HMS Networks AB

STO:HMS

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, welcome to the HMS Networks AB Q1 Report for 2020. Today, I'm pleased to present Joakim Nideborn, the CFO; and Staffan Dahlstrom, the CEO. [Operator Instructions] Speakers, please begin.

[Staffan Dahlström, Co]

Thank you. Good morning. Staffan Dahlström here. I will start with a short introduction, and then Joakim will take over and continue with some deep dive into the Q1 numbers. So let's just go into a very quick faceplate for financial summary of quarter 1.We just published our Q1 report. In summary, quarter 1 has been a mixed bag of things. Our net sales came in slightly lower than the same quarter 2019 but slightly better than Q4 last year. So I think we are moving sideways in our growth at the moment. We, however, got a fairly good order intake, record level, but part of this is probably also a bit of buildup of inventory by our customers, and Joakim will be back on this. We're increasing our EBIT, and we're close to our target of 20% EBIT margin. This is fine. And we have good cash flow and EPS is increasing. But again, Joakim will talk more about Q1 in detail.If we look at the trailing 12 months, we are seeing that most numbers are improving. All numbers are improving, I think. So we have -- we are in the right direction, but of course, our target of high growth and probability is not fully there. We are working with it, but we see some challenges at the moment to keep our 20% growth target.But let's move into a few pictures of our business. Just a short -- very short recap. We have our 4 main businesses with our wholly-owned businesses of Anybus, Ixxat, Ewon and Intesis. And we have our fifth business leg with WEBfactory, partly owned, 75%, that we acquired in 2019. But it's still a fairly small part of our business. But what's key for us is that we have 2 types of customers. On the right side, we have makers of industrial equipment and here we work with makers of industrial machines. That could be a variety of different technical things, everything from packaging machines, medical machines, wind mills, elevators, et cetera. And we work with manufacturers of industrial devices, such as robots or PLCs or circuit breakers, et cetera. This is very important for us. Makers are more than 75% of our business, but we also are working with users of the automation equipment, and these are users making everything from pulp and paper, food and beverage, cars, automotive and these kind of things. And there we mainly work with different partners, system integrators, solution partners that go to these end customers.So if we look on the distribution in quarter 1, we are seeing that the big majority of our business is still within makers. In makers, we have 2 models. We have what we call design win, which is almost a recurring sales process that they -- we sell components that are in designed in these applications. And then we have machine builders that is still good customers, but it's not the same type of business model where we are very sticky inside their machine and their builder material. So as you've seen, makers are the majority. And then on users, we do quite nice business with routers, switches, gateways, problem solvers for these automation companies. And we're also now publishing what we do in software subscription and services, which is a smaller part for our business but we want this to increase in the future, and therefore, we also start publishing this data.Just a quick look on our long-term targets. We want to grow 20% per year. Historically, this has been almost on par with 18%. And this is a combination of organic growth and M&As. And we have been seeing a fairly good development the last 10 years. Of course, right now, we see some challenges. But we have a long-term focus on keep on growing. We want to grow at good profit levels. We have a target of 20% EBIT margin, and we have been on 18%. So we are slightly better than the historical data in quarter 1. And we are normally distributing -- the Board is normally deciding to distribute 50% of EPS in dividends. However, this year, due to the corona circumstances, the Board have decided to cancel the dividend, so there is no dividend proposal this year.Short business update and the slide that you all had been waiting for, we start with the corona update. So if you look on corona, we can conclude that during quarter 1, all our team members are healthy and safe. And we haven't seen so much impact on the business for HMS in quarter 1. The biggest impacts have been in Spain. We are in one of the areas that is more or less under lockdown outside Barcelona. So we have been closed, really closed with no transportation and no material and no factory opening for a couple of weeks. But we also got some slots during Easter when we were allowed to manufacture. So I think most of the customers have received what they need. We are now more or less up and running there.We've also been working hard to make sure we mitigate any problems with our supply chain. We have some smaller disruptions from Chinese suppliers at New Year. But all in all, we've been working hard, but been very successful in maintaining a good and strong supply chain. And as you know, we have suppliers in China, but also quite much supply from both Lithuania and -- well, in Baltic states and also even in Europe in EMS manufacturers. So we are not fully dependent on only Chinese manufacturing. And of course, we have still quite a large portion of manufacturing in Halmstad, in Belgium and in Spain in our own factories.We have seen that we had a good order intake, but we think that maybe SEK 30 million, SEK 40 million of the order intake is probably a buildup of inventory at our customers' location. So the good order intake have -- is not a normal situation, we think.Looking forward, if we look on Q2, we can see that we are feeling a bigger impact on our business for corona. Of course, some of our end users, they have closed manufacturing in automotive and others. But on the other hand, we also see that some of our customers in food and beverage and pulp and paper are working at full speed. But we feel that we have around 20% down the first couple of weeks here in April compared to the same period in last year. So we expect a challenging quarter in quarter 2. And based on this, we also implemented short-time work in Sweden, our largest -- and Germany, our 2 largest -- the 2 largest locations for our employees. And on average, we are on -- I think in Sweden, we are on 80% on average. And in Germany, we are slightly below that. So this has started. And we keep a very close monitoring of the situation. Per our agreement, we can, within 7 days notice, change our short-term percentage to something more or something less. So we have good flexibility. We also have different plans that we can execute to do more cost savings going forward. But we're also a bit careful on this since our strategy for corona is to making sure that we keep our teams and our capabilities as intact as possible because we see that post-corona, we think that the market conditions for increased automation and increased digitalization will increase. So when we have this crisis behind us, we see good opportunities for HMS, and we want to make sure that we are able to take advantage of a better situation when that comes with intact teams and capabilities. But until that will happen, we'll keep a very close eye on our cost and our cash flow. So finally, business update, we can see that we have a volatile sales and order intake. And there are some customers who prepare for tougher times. In general, we have seen a fairly good trend in U.S.A. and Asia. In Asia, it's mainly driven from Japan, whereas if you follow us, you know, we had a quite difficult year in Japan in beginning of 2019. So this is a pickup again. But Europe, especially Germany, is the big weakness in our business. And we saw a slowdown was coming already last year. But of course, the corona effect is increasing that slowdown. So we are more or less rolling forward from the Q4 numbers going forward here.For our Ewon business, we still see a good development there, quite good development, I would say. One reason for that is that a big part of Ewon business is remote access of machines. And of course, this is a very interesting value proposition for service engineers when it's difficult to travel. So we see a good potential and good business for Ewon at the moment. But Anybus and Ixxat are down, but I would say, sideways from second half 2019.With Intesis, Intesis is working with building automation. We have had some supply chain disruption, but we also see that there are some challenges in the markets where some of the customers there are in hotel business and for air conditioning and things like this. So for Intesis, we are seeing some challenging in the near future. All right. That was a very quick update of quarter 1 and our forecast for the future. And I would like to leave over to Joakim to talk more about the financial numbers.

[Joakim Nideborn, Chief Financial Officer]

All right. Thank you, Staffan. And as always, we're going to start with the order intake. And as you can see, this is actually a record high order intake for us with SEK 401 million compared to SEK 387 million in Q1 2019. So just looking at the reported figures, we're up 4%. Organically, however, we're down 4%. And the main reasons behind this improvement is, of course, the currency effects and also this stocking up orders from some of our main customers. So book-to-bill is still 1.11, which we think is positive. And across brands, we can say, Staffan touched upon it already, it's pretty much an even distribution between the different brands. All of them are down a little bit, except for Ewon which is up slightly. On the positive side, we can also mention that WEBfactory that we acquired last year is -- had a very good quarter with SEK 9 million in order intake, and received a record order of SEK 4 million from a big customer. That was very positive.Looking at these stocking orders, we can also say that it follows a normal pattern. If we look at our order book, so 75% of the order book will be delivered in the second quarter, which is normally the case that we have. So it's not that we have these really long stocking orders, it will be delivered pretty much short term.And looking at the rolling 12 months, we're at SEK 1,484 million compared to SEK 1,470 million, so slightly up in the reported figure. However, organically, a decrease of 6%. And this is, of course, an impact from the last second half in 2019. Okay. Going over to the sales, obviously, we're down from Q1 2019, and we knew that already when we saw the order intake in Q4 last year. So we're ending up at SEK 361 million compared to SEK 380 million. So a decrease of 5% reported and organically 8% down. And here, we have a pretty big difference looking at the different markets. We still see in Europe and especially Germany, it's still really tough. And it's pretty much across the line. Factory automation is down. Automotive is still very challenging, and the machine building is at very low levels. However, we see a little bit of a pickup in Asia, especially Japan. There, we've been having some tough quarters, are coming back. We saw improvements already in Q4, now Q1 is even better. So that we think is positive. Also, Americas is doing okay. But we know, as Staffan said, there will be challenging times ahead. But for Q1, it's looking quite okay.For the rolling 12 months, we're at SEK 1.5 billion exactly in sales compared to SEK 1,425 million in previous period of rolling 12 months. So here we see a slight increase of 5%. Organically, it's pretty much flat compared to the previous period. And here, we also see a small growth in all markets in reported figures. Just looking at the sales per geography, you can see that we're now having a little bit more than we normally have in Americas, a little bit less than we have in EMEA and also Asia is slightly up, but it's pretty much the same picture with 20%, 60%, 20%, Americas, EMEA and Asia. And as you know, where U.S.A. is the big market in Americas, and Germany is by far the largest market in Europe. And in Asia, Japan represents more than half of our sales.So to try to understand our result a little bit more, we're going to give you some guidance here. We have reported SEK 67 million EBIT compared to SEK 60 million. So despite the lower sales, managing to improve the EBIT. And of course, we think that is very positive. One very big contributing factor is the gross margin that is substantially better, 3 percentage points up compared to the Q1 2019. And the main factor behind increased gross margin, there are, of course, many factors, but the product mix is good, especially within Anybus, where we now have integrated the acquisition of Beck that we made in 2018. And here we can see 2 things. One is that the margins in Beck is substantially up compared to a year ago. And even if it's up, we're still a bit lower than the rest of the business, also the volumes of the Beck business is a bit lower than the previous period. So this, all in all, helps the margin to be much better within the Anybus business. Then we also see small improvements in the other brands. So we're happy to see that the work we're doing give an effect on the gross margin side.Trying to understand the OpEx. You can see we're reporting SEK 6 million lower OpEx. Organically, that would mean a decrease of SEK 14 million. And the main reasons behind this is the -- of course, the restructuring program that we did last year. We have some corona-related savings, you could say, due to the fact that we can't travel as much, as much we normally do, and we also had to cancel some customer events. So of course, this is not positive in the long perspective, but in the short perspective, we're getting some wins from this. We're also having higher capitalized R&D. We have some big projects going on. And therefore, the capitalization is up a little bit compared to the same period last year.For the rolling 12 months, we're pretty much on the same level, and EBIT, we're doing 16.7%. So shortly -- a little bit shorter on the target, but still on a decent level. And gross margin is very close to 62% compared to just about 60%. So we've seen a bit of an improvement to last quarters, and we were happy to see that on the gross margin. That will definitely help us through these times.EPS, I don't have a lot of comments on this. Just want to show you that we're up from SEK 0.88 to SEK 1.01, and net financials is pretty much in line with expectations of SEK 4 million. And I think the same if you look at a rolling 12-month period, it's pretty much as expected.Cash flow from operations, we're doing SEK 55 million, despite working capital buildup of SEK 29 million. So we think that's quite positive, though we still managed to get out SEK 55 million from this. And the main reason behind the working capital buildup is increased receivables of SEK 41 million. This is, in fact, there are 2 things. One, that we had pretty high sales in March, which is increasing the receivables, of course. But also, we're seeing some effects that it takes a little bit longer for our customers to pay us. And of course, we don't like that, and we keep very close eye on the situation to make sure that we don't get any credit losses from this situation. We've also strengthened our internal rules on how to handle customers not paying in time. So we minimize the effect of credit losses. We have seen an inventory reduction of SEK 6 million in the quarter. However, we think that we might build up some inventory of components for the coming months. We follow this closely. It's not an easy call because on one hand, we need to try to relate to the demand, and then we also need to see that we can deliver to get the things in. There are some disruptions in transportations, some longer lead times. And of course, we want to make sure that we get the goods in.So a bit difficult to guide. We're now at -- if we look at working capital of sales, we're at 10.3% on average for the quarter, and we might see a slightly higher level than that for Q2, I think. But it's -- as I said, it's a bit difficult, and we follow the situation closely to try to make the best calls that we can. And this -- also for rolling 12 months, we can see that cash flow is up some SEK 30 million, so positive and despite some higher working capital.And finally, talking about the debt situation. And as you can see from the graph, we're taking down our net debt further, now at SEK 390 million, and a big part of that comes from IFRS 16. Looking at net debt to EBITDA, we are 1.13 compared to 1.33. So we've taken down the leverage a little bit. And of course, the fact that we're now not going to pay a dividend will help the situation further. So we think that we have a pretty strong balance sheet going into this crisis. And that's also what we wanted to achieve to make sure that we won't get into financial problems. And based on the situation today, I think we're quite satisfied with how things look on this side.I think that was what we intended to cover. So if we now can hand over to the operator for some questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Joachim Gunell of DNB Markets.

[Joachim Gunell, Junior Analyst]

You mentioned that Q2 started with a 20% order decline, can you perhaps comment a bit on the trend there? Has it improved in, say, the past week? And can you comment on the development for each brand? Is Ewon, for instance, closer to positive territory?

[Staffan Dahlström, Co]

Difficult to really give a good -- it's a short period of time. It's very volatile week by week, but I think some weeks are better, some days are better and some are worse. But Ewon, well, I think the Ewon business stand up better in general. But I think at this moment, we can't give you any detailed numbers. But I think the trend is clear that quarter 2 will be down, but it's very difficult to say how much. But what we see right now, it's down 20%. The majority of that is probably on Anybus, Intesis, Ixxat, I think, and not so much on Ewon, that would be my general guess here.

[Joachim Gunell, Junior Analyst]

All right. And can you perhaps talk a bit on the proactive cost measures in 2019 and the temporary layoffs now? How should that impact your margin profile as compared to the previous downturn? I mean we have seen -- I think, your EBIT margin troughed at 13% in the financial crisis. And what are the levers here to protect margin?

[Joakim Nideborn, Chief Financial Officer]

I think to say where the margin is going to end up is, of course, very difficult because it's, to a very large extent, will be dependent on the top line. But with the temporary layoffs or the short time work that we're implementing, we expect to save around SEK 4 million per month. And this is like the first measure that we're doing. We hope that, that will be enough. If the situation becomes significantly worse, we will, of course, see if we can do more. But the measure we're now putting in place will give SEK 4 million per month in the savings. And then, of course, given the situation where we can't travel, we can't have a lot of customer visits and events, we expect to save from the previous plan about SEK 2 million per month, and that is also what you saw in Q1 with the SEK 5 million that we saved in Q1.

[Joachim Gunell, Junior Analyst]

All right. And also, if you could elaborate a bit on the growth rates for each of your 2 revenue models which you highlighted here in the presentation? I mean the design win versus system-level in Q1, what are the growth rates for these 2 models? And once again, can you just remind us of the margin profile for this?

[Joakim Nideborn, Chief Financial Officer]

So organically, the growth rates of both of them have been about the same, down a few percentage points. And the margin profile is quite similar. The -- in the embedded business, we have some custom products that will have slightly lower margin. So we've had -- it depends a bit on what customer mix we have, if you put it like that. All in all, it's pretty much similar, but we can have some more changes within the embedded business depending on the customer mix, to put it like that.

[Joachim Gunell, Junior Analyst]

Yes, sure. I mean with full understanding here that, I mean, it's impossible to have a full picture, but can you give us just some context here? When you talk -- I mean what assumptions do you make here in your analysis when you've decided to entirely revoke the dividend proposal here about what will happen in the coming quarters? And is there a chance that the dividend could come back to the table?

[Staffan Dahlström, Co]

Well, I think this is a Board question that we don't take active part of that. So I think we need to leave that for the Board. But what I heard from the Board was that they feel it's important to preserve our cash in this turbulent times. But of course, we also see maybe a couple of months down the road that this may also be opening up potential for M&As and things like this. So I think there's a mixed picture from the Board that they want to preserve cash but they also want to make sure that -- the management team here also have [Audio Gap] to take some bold initiatives going forward. But I think that's the mix I heard, but it's not a management decision.

[Joachim Gunell, Junior Analyst]

Very clear, Staffan. Final question. Just curious to hear if you could provide some color on what you think the inventory levels are at distributors today?

[Staffan Dahlström, Co]

I think the distributors hasn't been stocking up a lot. It's more some of our main embedded customers that have been stocking up. So I think for the distributors, it's pretty much as usual.

[Operator]

Our next question comes from the line of Viktor Högberg of Danske Bank.

[Viktor Högberg, Analyst]

So just a follow-up on that question there, the distributors not stocking up, it's the embedded customers. I'm trying to figure out here is, 20% decline in order intake here for April, and I guess you're talking about the total order intake, not the organic, if that's the trough or not? What would you see, if you boosted SEK 30 million to SEK 40 million in Q1 on the order intake, this stocking up effect? What do you see -- or what will be normal for May and June then for your customers that did not stock up?

[Joakim Nideborn, Chief Financial Officer]

So Viktor, I'm just going to clarify one thing, the minus 20%, that is actually organic decline. Yes. Sorry, can you just repeat the question?

[Viktor Högberg, Analyst]

Yes. So what to expect here? If we see 20% declining in April, would you expect this to have been the trough in the declines? Or I'm trying just to figure out the effect on Q2 from the SEK 30 million to SEK 40 million stocking up effect in Q1? If you could elaborate a bit on that.

[Joakim Nideborn, Chief Financial Officer]

I guess we can speculate. And I think it's likely that, that will mean that we'll get a bit of a lower order intake in Q2 since many customers have placed orders in Q1 already that they would normally place in Q2, but that's just speculation.

[Viktor Högberg, Analyst]

And also, what did you say, Joakim, on -- you had a comment with the slides on the Q1 order intake and the deliveries. Did you say something on what you did expect for the deliveries in Q2? Or did I misunderstand that?

[Joakim Nideborn, Chief Financial Officer]

Yes. Sorry, maybe that was not clear. So what we were thinking when we see this boosted order intake, the first thought that comes to mind, okay, do we see customers that are placing all of their orders for the full year already now and with deliveries later out in time. But what I said was that we see that it follows the normal pattern. So normally, we would see -- if you look at our order book at a given time, 75% is normally delivered within the 3 -- coming 3 months. And we have the same situation now. So that -- the conclusion from that would be that the main effect of the stocking orders, the SEK 30 million, SEK 40 million would come in Q2, in deliveries in Q2. I think that's what I meant.

[Viktor Högberg, Analyst]

Okay, okay. I get it. But with the improvements you've made and you've seen and putting the mix effects aside in the gross margin, sounds like 62%. You -- earlier, you talked about 60%, maybe 62% range over time in gross margin, it sounds like 62% or the top part of that range would be more relevant in the long term or what do you see if -- will it rise beyond this year in terms of gross margin improvement given the current products that you have?

[Joakim Nideborn, Chief Financial Officer]

I think we want to be careful to give any promises, but I think the work we have done and with the mix that we currently have, I think, yes, around 62% seems quite likely. I think it's a pretty clean number in Q1. Nothing that stands out a lot. So right now, I can't see a big reason for why we shouldn't be able to maintain that.

[Operator]

[Operator Instructions] And there are no further questions at this time. Please go ahead, speakers.

[Staffan Dahlström, Co]

All right. Thank you very much. Thanks for attending this quarter 1 call here. And let's stay tuned for the coming months and quarters here. We expect some turbulent times for our business. But as I mentioned, I think when this is -- when the corona fog is clearing up, I see some good opportunities for automation and digitalization. So our strategy is to really maintain our team and keep on working with the things we can do, such as gross profits and these kind of things that we can control. But top line is unpredictable for us in these circumstances. So I think we keep on focusing on the things we can do something about ourselves and plan for the worst and hope for the best. So we stay agile for the coming months and are very close to our customers, but it's really difficult for our customers to make any predictions as well. So we live in times of high uncertainty. But in the long run, we are quite positive, but we just need to be careful in the short time. So I would like to thank you, and thank Joakim as well. And be careful out there, wash hands, and look forward to keep in contact with you. Thank you.

[Operator]

This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.