HMS Networks AB

STO:HMS

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, welcome to the HMS Networks AB Q4 Report 2020. Today, I am pleased to present Staffan Dahlstrom, CEO. [Operator Instructions] Staffan, please begin.

[Staffan Dahlstrom, Co]

Thank you very much. Good afternoon, good morning, everybody. Thanks for joining our Q4 call here. Myself, Staffan Dahlstrom, will start with some business updates; and then Joakim Nideborn, our CFO, will guide you through the numbers. So the agenda for today is just a summary introduction. I'll do a business update and then Joakim continue with what you all are waiting for, the financial results and then Q&A at the end. So let me just take a very quick look on quarter 4. Joakim will dive into the numbers. So I will not really go into the details here, but we are quite happy with Q4. We see a solid bounce back of the business. We do see a good growth in net sales, good growth in order intake. We are improving our EBIT despite the fact that there's still been some challenges in this pandemic situations. So all in all, I think we are going in the right direction, but I leave the numbers to Joakim to brass a little bit more into the details. Just an overview for you who are quite new to the company, we have a couple of different brands, but they all unite themselves in our vision to connect devices. We have hardware, we have software, and we help our customers to make sure that we can help enable and liberate data inside their machines and inside their devices. We have our 4 main brands: Anybus, Ewon, Intesis and Ixxat, and 2 smaller recently acquired business, WEBfactory in Germany and Procentec from Netherlands. But if we take a look on HMS as a company, we have more than 7 million devices connected. We have over 300 machines in our cloud-based Talk2M system. And our field is really industrial ICT, information and communication technology. We are a technology company. Right now, a big focus is for the future regarding 5G, wireless, IoT and these kind of technologies. But our main business is quite, I would say, conservative or long-term industrial customers. So we are one foot in more of IT and high-tech and one foot in more to industrial automation and industrial systems. As a company, we have 700 great employees around the world. We have offices in 16 countries. And our head office is here on the Southwest Coast of Sweden. Today, actually, in the winter landscape, we are not too spoiled by that. We just released -- or 2 months ago, we released our new long-term goals or 2025 goals. We want to be at 2025 with annual revenue beyond SEK pie billion, beyond SEK 3.14 billion. We would like to stay on our operating goal of 20% EBIT and as Joakim will explain, we have today -- 2020, we have a EBIT per share -- sorry, earnings per share of SEK 4.79. Our business is primarily focusing on -- let's see here, on 2 different types of customers. We work with users of automation systems, helping them to get data from machines and do the right decisions for their operations. This is around 25% of our revenue. Then a larger part is to help makers of industrial equipment, machine builders, device manufacturers to enable connectivity to their devices and their machines. This is around 75% of our business. If we look on our goals, we have 3 focus areas for 2025. We focus on environment. We do have an impact on CO2, and we want to be becoming a net positive contributor to this, both internally, but also externally with help of our products. We focus on staff and customers. We strongly believe that happy and high-performing employees generate loyal customers. So let's start with making sure that we have a great staff here. And we are a growth company. We love the combination of growth and profitability. So this is an important part of our history, but also for the future. So targets for 2025. Net positive internal CO2 impact. Here, we work with our internal footprint, green energy, really making sure we are sustainable in our operations. But we also work with external impact, things that is done through our supply chain, but also things we improve together with our customers in reducing their energy consumption and reducing their emissions, et cetera. So there's a lot of things we can do on the environmental side. Our targets for customer employees is measured by Net Promoter Scores. We want to be beyond 25, both from employees and our customers. And as I mentioned before, our revenue target for 2025 is beyond SEK 3.14 billion, with a 20% EBIT margin, and we also have an updated dividend policy of distributing 30% to 50% of EPS to our shareholders. So this is the company, a short business update. We are seeing a recovery in the market. It's not on one market. It's all over our key markets in EMEA, in Americas, in APAC. And we are feeling that customers are back on a more positive outlook, think they have adapted to the pandemic situation. And I think we and many of our customers also see that things are improving for the future. We have 2 notes as well. We are seeing that our customers have been really reducing their inventory levels through the difficult times in 2020. We see partly that they are expanding again to be ready for the future. We also know, especially from the automotive industry that electronics industry is suffering from component shortages and things like this. This also means that some of our customers is putting some extra orders in to make sure they get deliveries. So this is also partly helping. But I think the main thing here is customers are changing from being quite pessimistic to become more forward looking, looking into a brighter future. And we also see here in the first month of 2021 in January, things continue to do well and improve here. Europe back on double-digit growth, that's very important for us. It's our biggest market. And this is also where we have seen challenges in 2020. America has been quite steady through the pandemic. They're still steady, but we have a fantastic development in Asia, primarily China, where we see growth in segments like wind power with a lot of new investments there. Part of our business with makers is what we call Design wins. This means that our customers [ design in ] our component or technology inside their devices and then when they start selling their devices, we become included and then buy this component or this module from HMS. And this is a business that was 10 years ago, 75%, 76% of our revenue, 10 years ago. And today, it's 46%. It is still growing, but other parts and other acquisitions have been growing faster than this Design-Win model. So this is a cash cow for us. We are growing in this pandemic situation where it's been difficult to reach customers. We still improve 1.3% in total design wins. We have 165 new customers here. But we're also seeing that the life cycle can be over 10 years that some of our old customers are also dropping off. So we have minus 142, still a net positive. And considering the situation in the market, we are quite okay with this. I briefly talked about the 2 acquisitions. We have informed about this last call, and Procentec looks fantastic. We were very happy to be able to acquire 70% of them here after October -- in October. And we also see a very good performance in Procentec in the first time together here. WEBfactory, we acquired the remaining minority here back in the end of last year, and this is also now becoming more integrated into our offer. And our strategy, actually, with both these companies is to move closer to users, but also increase our percentage of software sales. WEBfactory is a pure software company, and this helps to add software on top of our hardware products. All right. With this, I would like to hand over to Joakim talking about the financial results, quarter 4.

[Joakim Nideborn, Chief Financial Officer]

All right. Thank you, Staffan, and we're going to kick it off with the order intake. Maybe before we dig into the numbers, I just want to take you through the journey, referring to the upper left graph on this slide. Where we saw a first quarter that was quite good for us in 2020, driven by a very strong March, where a lot of customers were stocking up to avoid ending up into problems in the difficult future to come. Then Q2, obviously, very weak, impacted by lockdowns and rate uncertainty in the market. And we started to see in Q3 still a slow market, but some recovery and some more positive signs, which has then continued into Q4, where we see that more and more customers are adapting with the vaccine starting to be rolled out. They also are now investing more in the future. And as Staffan said, also building up to more normal inventory levels. And this goes across all markets and actually all offerings as well. We do see growth -- organic growth in order intake in all our offerings. So then to go into the numbers. This is up in SEK 408 million order intake in Q4 versus SEK 337 million. So an organic growth of 13%, also 13% help from Procentec. And then we have some headwind from currency effect, given minus 5%. So in total, a growth of 21% reported. Some highlights. Looking at the EMEA market, that as you know, is very important for us. We have 62% of our sales in this market. And without growth in EMEA, it's difficult for us to grow as with any big numbers at the group. So very positive to see that, that is actually back now with 13% organic growth in the market. Another big growth driver is China, which is performing very well. It's been doing that throughout the year, 79% order intake growth in Q4 and year-to-date, 56%. So this is actually going in to become a quite important market for HMS, starting from low levels. The third item I want to mention is Ewon where we see growth of 22% for the quarter and 2% for the year. So we're actually managing to switch back to actually grow for the full year as well in Ewon. I mean, we see, as we've been talking about before we've been discussing that this should result in a higher demand for remote access. And I think more and more customers see the benefit in that type of offering with the thing like this happening as we see around the world. And Procentec as Staffan also commented, has started out very good and performed better than our expectations in the fourth quarter. Looking at the year-to-date number, we are at SEK 1,447 million compared to SEK 1,470 million. So not fully managing to get up the growth with a minus 2% reported, organically minus 4%. But as you saw, it's going in the right direction. Going over to the sales summary. As you can see in that left graph, we don't have exactly the same variations between quarters, but still it's pretty clear that the trend is pointing upwards with the SEK 405 million in Q4 compared to SEK 346 million in Q4 '19. So a 17% growth, reported an 8% organic growth on that side. And also here, EMEA is the big driver. We are up 15%. The main reason for that is, of course, that we have the Procentec business, with the main market in EMEA, organic plus 3%. And in the Americas, we also see some Procentec impact of plus 8% and organic plus 3%. Otherwise, the big growth driver is also Asia, where we now see the benefits of a strong order intake throughout the year. And as I said before, China is starting to become a more important market. Going also from now representing 4% of the group sales to 6% of the group sales. And we believe that we have a very good potential for future growth with a big exposure to wind power industry for instance, which is an important investment for China to reach the goal in 2060 to be climate neutral. Full year, we're at SEK 1,467 million compared to SEK 1,519 million, so minus 3% or minus 5% organic. I just want to make 2 quick comments on the sales distribution per region. What you can see is that EMEA is maintaining a high level, 62% for the group split. And the main reason for this has been, of course, the Procentec company. What's also worth noticing is Germany that is now representing 35% of EMEA and 22% of the growth. This has earlier been more than 30% of group sales. So it's good to see that we're becoming less dependent on 1 single market. And the other thing worth commenting is APAC. That is despite the fact that there is no M&A impact in APAC, we are taking a larger share of the group sales. And then also, you can see China is now 34% of APAC sales. Japan has before been, by far, the largest market in APAC. We think that maybe in a year or 2, there will be 2 equal markets. Then I think the results might need some explanation and especially the comparison with 2019. And what we can see here is that we, of course, have a significant improvement, reporting SEK 75 million EBIT, corresponding to margin of SEK 18.5 million. I think the fair comparison is actually SEK 33 million in Q4 '19, representing 9.5% adjusted margin. The reason for this adjustment is that we had an earn-out that we didn't have to pay to Beck that we acquired in 2018 that were solved in Q4 '19, and we also could lay back a provision for the restructuring costs from the program that we initiated in Q3 2019. And so we had a bit of a doped result by some SEK 22 million in Q4 '19. Otherwise, I think it's a combination of the fact that we see in our growth again, we had good progress on the gross margin, and we had some help from lower OpEx. And just to explain that, I have a separate slide of the OpEx, and we'll get to that in a second. It's also good to see when we now look at the full year, we reached SEK 288 million and 18 -- sorry, 19.6% margin, very close to our target of 20%. And the fact that we're dropping SEK 50 million of sales or more than that and still managed to improve EBIT by SEK 40 million is, of course, very positive for us. I talked about the gross margin. For the year, we see an improvement of about 1% to 62% and the main reason is that we've been running an internal program, focusing both on pricing and on our supply chain cost, which has proven quite successful. I'm very happy with the improvements we managed to do there. We've also had a positive product mix throughout the year with the fact that the main offering that has been suffering is the Anybus custom business where it has a bit of a lower margin than the rest of the offering. Let me now switch slide, and we'll talk a bit about the OpEx development. Let's start with Q4 and the square that you can see there, we have what I call nonrecurring savings. We have still some short-time work effects even if it's not much in Q4, SEK 3 million related to Germany. Then we have another SEK 17 million that we call here other corona-related savings, basically, the fact that we are not having the trade shows and fairs that we normally have in Q4. And as most of you know, we have a pretty tough cost situation in Q4 normally. While we normally have a bit of a lower margin. This is not happening in this year. And of course, it can be argued that some of that might be a saving. But for the main part, we think that, that will be back for the future. So there might be a small saving in this, but it's probably on the marginal side. Looking forward, I just want to say that we have finished most of the short-time work going into '21. We have one of our entities in Germany. We're still having some of it left. I think that will be soon ended, so there will not be a big impact from short-time work in 2021. And on the acquisition OpEx, the SEK 22 million that you see related to Procentec, this is a bit above the normal run rate. One reason to that is the fact that we also have some costs related to the acquisition itself in that number. Otherwise, there's not a lot of things worth mentioning in Q4. Going over to the full year. If I just take the items one by one, we have acquisitions effect of 29%. We have a write-down of goodwill related to WEBfactory that were made earlier this year, given another SEK 40 million burden. On the other hand, we have no restructuring costs from the restructuring program in 2019. And we have the effect from the restructuring program of SEK 35 million net in the year. In total, it was SEK 45 million, but we saw SEK 10 million upside already in Q4 '19. And then we have SEK 48 million in total, that we call nonrecurring savings. We have SEK 30 million in total for the year related to short-time work. Out of [ SEK 6 million ] is governmental support. And then another SEK 35 million on traveling, various trade shows and those type of activities, where, again, we think most of it will be back when everything is back to normal, but maybe not everything. I think we have managed to turn some of these interaction over to digital events. I think we've done a lot of that this year, and we think that will also continue in the future. And that's a matter post upside and some currency effects of SEK 4 million.Okay. So then let me go over to the earnings per share. Wanted to talk about Q4 and the full year 2020, there's no big surprises. We have SEK 1. 21 in Q4. What is worth noticing though is the comparable of SEK 1.46 reported in Q4 '19 is very doped by some different things. So the right comparison is maybe more [ SEK 0.68 ]. And we have to take you through some of those items, we talked about the SEK 22 million effect on the EBIT before but we also showed a positive tax of SEK 20 million in Q4 '19. This was driven by SEK 28 million, majority of that related to a positive tax position in Belgium that was also given us an upside for -- in both 2018 and 2019, came in, in Q4 last year and some other earn-out related tax effect. For the full year at SEK 4.79, an improvement then with a fair comparison of SEK 4.06. And earlier today, the Board decided to propose a dividend of [ SEK 2 ] to the AGM. Then we have our cash flow, which has been very strong, especially in Q2 and Q3. It's -- we still think this is quite good in Q4 with SEK 83 million. We don't have all the things working in our favor as we did in Q2 and Q3, but even so quite all right. We have some positive working capital effect of some SEK 5 million, also helping us and if you just look at the working capital effect in relation to sales, we're at 10.5%. Last year, we were at 9.5%. I think the main reason for the small uptick there is that we have now Procentec also in the business, which is running with a bit of a higher working capital level. I think we've been around about that 10%, and we expect to be somewhere at 10%, 11% going forward as well. For the full year, SEK 370 million in cash flow compared to SEK 254 million, obviously, a huge improvement. I must say that I think everything is really working to our favor. This year, we have the working capital effects going our way. We have lower net tax payments since we got some returns from last year due to the items I discussed before. And I think a fair cash flow going forward is probably more in line with our operating results, and this is really not sustainable. But again, fun to see that we managed to perform this strong in 2020. Okay. Then we have the net debt situation, where we can see, of course, this is on a low level, we managed to reduce the net debt by SEK 200 million during the year, driven by the strong cash flow and the fact that we didn't pay a dividend in 2020. The ratios, net debt-to-EBITDA now at 0.49 with the reported number, including the IFRS 16 effects, must be seen as quite low. We feel, of course, very comfortable on these levels and see that we have a very strong balance sheet in good shape to continue to execute our new strategy with a higher M&A focus. Then my final slide. Yesterday, Staffan told me Joakim, it's been a nice report, but why don't you say something funny before you hand over to the questions. And my problem is I'm just a dry CFO. I couldn't come up with lots of funny things. But at least I managed to put in this nice picture of the light in the tunnel to the right. So you have to stick with that when I go through my conclusions of 2020. I think we can say 2020 for us as for everyone else, it was a year like no other. We had to manage a quick turnaround to digital interaction with our customers, which we think we did in a good way. We had more leads than ever and a lot of digital meetings with our customers. That in relation to a quite careful approach to OpEx has been the foundation to maintain on decent levels and protect our EBIT margin. Then on the order intake, as I commented on before, we had actually really 2 challenging quarters, Q2 and Q3. Otherwise, Q1 was quite good, and Q4 is starting to get back on track. The increased footprint in China has been good and will be a good growth driver also for the future. That's good to see. And very happy with the gross margin improvement. With 1 percentage point, this despite the fact that we had the currencies and volumes working against us. And then, of course, Q4, where the trend is now pointing upwards again, followed by also continued good start in January. And I think, in general, a bright outlook in the market, especially in relation to the last couple of months. And finally, as I just said, we think that we have a very solid financial position, and that is excellent to continue to execute our M&A strategy. So thank you for that. Let's hand over to operator and see if we have any questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Fredrik Stenkil of Nordea.

[Fredrik Stenkil, Research Analyst]

Congrats on a good report. I have a few questions. You mentioned the large investments in China into wind power. And that accounts for a large part of the growth. I was wondering if you could describe a bit more what kind of products you're using? Is it Ewon? And also, maybe if you could give some background on kind of how you got into serving these customers, would be interesting to hear?

[Staffan Dahlstrom, Co]

All right. Maybe I can start and you can fill in, Joakim. Actually, it's not so much Ewon. We don't have such a big Ewon business in China. There has always been difficulty with the Chinese firewalls, and this kind of remote access out of the country. I would say that the major business we have in China is partly related to Ixxat, where we have some infrastructure component inside wind towers. We have some Anybus business with pitch control of the blades and things like it. It's several different design wins, and it's several different brands for us. So we're well positioned, but it's the manufacturers of the equipment that is inside the wind towers, that is our customers. So we are not working with the users or the wind parts themselves.

[Fredrik Stenkil, Research Analyst]

All right. Cool. And then just a question on the inventory buildup among customers that you mentioned. Have you had any issues with inventory or -- sorry, in sourcing components? I mean, gross margin is strong despite FX headwinds. So it seems that you have been able to get the components you need?

[Joakim Nideborn, Chief Financial Officer]

Yes, maybe I should take this one, Staffan?

[Staffan Dahlstrom, Co]

Joakim, will you take it? Yes.

[Joakim Nideborn, Chief Financial Officer]

Yes, sure. So I think just to answer the second question first, maybe, no so far, we didn't have any problems. What we have been doing, we are now building some extra component inventory at our [indiscernible] sites. So we've taken that upfront investment now to make sure that we don't get into problems later on. We see that the lead times are getting longer and longer. And right now, we're on the 3-month long lead times that we normally see. So that is what's causing us to make this buildup. And then on the -- I didn't quite catch the question on the customer side. What's your question? Maybe I heard something that wasn't there?

[Fredrik Stenkil, Research Analyst]

No, it was more an into, but I mean, you say that the customers are building up inventory to make sure they don't stand without components. And I mean, if there is the issues, I would think that you might have issues in finding components as well, but you pretty much answered that one. So I have one last question. And is about Procentec. You said that you were happy with how it's developing. And you're right that they contribute SEK 40 million in the quarter. So I'm just thinking, if I take this times 4, it looks like very strong year-over-year growth for Procentec, but maybe there is some seasonality in that business. But do you have a number of what the sales was in Q4 2019 or kind of the growth numbers for Procentec?

[Joakim Nideborn, Chief Financial Officer]

I must say I can't remember that number straight up. I think it was -- they did 18 -- sorry, EUR 11.8 million for the full year '19. And they are slightly above that in 2020. But then they have the same as we've had. They had a tough Q2, Q3 and then a good Q4. I don't want to give a guess on exactly how much growth they're seeing in Q4, but it's -- I remember from the due diligence that I did not react on the seasonality. With that said, it might not be as easy to just take 40x4 and say that that's the way they're going to perform in the future. I would love that to be that case, but I'm not sure if that is the right way to look at it.

[Operator]

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

[Viktor Högberg, Analyst]

Okay. So just a follow-on on Fredrik's question there on what to expect in terms of seasonality, SEK 40 million, would you say, is that a baseline going into Q1 or Q4 strongest quarter for them as well?

[Joakim Nideborn, Chief Financial Officer]

I think the only thing that we have as the data point is they normally have a very strong October. Other than that, I don't think there is any specific months, I don't know why that is the case, but that's still the same in the past. So maybe I wouldn't take 40x4, but I think that we expect, of course, to see a growth from this level of -- well, about EUR 1 million per month, as you could say, it's EUR 11.8 million. We expect it to be a bit better than that going forward. But I want to be a bit careful since we don't know the business that well, just to give a more clear indication on that.

[Staffan Dahlstrom, Co]

I think we can -- we are a real little bit joking with the management team at Procentec, that they really made a good first impression in the first quarter here, but I think they also feel that they are performing better than they actually expected themselves. So I think we had a strong quarter. So they also feel that this is better than their own internal plan.

[Viktor Högberg, Analyst]

Okay. And on the cost side, in Q4, you said a lot of money on not being present globally, trade price and such. What about for this year? Of course, it's going to come back when things normalize, but are we in a world where things are normalized now? Or what do you expect for the first half and second half of this year? What is your pipeline? Are you planning to do physical trade fairs? Or what is happening in your world?

[Staffan Dahlstrom, Co]

Maybe Joakim, I can -- should I -- I can start with a little speculation. I think we are -- long term, maybe, we can say that maybe 1/3 of these savings could be maintained over time, maybe in more digital things, maybe 2/3 will come back. When will it come back? We believe that the first half year, this year, 2021, will be on a low activity level when it comes to traveling. And we expect that after summer, it will ramp up again. So we are -- as we stand right now, we are thinking about doing this kind of more physical trade shows next fall. So I think the cost will increase.

[Joakim Nideborn, Chief Financial Officer]

Maybe just add a little bit to what Staffan said. I think it's fully correct that we will not be spending as much traveling and trade show costs in the first half. But when we see now that the business is picking up, I think we've been holding back on some investments internally, adding some position. So there might be that we're going to add some costs already now compared to where we stand. So we've been very careful during 2020, and we think that there might be some investment needed.

[Viktor Högberg, Analyst]

Okay. And so just a bit more color on the comments there on the supply chain bottlenecks that some of your customers have seen, which have resulted in them stocking up. Did you book any sales? Or was that late in quarter just affecting order intake? What do you expect for Q1 in this regard?

[Joakim Nideborn, Chief Financial Officer]

Should I go, Staffan?

[Staffan Dahlstrom, Co]

Yes, please.

[Joakim Nideborn, Chief Financial Officer]

So I think it's a very good question, and it's very difficult to answer. I think we definitely have some effect, obviously, in both the order intake, probably more in the order intake, but also some in the sales already. We don't really see that they are placing longer orders than normal. So they are taking the volume. And I think that we've seen also going through 2021 that have been taking the volume. So I mean what we suspect is that, I mean, they see what we see and everyone else sees. So they will prefer to have a little bit on hand themselves to not miss out on deliveries in the future. And exactly to what percentage is driven by this is we can only speculate. So it is difficult to say.

[Viktor Högberg, Analyst]

Okay. But in your discussions, it doesn't seem like they're front-loading now and might be taking more easy in ordering in the next couple of quarters due to this? Or do you think it, on an overall basis, would have marginal effect on the yearly order intake for the full '21?

[Joakim Nideborn, Chief Financial Officer]

I think what we -- yes. You go.

[Staffan Dahlstrom, Co]

Yes. Let me start there. We think the -- as I mentioned in my business update, I think the major thing is a more positive outlook. They are more positive. And I think a side note is that they're also building up more inventory to, I think, see less risks going forward. But I think the main driver is the -- it's a more positive outlook. So the fact that they are increasing inventory is, I would say, a smaller part of that.

[Operator]

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

[Staffan Dahlstrom, Co]

Thank you. Thanks a lot for attending this meeting. And I must say we are, as you hear, quite back on a more optimistic track after rough or at least eventful 2020. Of course, there are still uncertainties in the market. But I think in general, we feel -- we and our customers feel that we have the worst behind us. And I think Joakim's picture with this nice light in the tunnel that is really light we see there. That's how we feel as well. So thanks for this call here. Thanks for joining and stay tuned with HMS, and we look forward to an interesting 2021. Thank you.