Suomen Levyprofiili Oy (HANZA) Earnings Call Transcript & Summary

This is Erik Stenfors speaking, and thank you all for joining this presentation of the acquisition we announced this morning. We are quite eager to tell you more. So I think we turn directly to Page #3. We have prepared the presentation in 7 slides. I will first repeat the strategy for this year to put this deal in perspective. It's the Roadmap 2021. Then we will go through the new company, SLP. And next, I hand over to Lars Åkerblom, our CFO, to go through this transaction and the financial impact. We end the presentation with some conclusions, and then we move on to the Q&A session. So if you please turn to Page 4. As we stated in our full year report last month, 2020 was a quite tough year for some of our customers with lowered sales. The good news is that we expect the volumes to come back later this year. They are solid companies. But 2020 was also an interesting year because it also gave a full-scale test of our operation, where it's -- our larger cluster turned out really well. We got some recognitions and awards because we were able to maintain high quality and good delivery accuracy during really changing volumes. And our main cluster in Sweden, which accounts for 1/3 of our revenue, they had a quite dramatic drop of 12% in sales, but still we could post an operating margin well above 9%, which is outstanding. And we also saw that we had actually all-time high in our cash flow last year, over SEK 180 million. And in addition to this, this pandemic brought out in the open how fragile the global supply chains are. And this was actually fueling a trend we've seen a few years where the globalization is turning back to regionalization of manufacturing. So if we turn to Page 5. So in light of this, the way forward is quite clear. We will further strengthen our clusters. This both then to be able to cope with changing volumes in all clusters, especially when the volume comes back. Sales is increasing, but also to accelerate the margin to bring up the good cluster margin to a group level. And we're doing this in 2 ways. We are investing in Estonia. We announced just before New Year's Eve that we will buy a new production plant -- build a new production plant, 12,000 square meters. It will be ready in 1 year from now, and I really hope that the pandemic will be over, and we will have a chance to meet in person and not only through this distance communication. Another way we strengthen our clusters is through acquisitions. Now there are a lot of companies out for sale, and we are quite careful when we look at these different single contract -- single-technology contract manufacturers. They have to add customer value, and they also have to fulfill our acquisition parameters. And that moves us to Page #6, please, because we have here a perfect fit. This is the company, SLP, Suomen Levyprofiili. It's located in Eastern Finland in North Karelia. It's actually a mirror of Sweden. We have our operation in Western Sweden, close to Norwegian border. And here we're in Eastern Finland, close to the Russian border. We do like to stay out of the big cities because, of course, cost structures, the premises are -- have a better price outside the big cities. But also people tend to be more loyal when you move out from big cities. This is a manufacturer of sheet metal mechanics, and they are specialists in tanks, covers and hoods. Now if you do, thanks, you have to be really skilled in welding because you cannot have a leakage. In hoods and covers, you have to have first-class painting. And this is actually then competence which is not just added to Finland, but also to the whole HANZA Group. So we have customer value right there. We are running this in 7,000 square meters really nice, well-organized production plant, built 2014, already tailor-made for a lean production flow. And we are -- the owner of this building is the Joensuu municipality. So we have a lease contract. The customers, they come from forestry, which is an interesting sector for us. We'd like to increase that. They come from mining. We already have a good customer base. But by this, we can then increase our complete offer, and they also have the machinery customers. The management director is Aku Lampola on the picture to the right. Actually, we're following this company for a couple of years. And what is really important is that they have the same culture as we have. We do believe in a careful HR due diligence. And it's really good that we are sharing the same core values. Why? Because we have decentralized organization. It's really important that different factors are responding to the same values. So let me turn to Page 7, and this is then the upgraded cluster in Finland. We have the operation in Iisalmi, where we are experts in machining. We have the unit in Heinävesi, a large one, 11,000 square meters, where we are -- we have different technologies. It's a multipurpose unit and also good for logistics. And then we have Joensuu. And as you can see on the map, it's quite close. It's only 80 kilometers between Heinävesi and Joensuu. And this means that we can bring out our checklist and tick all boxes when it comes to these acquisitions parameters. So geography, technology, customer base, culture and also finances. And to show that, I will now leave over to Lars Åkerblom, and we move to Page 8, please.

Thank you, Erik. Can you confirm that people can hear me?

We hear you.

Yes, very good. So we did this acquisition today. And the valuation or the price of 100% share of SLP is approximately SEK 33 million. On top of that, we also purchased to cover a shareholder loan of approximately SEK 15 million. So the -- and the sales of the company is approximately SEK 150 million with an EBITDA of SEK 14 million. There is a loan in the company of approximately SEK 22 million. And there's also this shareholder loan that we acquired. So if we take the share what we are paying for, for the company and divided for the shares and includes the shareholder loan, that gives the EBITDA multiple of 3.4 and the price per enterprise value in relation with EBITDA of 5 -- approximately 5. We paid -- the purchase price is paid with full cash today and also what we paid in cash flow to the loan. And there is a smaller part in additional purchase price. And we also paid with 1.8 million shares in HANZA. And these shares are within a lock-up agreement, and they cannot be transferred or sold until 1 year from now in April 2022. And this issue leads to approximately 5.5% dilution. And by that, HANZA will have 32.8 million shares going forward. And then we move to Page 9. And we are from now and including SLP including the financials of HANZA. So by the end of the month of March, we'll have the balance sheet and a smaller part of the older P&L in quarter 1 results and financials. The operational debt, as I said previously, is approximately SEK 22 million and the turnover is SEK 150 million, with a quite solid and good profit of EBITDA margin of SEK 9.3 million -- of 9.3%. We have estimated the integration costs to be SEK 6 million, and the main part of that will be taken in quarter 1. Due to these integration costs and then transaction costs, we say that the total contribution to the HANZA P&L of the earnings will be quite small in 2021. And that is, of course, that we are making money in the SLP, but we have this onetime cost. So in total, it gives a smaller contribution to the earnings. But once these are taken, the onetime costs, of course, that this will contribute to the earnings per share and then the profitability in the HANZA Group. And then I'll leave over to Erik to summarize the acquisition.

Thank you, Lars, and then we turn to Page 10, some conclusions. So year 2020 brought full-scale stress test to HANZA, and we saw how well the larger clusters responded to this. And we had a good proof of concept. We also saw that we came out of this year with a good financial position. And we also see this global trend. It strengthened the trend towards regional manufacturing, which is actually the core of our business concept. And based on this, it's quite easy to set the road map for this year to further strengthen clusters. And it means that this acquisition of SLP is not just an acquisition, it's actually an important delivery on our strategy. And therefore, we can, at this very good and sunny Friday, welcome 100 more competent and experienced people to the HANZA Group. By that, we leave over to the Q&A session.

[Operator Instructions] Our first question comes from the line of Fredrik Nilsson from Redeye.

Fredrik Nilsson from Redeye here. Following this acquisition, how strong will the Finnish cluster be? Will it be on par with the Swedish one? Or do you need additional acquisitions in Finland to achieve that?

It will not have the same size as Sweden, but it will be operationally really well. I think we told you that in the year-end report that we spend a lot of energy to fine-tune the organization last year. So we do have strength in the organization prior to this acquisition in Finland. So we believe that this is -- there could be more acquisitions, of course, but we think this is the important one to then really strengthen Finland and make the future great.

Okay. So in terms of margins, the Finnish cluster should have a long-term potential in line with the Swedish cluster, if I understand you correct.

Lars, would you comment on this?

Yes. I can comment. We have said several times that within the other markets, we have different levels of profitability in the different sites and in the different clusters. And that the overall goal is, of course, that every cluster should have the -- you can meet the financial -- targeted financial goals we have with HANZA. And by this acquisition, the goal is when we are taking this onetime cost. And it's, of course, that we should meet and be able to have the cluster of Finland to align with the financial goals that we have within HANZA. If that is within 6 months or 1 year or 1.5 years, that we will not be able to tell right now. But of course, we see cluster Finland must and shall be on the right level on percentage-wise in earnings.

Okay. And one question regarding the impact from COVID on SLP. I mean considering the industry exposure, it seems reasonable to assume that there may have been a negative impact. Can you elaborate a bit on that?

There has been an impact, yes, of course. So sales -- the sales we are talking about now is, of course, lower than it was prepandemic.

Okay. That's all from me.

So we expect also some volumes back to this company. Actually, we -- part of Finland was quite hurt by the COVID-19. They had a bit better or a strong lockdown in Sweden. But we expect also volumes to come back a bit to this company.

And the next question comes from the line of Johan Högberg from Aktiespararna.

Johan Högberg, Aktiespararna here. What kind of synergies can we expect from this acquisition?

So Erik here. From the sales part, of course, if you are a single technology manufacturer as SLP, now you can go to your customers say that now even better. Previously, we were just offering one technology in one factory. Now they're offering both technologies, and they're also part of a global footprint. So of course, now experienced customers respond really good to that. Secondly, we see also when it comes to sales backsourcing trends. We see customers coming back. Been in Asia, come back to Finland. So I think that this setup will help us to be a place where this moving manufacturing can land. Cost side, of course, Lars can comment on this. We work with service centers and other ways of collecting costs.

Yes. Look, I can comment also on the -- of course, what we can utilize and we've been historically quite good in manage the working capital. So we're not giving any promises. We will, of course, work with the working capital and try to release some cash flow from the balance sheet. And as I said, we can integrate and utilize the resources in admin and the financial, employees, et cetera in a better way than we have the cluster.

Okay. One final question. Year-end, you had about SEK 121 million in cash. Why did you choose to partly finance with new shares?

I think if you look at the acquisition price, so we paid SEK 33 million for the shares, and they make an EBITDA of SEK 14 million. Part of making such a deal is, of course, that the sellers also believe very much in enhance them, enhance the development and the plans we have together. So I think that, that's a way to make a good deal for both parties.

[Operator Instructions] We have one more question from the line of Erik Cassel from ABG.

Congratulations on the solid acquisition. So with IFRS 16 and the kind of leasing you mentioned for the facility, I find it somewhat hard to truly interpret the EBITDA margin. Is it possible to give some clarity on the EBIT level as well?

You are totally correct. The SLP is reporting according to Finnish GAAP, and we need to adjust it to IFRS. If you compare in Finnish GAAP the difference between EBITDA and the EBIT, it is minor difference. So the EBIT level is, I would say, 2% to 3% lower than the EBITDA margin.

Okay. Perfect. And do they own their own machinery? Or is that leased as well in some way?

Sorry, I didn't hear you.

Are the machine re-leased within the facility? Or do they own that?

The main part of the machinery is owned so -- but there are some smaller leasing agreements for machinery as well.

Okay. Perfect. So I guess there aren't much investment needs to kind of -- we won't see above normal CapEx to sort of invest in this facility then?

That's a future question. We will continue to invest like we invest in every cycle, in every cluster depending on how the sales growth and the customer base.

Okay. But there is no urgent investment needs in this facility, I suppose?

No.

No. I can comment, this is Erik. So there is no urgent need. And as I think it was early in the presentation, we have already invested about SEK 10 million in Estonia/Finland in new machinery side. But then again, with good sales, more investments can come.

Yes, of course. So how long do you think it would take before you reach a level of integration and kind of full synergies between their businesses here in Finland?

Within this year.

Okay, perfect. And then on the -- I think you mentioned cash additional purchase price. Could you provide any clarity on the sort of earn-out structure and the terms for performance, if there are any?

Lars, can you share something about that?

No. We can -- I think we can comment in the way that we are, it will not affect our work with being able to consolidate the Finnish cluster and integrate SLP into the HANZA way of working.

And as there are no further questions, I'll hand it back to the speakers for closing remarks.

Let me just thank you for dialing in. It's a really good day for us in HANZA and a good solid delivery on our strategy. And we hope to be able to bring out more news later on, and then we can speak again. Thanks so much.

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