HMS Networks AB (publ)

Thank you. Good morning. Staffan Dahlstrom here. I will start with a short introduction and then Joachim will take over and continue with some deep dive into the Q1 numbers. So let's just go into a very quick faceplate for a financial summary of Q1. We just published our Q1 report. In summary, Q1 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 a buildup of inventory by our customers, and Joakim will be back on this. We're increasing our EBIT and we are close to our target of 20% EBIT margin, so this is fine. and we have a good cash flow and EPS is increasing. But again, Joakim will talk more about Q1 in the details. If we look at the trade in 12 months, we are seeing that most numbers are improving. All numbers are improving, I think. So we are in the right direction. But of course, our target of high growth and profitability 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. You know, we have our four main businesses with our wholly owned businesses of Anybus, XSAT, E1 and Intesys. And we have our fifth business leg with WebFactory, partly owned 75% as we acquired 2019. But it's still a fairly small part of our business. But what's key for us is that we have two 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 windmills elevators etc and we work with manufacturers of industrial devices such as robots or plcs or circuit breaker breakers etc this is very important for us makers are more than 75 percent of 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 look on the distribution in quarter one we are seeing that the The big majority of our business is still within makers. In makers, we have two models. We have what we call design win, which is almost a recurring sales process that we sell components that are in design 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 bill of material. So, as you see, 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. 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 Q1. And we are normally distributing, the board is normally deciding to distribute 50% of the EPS in dividends. However, this year, due to the corona circumstances, the board have decided to cancel the dividend. So there are no dividend proposals this year. Short business update and the slide that you will be waiting for. We start with a corona update. So if you look on corona, we can conclude that during quarter one, all our team members are healthy and safe. And we haven't seen so much impact on the business for HMS in quarter one. The biggest impact have been in Spain. We are in one of the areas that is more or less under lockdown outside Barcelona. So we have been 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 chains. have some smaller disruptions from chinese suppliers that 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 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've seen that we had a good order intake, but we think that maybe 30, 40 million SEK of the order intake is probably a build up of inventory at our customer's location. So the good order intake is not a normal situation, we think. Looking forward, if we look on Q2, we can see that we are feeling a big 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 two. And based on this, we also implemented short time work in Sweden, our largest, and Germany, our two largest, the two 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 is started. And we keep a very close monitoring of the situation. per our agreement we can within seven 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 also be careful of 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 keep a very close eye on our costs 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 the USA 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, a good business for E1 at the moment. But Anybus and ICSAT are down, but I would say sideways from second half 2019. With Intesys, Intesys 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 interest, we are seeing some challenging in the near future. All right. That was a very quick update of quarter one and our forecast for the future. And I would like to leave over to Joakim to talk more about the financial numbers.

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 a 401 million. compared to 387 in Q1 2019. So we have to look 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 build still 1.11, which we think is positive. And across brands, we can say, Stefan 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 E1 that is up slightly. On the positive side, we can also mention that Webfactory that we acquired last year had a very good quarter with 9 million order intake and received a record order of 4 million from a big customer. That was very positive. Looking at these stocking orders, we can also say that it follows the 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 1,484 million. compared to 1470, so slightly up in the reported figure, however organically a decrease of 6%. And this is then, 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 361 million compared to 380. 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. We have factory automation is down, automotive is still very challenging and machine building is at very low levels. However, we see a little bit of a pickup in Asia, especially Japan, that we've been having some tough quarters coming back. We saw improvements already in Q4. Now Q1 is even better, so that we think is positive. Also, America is doing okay. But we know, as Staffan said, it will be challenging times ahead. But for Q1, it's looking quite okay. For the rolling 12 months, we're at 1.5 billion exactly in sales compared to 1425. previous period overall in 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 the 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 America, 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, the USA is the big market in Americas, and Germany is by far the largest market in Europe. In Asia, Japan represents more than half of our sales. So to try to understand our results a little bit more, I'm going to give you some guidance here. corporate 67 million ebits compared to 60 so despite the lower sales managing to to improve the the ebit and of course we think that is very positive and one very big contributing factor is the gross margin that is substantially better three percentage points up compared to the q1 2019 and then the the main factor behind increased gross margin there are of course many factors but the product mix is good especially within any bus where we now have integrated the acquisition of Beck that we made in 2018. And here we can see two 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 Anabas 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 6 million lower OPEX. Organically, that would mean a decrease of 14 million. And the main reasons behind this is, 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 we normally do, and we also have 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 in EBITs. We're doing 16.7%, so a little bit short of the target, but still on a decent level. And the gross margin is very close to 62% compared to just about 60. So we've seen a bit of an improvement the last quarter, 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. I just want to show you that we're up from 0.88 SEC to 1.01. And net financials is pretty much in line with expectations of 4 million. And I think the same if you look at the rolling 12 period. It's pretty much as expected. Cash flow from operations, we're doing 55 million, despite working capital buildup of 29 million. So we think That's quite positive that we still managed to get out 55 million from this. And the main reason behind the working capital buildup is increased receivables of 41 million. This is a factor of two 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 also strengthen our internal rules, how to handle customers not paying in time. So we minimize the effect of credit losses. We have seen an inventory reduction of 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 transportation, 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 as I said, it's a bit difficult and we follow the situation closely to try to make the best calls that we can on this. Also, for only 12 months, we can see that the cash flow is up some 30 million, so positive, 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 390 million. And a big part of that comes from IFRS 16. Looking at net EBITDA, we're 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 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. 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.

Thank you. If you have a question for the speakers, please press 01 on your telephone keypads. And our first question comes from the line of Joakim Gunnell of D&B Markets. Please go ahead, your line is open.

Thank you, operator. Good morning, Staffan and Joakim. 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? Can you comment on the development for each brand? Is E1, for instance, closer to positive territory?

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 in general, I think the E1 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 it's clear that Code 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 indices, I think, and not so much on E1. That would be my general guess here.

All right. 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 dropped at 13% in the financial crisis. And what are the levers here to protect margin?

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 4 million SEK 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 measures we're now putting in place will give 4 million per month for the saving. 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 2 million per month. And that is also what you saw in Q1 with the 5 million that we saved in Q1.

All right. And also, if you could elaborate a bit on the growth rates for each of your two revenue models, which you highlighted here in the presentation. I mean, the design win versus system leveling in Q1. What are the growth rates for this two models?

uh models and once again can you just remind us of the margin profile for this 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 the um in the embedded business we have some some custom products that will have slightly lower margin um so if that 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.

Yes, sure. I mean, with full understanding here, I mean, it's impossible to have a full picture, but can you give us just some context here? 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 the dividend could come back to the table i think this is a a board question that we we don't take active part of that so i think that 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 these 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 something to take some bold initiatives going forward. But I think that's the mix I heard. But it's not a management decision.

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

I think for the distributors, it 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.

Thank you very much. That's all for me.

Thank you. Our next question comes from the line of Victor Hogmey of Danske Bank. Please go ahead. Your line is now open. Good morning.

So just a follow-up on that question, the distributors not stocking up Bits.T and better customers. Yeah, I'm trying to figure out here if the 20% decline in order intake 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 30 to 40 million second 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?

I'm going to clarify one thing. The minus 20%, that is actually organic decline. Okay, it was. Sorry, can you just repeat the question?

Yeah, 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 30 to 40 million stocking up effect in Q1. If you could elaborate a bit on that.

I guess we can speculate. 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.

Also, what did you say, Joakim, 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?

Yeah, 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 forepaws the normal pattern. So normally we would see, if we look at our order book at a given time, 75% is normally delivered within the coming three months. And we have the same situation now. So the conclusion from that would be that the main effect of the stocking orders, the 30, 40 million, would come in Q2, in deliveries in Q2. I think that's what I meant. Okay, okay.

I get it. With the improvements you've made and you've seen and putting the mixed effects aside in the gross margin, It sounds like 62%, earlier you talked about 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. What do you see if we lift rise beyond this year in terms of gross margin improvement given the current products that you have?

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, yeah, 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.

Okay. So that was it for me. Thank you. Thank you. just to remind everyone if you wish to ask a question please press 0 1 on your telephone keypads and there are no further questions at this time please go ahead speakers all right thank you very much thanks for attending this quarter one call here and let's stay tuned for the the coming months and quarters here we expect some turbulent times for our business

But as I mentioned, I think when the corona fog is clearing up, I see some good opportunities for automation, 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 the 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 thanks joachim as well and be careful out there wash hands and look forward to keeping contact with you thank you