HMS Networks AB

STO:HMS

Earnings Call Transcript 2021-Q2

[Operator]

Welcome to the HMS Networks Audiocast with Teleconference Q2 2021. Today, I am pleased to present Staffan Dahlstrom, CEO. [Operator Instructions]Staffan, please begin.

[Staffan Dahlstrom, Co]

Thanks, Mark. Good morning, everybody. Welcome to this quarter 2 session by myself, Staffan Dahlstrom; and Joakim Nideborn, our CFO. And the agenda for today is just a quick summary and introduction. I will continue with a short business update, and Joakim will then dive into the financial numbers, and we'll finish up with a Q&A.So let's take a look at the numbers. Many of you have seen the reports an hour ago, and we have a very good quarter 2. Record level on net sales, up 33%. Fantastic order intake. We have a strong demand in the market, but there's also one component that is more of safe buffering from our customers, and Joakim will talk a little bit more about this because this is important to understand. And a very good profit level, SEK 121 million for the quarter. Good EBIT margin, good cash flow, good EPS, so we have a fantastic quarter. We are very happy with quarter 2.And when we combine this good quarter 2 with a good previous quarter 1, we get a very good first 6 months of the year. So we are approaching SEK 1 billion on the first half year here, SEK 929 million on the net sales and a very good order intake. And this also gives us a fantastic backlog for the remainder of the year and also some of it actually into 2022.And same thing here. We accumulate 2 good quarters, and this means that we have very good numbers. EBIT margin, north of 25%, much higher than we have expected actually. Good cash flow and good EPS.So let's move a little bit into the details. But before that, let me spend a couple of minutes just describing our business for you on the call who are quite new to our business.HMS, Hardware Meets Software, we do industrial connectivity, connecting devices. So this is a combination of hardware and software, and we allow our customers to connect different machines to interchange information, also the machines to different cloud systems or IT systems. Our 4 major brands, that is divided into our business units, Anybus, Ewon, Intesis and Ixxat, have different connectivity and communication and information products. They're all sold through our common sales channel through our 4 different market units.We had 2 quite recent -- fairly recent acquisitions, German WEBfactory, software company. And last fall, we acquired the Dutch Procentec company. They -- Procentec goes very well, and I'm sure Joakim will talk about this a little bit more. So this is our business and our brands.And if you look on where we do our business, we are talking about industrial ICT. ICT, information and communication technology, this is our business, and we do the industrial part of that. We're well established. We have more than 7 million products connected in automation. We have more than 300,000 machines connected into our cloud systems so we can help our customers to remote diagnostics and remote access to these machines.But we are a technology company. 1/3 of our employees is in R&D, another 1/3 is in sales and marketing. So this is -- R&D and sales and marketing, of course, are 2 major activities. But we focus on new things such as 5G, IoT, wireless and this kind of things.And as a company size, we are slightly more than 700 employees around the world. We have operations with subsidiaries in 16 countries and partners in over 50 countries. And we're headquartered on the southwest coast of Sweden, sunshine also outside, not only on our numbers, in a fantastic summer day here. Sunny 30 degrees outside.So let's take a look at how we go to market. We have 2 types of customers. We have users of automation system. This is the smaller part, maybe 25% of our business, the system integrators, end users. And here, we normally go to market through our partners and distributors. The larger portion is the makers of industrial equipment, could be machine builders or device makers. And here, we mainly go direct with our own sales force to these customers.We set a new strategy for the coming 5 years. Last fall, I think we presented this in December, or maybe it was November, with 2025 targets in 3 different areas. We have environmental targets. We have staffing, customers and growth and profitability. And on the left side, the environment, we have bold goals here. We want to be net positive by 2025. So we put a stake in the ground. This is important for us, but it's also important for our customers. We want to be net positive on our own internal operations, of course, but the major difference we can make is actually helping our customers to help them with their sustainability and their environmental targets.We have very good target numbers for staff and customers. We measure Net Promoter Scores. We have high scores there. And we are approaching to our growth and profitability targets. 2025, we'll have revenue of SEK 5 billion, more than SEK 3.14 billion. We want to maintain an EBIT margin of 20%. And as you noted, we are much higher right now. And we keep a dividend policy of 30% to 50%. So these are our targets, and we work hard to fulfill all these 3. And we think, with these 3 targets together, we'll become a very good company.Short business update. If you look at quarter 2, we can see that we have grown everywhere. All our brands is growing with an order intake more than 50%. So we see a very exceptional strong market at the moment. A couple of drivers is the machine building and robot manufacturing. New record levels goes very well. You also see this on industrial PMI that is also very high. After a couple of weak years for us in automotive, we see also that the investments in e-cars is helping our Anybus business in Germany, U.S. Of course, the combustion engine is -- now moved to an electrical drivetrain, but there's a lot of pieces in the car that is being assembled and automated and things like this. So our customers in that market see a very good situation at the moment.We also find some new businesses in renewable energy in wind, but recently also more in battery manufacturing where we see a lot of investments, then they need more automation here as well. But second point here is that we need to keep in mind that there's also a boost effect in our orders. We expect this to be SEK 100 million in the second quarter. We have component issues, both HMS, but it's a market problem in general. And we see that some of our customers are placing more orders just to make sure they have secured their shipments too from us. So we estimate that there's extra orders. But without this, we still see a good -- very good market.And we think this will continue for 2021. We see the good investment climate, but we have challenges in the component situations, and we believe that we will see more problems in quarter 3. Some of these orders will be probably pushed out to quarter 4. But all in all, we hope -- and we hope and expect that the end of the year we should be more in balance. So what is kicked out of quarter 3 will probably be delivered out in quarter 4.We made a new acquisition 1st of July, small acquisition in Spanish Bilbao. It's -- we bought 60% from the founders of this company. So the 4 founders may keep 10% each, and they remain very committed to the business. Owasys is doing wireless gateways and platforms for what we call mobile machines. This could be utility vehicles. It could be ATVs, and this kind of transportation, things that is moving that need local control, but also wireless technology, cellular or short-range wireless here.Small company, revenues around EUR 6 million, good EBIT level and also a good growth -- good customers, good growth and good technology. And we see synergy here to also take some of our software components and put that on top of the Owasys product here. So nice, it's small, but it's a nice area for us, and we believe that this is opening a new door for HMS into the interesting area of mobile machines.I'm sure you are very curious to hear more about the financial numbers that looks good. Joakim?

[Joakim Nideborn, Chief Financial Officer]

Thank you, Staffan. And as always, we're going to start out with talking about order intake. And then if you start by taking a look at the graph on the upper left, it really is like how this chart should start to look like.Staffan already mentioned we're SEK 606 million in order intake, up 100%, nice round figure compared to, obviously, weak second quarter last year, but still very nice comparable. 88% of that is organic. So we can see that all our businesses are going very well indeed. The same number for the first half of the year is SEK 1,170 million compared to SEK 703 million. So 67% up organic, 60% up.So I just wanted to mention and talk a bit more about the stocking effects that we see. We have SEK 100 million in Q2 roughly and SEK 170 million year-to-date. And of course, that will come back some time to impact the future order intake because what it really means is that we have orders that should be placed in Q3, Q4 that are being placed now. I think the reason is that we see sort of a ripple effect through the wholesale supply chain starting with the semi foundry saying that instead of placing a forecast, you need to place orders. And that message is escalating through the supply chain and also impacting us, of course, and our customers as well. So this SEK 170 million is our best judgment of what we think is sort of out-of-period orders.And given the situation that is still quite strong in the market, we see very good GDP growth numbers. We see strong PMIs, and math experts say that this will continue in a good way. We don't really know where we will see this SEK 170 million impacting us in a negative way. It might actually be that it will not even be this year, but we guess that it will be a slow process when the market is stabilizing and the component availability becomes better. But it's difficult to say exactly.Looking at the different markets, I think everything is good. Europe, obviously, very strong, more than 100% up. We had also a tough quarter in Q2 last year in Germany, France, Italy and so on, when we see really good comeback in those markets.I also wanted to highlight Ewon, which is also performing extremely well with -- this is our remote access offering. And what we see is a big change in behavior from some customers that used to have like an optional remote access feature and more of them are now standardizing to remote access, and that is obviously a very positive trend for us because that will be with us for the coming time as well.So going over to the net sales situation. Also here, we have a good development of SEK 474 million compared to SEK 355 million, so 33% up, out of which 28% is organic. For the first half, we have SEK 929 million, 30% up or 23% organic. And I think also here, we have a good development in all brands. I wanted to point out Procentec that is doing extremely well. We have doubled sales in Procentec. And I think we have to say that the brand has reached to a new level. And it's a combination of a strong development of existing customers, especially in the U.S. is doing very well. But we also have some really interesting new customers, global customers that are choosing Procentec. And that will have -- also we expect to have a good development going forward with this business.Ewon is well, doing well, 45% up. And it's also good to note that Intesis, our brand within building automation, is doing well and growing 26%. This has been a few challenging quarters in the building automation space, and we haven't seen the rebound as we have in the industrial automation space. But now we're doing okay also in the building space, which is good to see here.I also wanted to comment a bit about the sourcing situation and with the availability of components. It is difficult for us to forecast exactly how this will happen. We know that we have an impact in Q2 of about SEK 30 million that we couldn't deliver, and we had to push out those orders into Q3 and Q4. And then we will have some components coming in end of Q3. So it's a bit uncertain how much we'll be able to get out in Q3, might spill over -- have a spillover into Q4. So I guess what we say is that it's likely that Q3 will be a bit weaker and Q4 a bit stronger. And I don't want to speculate exactly how much because we simply don't know.I think the main point we want to make, though, is that the order book is very strong. It's the best order book we had ever, more than double compared to the average order book last year. And even if we have to push out some deliveries, we have the orders, and the customers don't really have any alternatives. So we're not that afraid of losing business, but it might be a bit of a timing issue when we can deliver.Sales per region overview. It looks about the same as always. Thus, we have the EMEA region being the biggest one with 61% of our sales, up a little bit from last year where that was heavily impacted. The U.S. or Americas is up 22% -- sorry, it's 22% of the total and then APAC 17%.Going over to look at our results. Also here, we have a record quarter with SEK 121 million EBIT, a good margin of 25.5%, up versus 19.4%. And the main driver here is the high volume, of course. We also have continued good gross margins of 63.7%, so we're quite happy with that number. We see that the price increases and the work we did last year is paying off. We see full effect from the price increases. So even if we have a slight hit from component increases, we have -- that impact is about 1% negatively. We still managed to have a solid level on the gross margins. And of course, also the volumes in itself helped a little bit to get better utilization on our fixed costs. So that's also working in our favor.The OpEx is under control, we must say. We're up -- I guess the relevant comparison is up SEK 19 million compared to Q2. Taking up some nonrecurring items in Q2 2020, 12% up in the OpEx. So I think we're about in line with what we had in Q1, which we expected. What we can say going forward is that we have launched some interesting growth initiatives during the quarter. That will impact slightly in Q3, but primarily in Q4. So I think Q4 will definitely be some 10% up from the OpEx levels that we see right now.So let's just have a look at EPS. I don't have a lot of comments. There's not a lot of interesting things happening here. I think we see good development, which is just a result of a solid business. The first time over SEK 2 with SEK 2.02 EPS. And compared to SEK 1.24, that is a good increase of some 63%. And also for the first 6 months, we have a nice SEK 3.94 compared to SEK 2.26.Then having a quick look at the cash flow. I think we continue to have a good cash conversion. What we believe is positive is that we keep the working capital in good levels in these kind of difficult times. So we have just small effects from SEK 5 million negative working capital impact in the quarter. So all in all, SEK 126 million compared to a very strong SEK 115 million that we had in Q2 2020. But there, we had the working capital working in our favor a bit more.So for the first half of the year, SEK 257 million, also a very good number, and you see in the bars that we have a good trend on the -- also on the cash flow, which brings us to our last slide, looking at the debt situation. And I think if you take away the leasing debt of SEK 75 million, we're almost at SEK 3 -- only SEK 3 million in debt. Also, very positive that despite that we paid a dividend of SEK 93 million in Q2, we managed to decrease the debt level.And then as you probably have seen all the stuff I talked about, we made Owasys acquisition 1st of July, which will, of course, impact the debt situation slightly. But it's on the margin, I'd say. So I think all in all, we can look back in Q2 with the same balance sheet. And about our M&A agenda, we're quite optimistic that we have the means we need to fulfill that.So I think with that, we will leave over to 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]

So just one follow-up on the stocking effect here. Can you comment a bit about the nature of this, whether it's broad based or whether it relates to, call it, the larger orders from fewer customers being put? And also perhaps any comment on how -- I mean the trends you alluded to, how they have progressed throughout the first 2 weeks of Q3?

[Joakim Nideborn, Chief Financial Officer]

Sure, I can give it a shot. Joachim, thanks for the question. Or do you want to take it, Staffan?

[Staffan Dahlstrom, Co]

No. Please go ahead.

[Joakim Nideborn, Chief Financial Officer]

So I think your analysis is kind of right what you implied, the main effects come from our larger customers that have our products embedded. So it's mostly impacting the Anybus brand, but we also see it, I mean, across all brands, but Anybus has the biggest impact. They are taking some precautions and putting some extra orders in place to make sure that they get the volumes going out. For the smaller customers, we don't see the same effect, then also we don't have the same effect on gateways and those kind of products that will be more a need right now type of business.The second part of your question, sorry I missed to take -- yes, the first 2 weeks, sorry, of July, right? So I think it's continued in a good way. It's pretty much the same business that we saw in Q2 that is continuing. So good to see that the market is still there.

[Joachim Gunell, Junior Analyst]

Understood. And perhaps also some comments here. I mean -- with regards to the Owasys here acquisition, the balance sheet growth is stronger by the day as you continue to deliver excellent results here. But any color here on M&A pipeline with regards to that, okay, you just completed the Owasys acquisitions, you have made some recruitment with regards to your M&A organization. So what can we expect there for, call it, the coming 6 months? And also, call it, what types of targets are you evaluating? Because it seems like the Owasys acquisition is slightly a step outside of your core factory automation verticals. So are there perhaps any specific verticals where you see, call it, larger opportunities to complement your existing business?

[Staffan Dahlstrom, Co]

Maybe I can start mentioning something, and Joakim can fill in. I think what we do with Owasys is -- and you're right, it's not maybe factory automation, but it's industrial automation. And we see more and more with mobile machine stores like ATVs in the plant with logistics and this thing. So we see a combination of mobile machine, battery-powered machines and communication is a quite strong combination for new things. So we believe that this is a market that is -- will have more and more of telematics and communications. So we believe that this is a very close and adjacent market for us.And actually, we have a couple of customers already before Owasys. So we think this is close to us, an interesting opportunity. But this is an example that we try to make positions that is close to our business but open some new doors. We also look on, for example, areas in water, wastewater and kind of things where we can take a step into a vertical. So that's one part of our acquisition strategy.Maybe, Joakim, you can talk a little bit more about the acquisition pipeline.

[Joakim Nideborn, Chief Financial Officer]

Yes, sure. Happy to do that. So what we've done, we had a short list that we had before with the capital companies that we monitor. And then what we managed to do now in, I guess, with the expansion of the teams that we've built, we're starting to get a much longer long list. So we're just in the process of getting that down to a short list.So I think what we'll see now going forward is that we'll have more companies that we will be talking to and have it on the short list to monitor daily. So of course, this will take some time for conversion for these new prospects, but it's -- I think it's very good that we do this work and that we're getting a strong pipeline because we need it to meet the targets for 2025. And I think I don't have a lot to add on what type of companies that we're -- actually, I think Staffan did a good job there.

[Joachim Gunell, Junior Analyst]

Understood. And just one final one for me. With regards to that -- okay, you commented that, okay, we should see an OpEx step-up of 10% going into Q4 from where we stand now. But still, I mean, with the demand backdrop, I mean, you will, I mean, materially outperform your profitability target in the medium term. And I know that, that could be diluted from acquisitions going forward. But how should we think about the OpEx space for, call it, the next year? And what investments need to be taken to continue to, I mean, deliver a stellar growth?

[Joakim Nideborn, Chief Financial Officer]

Yes. So I think the first step we're doing now is with these initiatives that we're starting up now. And I think we'll do some more, of course, next year. I can't say exactly since we haven't made a plan. But we did some expansion into China this year, opened a second office. That will certainly be interesting to look more in that market that we will see good growth and a lot of nice opportunities. So that will definitely be on the initiative list going forward.And then I think we need to look in the portfolio and say that's still something that we should escalate and try to do a bit quicker. But I think you'll probably see a slight increase for next year as well, and that's pretty given. And we think we need to do that in order to be able to deliver the organic growth targets that we have in place. And now we're going to have also, I think, quite strong 2021 that we're, of course, going to beat in 2022. So we need to do some new things there.In regards to the EBIT target, I think we also see that it's -- that we're going to perform quite well in relation to that target at the moment. But I think we need to wait until the situation is back to more normal business before we will make any comments on that target. And I think you also pointed out that we -- given the pipeline that we have, we know that most targets will have a dilutive effect to the EBIT level. So I think we just have to wait and see.

[Operator]

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

[Viktor Högberg, Analyst]

So checking on the cost side, the acquisition-related cost of SEK 6 million in Q2, was that due to the Owasys acquisition? It was done in Q3, so will that mean anything for Q3 then? That's the first question.

[Joakim Nideborn, Chief Financial Officer]

I'm not sure if I fully caught the question. If you can -- did you mean if we had an acquisition-related cost in Q2? Was that the question?

[Viktor Högberg, Analyst]

Yes. In the table of [indiscernible] report, the acquisition -- EBIT, excluding acquisition-related cost, SEK 127 million. I don't know if that was a mistake or if there were any adjustments.

[Joakim Nideborn, Chief Financial Officer]

Now I understand what you're after. So what that shows is without the amortization on the over value. So it's also the acquisition cost for Owasys, but that was minor. So that's not a lot to talk about.

[Viktor Högberg, Analyst]

Okay. And in the cost guidance, you said the 10% up in Q4. Was that for the full Q4 level or the run rate going out of Q4?

[Joakim Nideborn, Chief Financial Officer]

Yes. I think for both, both for the impact in Q4 in comparison to the current level we are at, but that will also be affecting run rate going forward.

[Viktor Högberg, Analyst]

Okay. And you have some comments on it, but I wonder if you could elaborate a bit further on the order intake. 2 quarters now with very strong order intake, SEK 170 million together in nonrecurring, if we could call it that, orders. So what -- could you maybe try to quantify, I don't know, not a specific number, but maybe a range of what to expect for Q3 and Q4 or H2 orders?Underlying order level seems to be around SEK 500 million in both Q1 and Q2. Is that to be expected underlying as well in Q3 and Q4? Or will that be hard to reach this SEK 500 million levels given the front-loading on the orders due to restocking issues or component efficiency in the first half?

[Staffan Dahlstrom, Co]

This is difficult to speculate about, but I think you're right that the level beneath the stocking effect is probably around the SEK 500 million. But we don't really see that this kind of adjusted back from this a little bit not normal stock situation will go away. So we think it will continue, maybe not at the same level, but there will even be some stocking effects also in Q3. People are concerned about component deliveries. And when we talk to foundry, especially [ TSMC ] and other big suppliers, they are investing a lot, but it will take time until this is back to normal. So we believe that orders will -- the stocking effect will continue for the coming quarter as well.

[Viktor Högberg, Analyst]

Okay. And you had some that you -- I respect you don't know when it will have a backlash or if it will, but the prospects for 2022 orders and deliveries with H1 and potentially part of Q3 then being very high orders, do you have any comments on the 2022 order potential and deliveries and what to expect? Will it be mostly growth next year given what you know now?

[Staffan Dahlstrom, Co]

Yes. We'll focus on our 2025 targets, and we don't really have a 2022 target right now. We don't know. It's too far out, I think. And the market we see right now is very strong, surprisingly strong, I would say. We see normally this market, customers do more CapEx investments when they are at full utilization of their capacity, but now we see a lot of CapEx investments. And we also see investments in -- more in energy savings, sustainability. Maybe there's a post-COVID effect that many automation -- industrial companies also invest more in automation and digitalization. So I think there are several strong trends that is helping us right now. These trends are not just for this current quarter. I think it's continued for quite some time here.

[Operator]

And our next question comes from the line of Fredrik Stenkil of Nordea.

[Fredrik Stenkil, Research Analyst]

So I had a question on Owasys. Is it fair to assume that the majority of sales is in Europe or perhaps even in Spain? I did see a British bus on the picture, though, so I guess they have some in England. And also on that, kind of the plan around geographic expansion for them going into the U.S. perhaps?

[Staffan Dahlstrom, Co]

The business we have today, I would say it's mainly towards European OEMs, not so much in Spain. There's domestic sales. I would say that Continental Europe is the big market for Owasys today. We see a potential in America. And one of our ambitions together with Owasys is that they will use our infrastructure and hire some salespeople, overseas salespeople in U.S. that will sit at offices and use our back office system and things like this because we see potential for this market in the U.S., but they've been too small to really target that. So you're right that the U.S. is a target market for us.

[Fredrik Stenkil, Research Analyst]

Okay. And that's prioritized ahead of Asia then? Or will you do both?

[Staffan Dahlstrom, Co]

It's a small company. We see a lot of opportunities also in Europe here. So I think that Western Europe and U.S. is the 2 targets we focus on with Owasys.

[Fredrik Stenkil, Research Analyst]

Okay. Great. And then both previous analysts have tried to gauge the phasing due to the component shortage, but I'll just try one additional angle, if that's okay. So in terms of sales, you did say that Q3 is likely to be weaker than Q4. But I wonder if you could say anything about Q3 relative to Q2. Because I'm thinking that demand is not the kind of what's holding you back here. It is the supply of components. So sort of if you could comment on how the kind of sourcing has been, how is it looking for Q3 compared to Q2.

[Staffan Dahlstrom, Co]

Yes. Let me just start, and Joakim can fill up with more details. I think we see a very high volatility at the moment. We have -- I have one example from one order from one of the major semiconductor companies that have been changed 24 times, one order, the last quarter. So it's a very high volatility, and we see changes day by day and week by week. So I think this will continue.We have a good relationship and we are seeing some improvements with these suppliers, but it's -- if it comes in -- what goes out in Q3 or Q4, it's very, very difficult at this time to say. We feel confident that we will not lose the orders from our customers because we are, in many cases, specified into their bill of material. So we feel quite good, but it's very difficult to comment about Q3 deliveries. But Joakim, you can give maybe more detailed pictures.

[Joakim Nideborn, Chief Financial Officer]

No, I don't have a lot more to add. I think it's -- the stand would be rather big if we were to give a stand, so we wouldn't do it. What we maybe can say, we think that Q3 will be difficult to reach the Q2 levels. I think that's I probably can say, and it's not because we don't have the demand, it's because we just can't get the components in the pace that we need. But I think we'll probably leave it at that.

[Operator]

[Operator Instructions] Okay. So seems to be no further questions on the line, I'll hand back to our speakers for the closing comments.

[Staffan Dahlstrom, Co]

Thank you. And let's just say that we are super happy about the continued good progress. After a strong quarter 1, it feels really good to have this strong quarter 2. So we see that the trends are still continuing to be favorable for us, so we look forward to the coming quarters here.We have issues with components. We know that. But in the long run, we are quite sure we will manage this, but there will be some volatility between the coming quarters, but we are not really super concerned about it. We are working closely with our customers to try to mitigate what we can about this.So I would like to thank you for joining this call, and thank you for following HMS. I know that some of you need to look on other reports in the coming days and weeks and some of us can go for a couple of weeks on vacation now. So I would like to wish you all a very nice summer. Thanks for attending.