HMS Networks AB (publ)

Thank you very much. Hello, everybody. Welcome to this Q3 call. And it's myself, Staffan Holström, and Joachim Niederborn, our CFO, who will be joining you for this afternoon. And we have a couple of topics. I'll start with a short summary and a business update. And then Joachim will drill down into the details of our numbers, just presented an hour ago. And then we end up with a Q&A. But let me start with just a short overview. For the quarter, we are continuing to see a quite weak development on our net sales and also order intake, a little bit less expected. Keep also in mind that quarter three last year was a fairly good quarter for us. We have strong comparables. So we have a weak top line. It looks better further down. We are quite happy with a good EBIT. We are up compared to last year. We are 77 million Swedish crowns compared to 56 million. But you also need to keep in mind that last quarter three, 2019, we made a 25 million Swedish crowns provision for our restructuring program. So we are similar to the EBIT level we had before that provision. So we land on a 22% EBIT margin, better than our long-term target, which is 20. That's quite good. And I must say, we are very pleased with the continued good cash flow for operations, landing at 116, resulting in quite good earnings per share. So that was the quarter, and it's accumulated over to the nine months with a similar development. We order intake, we connect net sales as expected, but we are on par with the last year's profit before that provision for restructuring. And we are landing last nine months on 20% EBIT margin on our target. So we're quite happy with that. We've been maintaining good cost control. And of course, we've also done some savings from the restructuring program. But also COVID-19 situation helps us to also reduce some OPEX costs. Joakim will talk more about that. So just a few words about our business. What we wake up every morning doing is to think about how we help our customers connecting their devices and machines to different networks. We have millions of critical applications, critical machines that are connected in power plants, in automotive plants, in breweries, in this kind of industrial automation applications. We have four brands. We have Anybus. We have Ixart. We have Evon. We have Indusys. all with different functionality and a little different focus area. We also have our fifth area for software, WebFactory, and I'll talk more about WebFactory in a minute. We focus on two areas. We focus on makers, makers of industrial equipment and industrial devices, companies such as Rocket Automation, Schneider Electric, Caterpillar, But we help them with their connectivity built into their device or into their machine, which allow them to connect to any type of system that their end user may have. We also work with these users. This could be companies that produce the beer or the car or the electricity that you use. And here we have different products for interconnecting different systems and machines in their plants or in their remote installations. So these are two very important areas for us. And if you look on the distribution of our sales, it actually looked quite much the same as previous quarters. So even if we see a downturn on our top line, the distribution is quite much the same. We have 47% of our quarter free revenue on the design model. This is a long-term model where we embed our technology in the maker's products. And this is a long-term business. But of course, we need to have makers that sells a lot of product that can buy a product as well. So really depending on our customer success and that we've seen some headwinds in this business the last quarters. We also work with our gateway routers and other products. That's a mix. We sell this both to users and to makers. And this comes together to 48%, quite much the same as we've seen before. And software subscription services is an area we want to expand, but we are still on a low 5%. And we have long-term targets to grow that, but it's still on a single biggest percentage. What we and our board of directors have done in the last couple of months is to spend a lot of time thinking about the long-term future. course we need to have two things in our minds for the future the short-term activity we do in this kind of challenging market but we also need to make sure that we focus on our long-term activities so we have now set a new goal and our ambition is to for 2025 which our revenue that year should exceed pi billion or more than 3.14 billion swedish crowns you know we're engineers so we like this kind of easy to remember kind of numbers so High building is very important for us, and that's our ambition to go there, both by organic growth and also by selective acquisition, and maybe the mix will be approximately 50-50 to go there. Profitability, we are around 20%, and we will maintain that target going forward. That's an ambitious target, but we've seen that we can deliver that, and we would like to maintain this profit level over the business plan for these years. We are doing a slight change to our dividend policy. We used to have 50% of EPS should be in, approximately 50% of the EPS should be in dividend without saying 30 to 50% to also allow for some more flexibility when it comes to keep preserving some cash in the company for acquisition, et cetera. But at the same time, we are saying that dividend is important for our shareholders. With the business update, let's go quickly in there. We have a couple of companies' acquisitions we have done. We bought 70%, the majority of the Dutch percentage group. The remaining 30% is owned by three senior executives in the management team there. And we work with them to develop this company. And what they do is hardware and software for surveillance and diagnostic of the network traffic in industrial applications. This could be in a steel plant or in a paper plant where they attach their sensors and equipment to the network and we can then monitor potential problems in the network to have a service, they do the service, we can predict also that there are areas that might impact their network traffic going forward so therefore they can also do proactive services in these things. A specialized company and they are headquartered in Rotterdam in Netherlands and have own sales offices in Germany, UK and Italy. And they are around 70 employees. It's a small company but very nice technology and it fits very good to our users and our ambition to do more business within software and services which we think we can develop here. 12 million euro approximately going forward we expect maybe single digit growth and double digit EBIT margins and of course our vision is to improve the growth by helping them but we also know that this is with users in this industry it takes time to generate new business models but the idea is also to develop their business with them more from this kind of products they have today to explain why things doesn't work, to also have predictive maintenance and have more intelligence in these products to help our customers to have preventive maintenance. From preventive maintenance to something more intelligent that can predict future potential problems. We see a good market and a good fit with Procenta going forward. As you may remember, we bought 74.9% of the software company WebFactory last spring. And we now agreed with the founder who owned the remaining 25.1% to acquire his shares. And the idea now is to speed up the integration and use more of their products integrated with our other hardware operators. So far, the business with primarily Germany and Central Europe has been quite challenging, and we have seen a lot of delays with customers in this kind of software and monitoring applications where we do focus on. But we strongly believe that being 100% owned on WebFactory can help us accelerate how we use the product, how we sell the product, but also how we bundle the software together with other products to make a solution based on both hardware and software. We also see continued impact from COVID-19, but it's a mixed picture. We see customers with exposure towards medtech and food and beverage. They are performing quite well. But we see continued challenging business related to automotive. We've seen that for quite some time, and this is still a challenge. In China, we see quite good pickup in some verticals like wind power. We see that our ordering tech in China is up 50%. And that looks quite good. But in general, we see a low or hesitant CapEx investments in the industrial applications in general. But what we know from other earlier downturns is that these lower CapEx investments normally doesn't take away CapEx long term. It's more a delay. So we believe that there's a good opportunity post-COVID that these investments will come. So we are quite positive in the midterm, right? We see in general that Europe has been down, both in sales and order, especially Germany, France, Italy, Spain, where we see a lot of effects from corona. Asia is down in our revenue, but a good pickup in orders, so that looks promising. And the U.S. is, I would say, sideways, low growth, but it's quite okay. But there's also big uncertainty in the U.S. for the near future. So we see... germany and central europe is down we see that any bus is down but for other brands and other geographies it's quite okay this picture we have stable gross margin despite lower volume and also despite a current situation that is a bit unusual for us we have had years of positive effects but now we see some headwinds on this and this is also affecting some of our gross margins but we've been fighting to really be more efficient here internally and we are quite happy to maintain a good stable gross margin here. Finally, from my side, a short COVID-19 update. We still have a team that is fully functional, fully healthy, so we have no direct impact in our teams for COVID-19, but we are very careful. We have continued home office work for most of our staff. Now the policies that we would like to have our different teams at least one day a week in the office and their manager decide what is the best day and we try to organize it so we don't meet everybody at the same time. So we're finding new ways to work and new ways to meet to make sure we can do our business going forward. We continue some short time work in Germany, in smaller, it's around 20%. In Sweden we work full time and most other countries we work full time as well. full function in our supply functions in sweden and in spain in belgium so we are fully up and running there looking forward for quarter four and we can say that the quarter four so far has started to be in line with quarter three we don't see big changes upwards and downwards so it's more sideways keep on rolling here we see challenges in germany so we maintain short-term work until further notice We continue COVID-19 very much. And of course, like we all, we are quite concerned about this second wave coming up here. Many of our markets, we need to be careful, but our customers are also learning how to deal with this and taking countermeasures. So most of our customers are up and running and have a business that is working quite well. But we are canceling all these traditional affairs and face-to-face meeting with customers. So we see a lot of digital events and I must say I'm quite both surprised and sometimes also impressed how well this works and customer interaction that it goes on and we see a lot of digital meetings with our customers and customers appreciate this as well for their safety but also for their efficiency. As you said last quarter, we believe that even if we have a little bit headwind right now, we see a good market conditions for automation and digitalization going forward. And we are quite optimistic for medium-term of our business when we have Corona behind us. So we focus on our long-term business for the time here. With that, I would like to shift over to Joakim to give us a little bit more details of numbers.

Okay. Thank you, Stefan. So we're going to start out as normal with our order intake situation, which is maybe the softest point in the report. Even so, I mean, we see a bit of an uptick from the week Q2, and things are definitely moving in the right direction, even if that is pretty slowly so. So we are showing now $336 million in comparison to the $372, organically a decrease of 7%. and it's really isolated to a couple of countries where we see the big drop and it's it's germany italy and france that is is representing this challenging development otherwise we had a small decline in the us and the positive as staff and also mentioned this asia both japan and china is doing well china is doing extremely well and we're winning a lot of new interesting projects in in china that is probably going to help us a lot in the in the future so very good ordering thing there the first nine months we're down pretty much 100 million organically nine percent and um as stefan said for the first time now in some years we're actually seeing some some headwind from from the currencies which you will see throughout the report is affecting us on many lines here the picture is pretty much the same as in the in the quarter for the first nine years we have german and italy being the main reasons for the decline. U.S. is pretty much flat and Asia is growing very nicely. So that's, of course, very positive. So a bit of a change, a different picture, depending on what geography. And Staffan also commented on the customer mix. That is also quite different. We have some customers performing quite good. And the ones that are more into automotive and industrial investments are having a bit of a more challenging time. let's have a look at the sales which is um a slightly different view than than on the order side as you see we're we're now pretty stable around the 350 level if you look at the last couple of quarters uh we have 345 million in the quarter to compare with 377 for q2 one year ago and organically we're down six percent uh it's it's the uh the german market and kalida is It's behind most of this decline. And the difference compared to the order intake is that we have also Asia being down on the sales. But obviously, this is going to change in the future given the strong order intake that we see now. Also, in the first nine months, pretty much the same view here. We're down 111 million Swedish crowns in sales. Organically, that means 9%. And as you see, it's pretty much the same view on the different markets as in the quarter. So I think for the coming, I think we wrote in the report for Q4 that what we've seen as a quarter intake is continuing pretty much in line with the pace that we see in Q3. So I think we believe that there will be pretty slow recovery from this situation, but we're a little bit positive and hope that we will see at least as good numbers as we see now for the coming quarter as well. Then the sales split per region in percent, maybe not that interesting. We have 60% of the business in EMEA, which is quite normal. We have a bit more in America with 23 and 17 in Asia. This will probably change a little bit in the coming quarters where Asia will have a bigger percentage given the strong order intake. Otherwise, it's pretty much what we normally see here. Then maybe what needs a bit more explanation is to understand the result and the gross margins. Because you might get a bit of the wrong view just looking at the numbers without understanding the underlying reasons. If we start with the EBIT level as such, it's actually a record quarter first, 77 million, even if we had adjusted 81 in Q3 last year, adjusted for this restructuring provision that we had. But it's also good to see that we have margins 22.3%, which I think is the best we'll be seeing in many, many years, and also above our targets. And the reason is, of course, the low OPEX and still quite solid gross margin that makes us achieve this good number. And just to understand the gross margin, 61.9%. You might also see that this is actually down compared to Q3 last year. But we think, if anything, we're quite satisfied with that number in the report, actually. And we have negative impact from the fact that we have low volume. 32 million lower sales, which gives another absorption of our manufacturing overhead. And that is impacting with about one percentage point negatively. We also have currency headwind, which is also giving about one percentage point negative effects compared to the number one year ago. So I think although we managed to do some good things internally, we did some good things in supply, we managed to get through some price increases. So to achieve the 61.9 with this low volume, we think it's actually quite good. Then looking at the OPEX, it's of course dramatically down 44 million, but then you also should remember that 25 of that is related to this provision that we had for the restructuring program. And the organic number is 30 million down, so 8%. Also, I just wanted to mention the short-time work impact, which might be interesting to also know. In total, that's 4 million, where 1 million comes from governmental support related to this. That same number for the full year is 5 million in governmental support and 7 million for the other impacts. So my comments on the first nine months, it just happened to be so that the EBIT level is exactly on the same number as for the first nine months last year. So 230 million, which given the lower sales takes us to precisely our target, 20%. And here you can actually see that the margins are up one percentage point. So 62.1 compared to 61.1. And this is due to the reasons I mentioned before and also quite positive to see that we can actually increase this margin even if the volume is working against us. OPEX is, of course, dramatically down 70 million organically and adjusted for this 25 million restructuring provision. It's 53 million. And out of that 53, we have about 33 million related to the restructuring program. And the rest is just basically lower run rate in terms of lower activities with less traveling and less customer events and so on due to macro situation. So we're also now when we're pretty much through the effects of the restructuring program, happy to see that we will get the 25 million, sorry, the 45 million yearly effects that we had planned when we did this last year. Yes, some comments on earnings per share. There's not a lot of interesting things happening here. We have a good underlying result, which is basically us following through, no strange things happening with the net financials or tax in the quarter. So happy to be able to present 1.33 Swedish crowns in the quarter and 3.58 year-to-date on the earnings per share. Looking at the cash flow, we have also record cash flow, 160 million. of course we do get some help from some working capital adjustments so we have a positive effect on the cash flow by 20 million due to this the two main items is we have some inventory reductions compared to last quarter and also we have substantially lower receivables by 28 million With that said, I also wanted to say that we still have pretty much the normal level. We're actually up a few million compared to year-end in receivables. It's not that we just empty out this. I think we managed to get some help and maybe we'll not have the same effect in the coming quarters. But we're very happy with the 116. And even if we get the help from the working capital, we still think that's quite healthy. So in relation to sales, we're at 10.7% working capital, which is where we normally expect to be around this 10%. So nothing strange there. Year-to-date, also very strong number, 286 compared to Y93. We get some help from working capital reductions, not so much for the first nine months, only 8 million. And here we have the big change is actually inventory that is down 23 million compared to year-end. But we might see a bit of a build-up in inventory for the coming quarters, since we will have to take on some components that we see a bit longer lead time due to some corona impact. One thing that's been common for us, but we need to have those components, so we'll take a bit more inventory of those that we normally keep. Also, what is behind the very strong cash flow and the improvements is that we got some tax returns that I think we talked about in Q4 reports related to the Belgian business. And overall, I think we have pretty low financing costs due to the fact that we have a low debt at the moment. And we also, when we get the lower net debt, we also get better financing costs as such. So yes, to end up with the leverage and the debt situation here, we have, as you can see on the graph, a very positive trend. Of course, the fact that we didn't give a dividend this year helps a little bit. But still, we've been able to convert pretty well to our cash and to work down the debt level. So I think we have a very strong situation now going into Q4. As you understand, we made the acquisition of Procentec in October and also the last 25% of WebFactory. So that will, of course, increase the net depth in the quarter, but still it will be on very low levels. And, I mean, going out to the quarter at 0.42 net depth EBITDA. Even if that will be a little bit higher after Q4, it will still be on very comfortable levels and we will have a lot of firing power left for new investments and interesting acquisitions. And before I leave back to operator for questions, we just wanted to say also that we will have a capital markets day. It will be digital. It will be in November 18th between 9 a.m. to 12 a.m. Central European time. And we hope that you will want to listen in to see what we have to say about the coming time for HMS. So thank you for listening. Operator?

Thank you. If you have a question for the speakers, please press 01 on your telephone keypad now. Our first question comes from the line of Victor from Danske Bank. Please go ahead.

Hi. So I've got a couple of questions. First on the new revised financial targets and the implications from them. and it's a slightly lower growth rate over time than a previous target and a slightly lower organic and growth rate that is at least my my take is that due to the higher revenue base or do you see something shifting in the market or from the competition or could you just elaborate a bit on the organic yeah part of the of the growth target up until 25

Maybe let's talk about Joachim. I just want to say that me and Joachim are on different locations. We don't see each other, but let me start with this. I think this new target of exceeding 5 billion in 2025 represents growth of what can be 18% a year, something like this, which is lower than our original, but it's still not that far away from it. I think this is a combination of bigger numbers and what we see is challenging, but also realistic going forward. and our estimation is that this would probably let's say 50 50 mix based on organic and mnas so organic will be eight to ten percent something like that and the same for mnas going forward and joaquin maybe you can give a more detailed picture on this

No, but I think it was a good description, Staffan. And I think the fact that, as you say, if you do the math, you're probably not a little bit lower than 20% that we said before. And our feeling is that we don't really have that. The market isn't really there. And maybe we've overestimated the potential before. If you look at the market reports and so on, we still think this is quite ambitious and in line with the high intervals on the industry reports. That's the reason behind.

Okay, so turning to the M&A part, half of this growth. Where do you see your pipeline? You just executed on a deal a couple of weeks ago. And so how's the pipeline looking? What are you looking at? I know software multiples are higher than hardware multiples, but you're still wanting to grow your software business and also How do you see your balance sheet over time? How much gearing would you be comfortable with?

Joakim, will you take this? Yeah, sure, I can take it. And I think it's a mix, what we're looking for. I think we'll probably see us doing some software acquisitions more than the web factory business. But I still think that the majority will be maybe a little closer to our more What should I say? Base business, so to say. I think the business for remote access and remote data we have with mostly through E1 is also an interesting area for us to see what more there can be done. That's one area that we're going to look more to. And what else did you have with the gearing? Well, I think, you know, as you see, now we're at very low levels. I think going up to like 2.5 or so will not be a problem at all. And that's through EBITDA.

and they were quite comfortable i think it could go higher than that it might happen from time to time but that will probably be in a limited period if that happens okay and just the last question on on growth placentic you said you expect single digit organic growth is that to be expected over time or is that near term expectations uh or what do you see for for the percentage business maybe for 21 in a recovery year with easier comparatives uh maybe about that or what do you see from uh percentage short term and longer maybe i can start with a single digit uh growth for that business that is how they are standing and going today and so they have growth on their current business

I think the first, maybe 2021, HMS will not be doing a lot of changes. We need to support them and help them. Going forward, I can see more engagement from us to help them find new markets like in North America, in Asia, where they are not really present today. So we hope that can also, over time, help them to grow faster than they think they get to grow. But for 2021, I would expect HMS will not be having the time to accelerate that faster. But in the mid-term, we will be able to grow that business more than single figures, I think.

Okay. And on the gross margins, you had some headwinds here, both in volumes and in FX. You quantified it to around 2 percentage points. And you still managed at 62% gross margin. You know, it's quite below 62. What does that imply when we will see volumes coming back, presumably next year? um would the 64 percent would be a relevant target or 63 percent on the gross margin or what do you see over time or will that be we need another headwind in in gross margins besides this well maybe i should talk stuff on i think what we also should remember that i i think i mentioned quickly is that we we also given all those headwinds we have the help from a good product mix

As you saw when Stefan presented, we have the embedded business, the final business was only 47% of revenues. That is normally around 50, maybe 51. So that is actually helping us a little bit that we have less of this low margin custom product. So I think on one hand, when the volumes comes back, it will also probably coming back on those offerings with a bit lower margin. So that might be working a little bit in a disadvantage. With the currency situation, it's very difficult to say. But I think when volume comes back to be slightly north of 62, it shouldn't be impossible. We want to be careful with guiding since we still think that 62 is, we've been improving from like 60 to 62 in the last couple of years. But somewhere 62, maybe a slightly north of 62 should be achievable, we think, for the coming year.

yeah okay and uh just last comment or a question on the gross margin percent take uh we got the the ebit expectations what about their gross margin is it in line with your business or or slightly below i would assume it to be closer to 50 and 60 percent given the ebit margin yeah i think um you would think maybe but actually it's very much in line with our gross margin

So we don't really see that that will have an impact in any direction from that point of view. I think where there might be some potential is that it's still a relatively small company starting to set up a bit of a group structure with some sales offices. So I think that's why maybe you see the OPEX being a bit higher in percentage compared to, for instance, us. So that's what we think we can work a little bit on to maybe get the EBIT margins up slightly. But the gross margins are very healthy, so that's what we're happy with.

Okay, last question. ABB comments the robotics surprise positively for them, but their comments were that we're going to see on orders, this is going to be seen in the numbers in 21, not in Q4. So could you, what do you see for Q4? We have a very much easier comparative when it comes to growth from Q4-19 than we had in Q3-19. But is the market there for returning to growth, slight growth, already in Q4? Or what do you see? You added the comment on positive data points, but still uncertain markets. On a net basis, what does that tell us?

That's a very good question. And to be honest, we don't fully know. We've looked on the macro data, and the PMI indexes are looking quite good, actually, going forward. When we talk to customers, we still see some. They are nervous and a bit hesitant. So we get mixed feelings. So I think our conclusion is that it will continue to be sideways for a couple of quarters. We don't see a strong momentum yet. Even if the macro data seems to be better, we can't really see that we see this in our orders and in the comments from our customers yet.

Okay. That's it for me. Thank you.

Thanks, Victor.

And just as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. And as there are no further questions, I will hand it back to the speakers for closing remarks.

Okay. Thank you very much. And thanks for taking time on this Friday afternoon to join HMS here. And I want to highlight again, Capital Markets Day, Digital Format, November, 9 o'clock Central European Time. Be very welcome to join, and we'll talk more about the strategy. We'll have some other team members from our management team as well joining, and we hope to take this time to give you a little bit more detailed information about our business and our view of the future. So thanks a lot for this meeting, and look forward to seeing you soon again. Thank you. Have a nice weekend.