all the customers need by the end of this year as I stated and that of course gives a large upturn in profitability. Meanwhile, then we get some kind of compensation from this additional purchase sum as Lars stated. Would you like to add something on that, Lars?

No, I think it's quite clear and that was also the reason why we also have this setup with an earnout. We knew when we did the acquisition of Leden that they were just moving into a new factory and there was some uncertainty on how long that would take in order to get back into good margin.

Okay. That makes sense. And following up on then just your comments there on order bookings developing positively in the quarter. I mean organic growth was slightly lower than what it was in Q2, but positively, you shared their order bookings are improving. Could you quantify this a bit for us sort of and what the reasonable expectation towards year-end should be here?

I can talk in general and let's see if Lars can give you any figures, I guess not. So we are not out of the recession. We see some industry that is moving strongly now like of course defense and energy, but also mining, forestry and industry and this is giving us an upturn in the order intake. And in addition to this, we have been securing the future by taking new customers and new orders and they are also kicking in at the same time. So that's why we are really positive about the future. Any numbers, Lars?

No, of course I cannot tell you the numbers. What we can say is that we also during the quarter had a positive trend in Q3 with a strong organic growth in the end of the quarter compared to July.

Okay. That's good. And just a final question sort of more high level. I mean based on your recent acquisitions not just Milectria, but also on BMK and what you stated there about kind of defense having not been a prioritized end market for them previously. I mean 2, 3 years out, what do you think defense could realistically account for as a share of HANZA's total sales?

Again you're asking about numbers that we cannot provide. But clearly, this is the strongest upturn in 1 industry we have seen. The demand is huge, the need is huge. The missing link is capacity. There is a challenge that we don't have this capacity. As I said, we outsourced our manufacturing to Asia. Now we are in need of a local complete manufacturing, which we are offering. But I will pass the question to Lars. Do you have any numbers for that?

You are passing all the questions to me that you know that I cannot answer. Anders, you said Milectria, I fully understand. Milectria had quite a big part into defense already at the acquisition. What is important is that we are providing to all the other customers capacity. So the capacity needed for defense should not sort of move out the capacity from the existing customer that is also growing right now.

That makes sense and I appreciate that it's hard to quantify all the questions. And just to be clear, when I said defense volumes having been a fairly low share, that was BMK not Milectria of course.

The next question comes from Oliver Uusitalo from Aktiespararna.

Hope you can hear me well. First of all, regarding the growth outlook here. Of course the defense being a driver of volume going into 2026 and as BMK has quite a low part of the revenue coming from defense, how should we view growth during 2026 for BMK? Can you guide us in any way that will be very helpful?

I think that the BMK is a very good tool for the defense industry because they are not just a world-class electronics producer, they are also world-class in complex assembly. So they do complete products. I think the knowledge we have from the defense companies in the Nordics so big companies like Saab and Patria could be applied together with the strong knowledge of the manufacturing competence in this defense cluster area and the need again is huge. So of course we are already in contact with some companies. I cannot give you any numbers, but we see that the fit is really, really good. Was that some guidance for you, Oliver?

Perhaps. Well, the other question I had was regarding the low defect rate of 5 ppm. I mean can you explain how have they been able to be reaching these low levels? I mean is it safe to assume that it's anyway linked to the fact that they had this 1 huge plant or how should we think about this?

Well, I think it's almost in the water of Bavaria. Here is the place where they have built the -- have the automotive industry. And when you run large volumes, every $0.01 counts so you have to do it perfectly. So it's really the main challenge to run this automotive industry and that's of course created a lot of special competence in this area. Now BMK has not been focusing on automotive, but of course they have a lot of the competence for the area and that's also a good match for the defense industry. Of course if you do military products, you must have extremely high quality. So that's also one thing which is really good when we now move into the defense industry in Southern Germany.

Okay. Fair enough. And being this efficient, do you think that there is any untapped margin potential here in the long run?

Yes.

Can you elaborate?

You want a longer answer. Well, I think that every company we bought, as I said previously, has been better inside HANZA. We have a good combination of companies, and we see that Leden gave us mechanics, Milectria gave us defense capacity, BMK gives us world-class electronics. Together, we're not only as bigger, we are better. So that's why I can answer yes on that. We do expect the margin to be better inside HANZA than before.

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

Okay. So thank you so much for being with us this morning, and we really look forward to meeting you when we launch HANZA 2028. Bye for now.