HMS Networks AB (publ)

Good afternoon. Good morning, everybody. Thanks for joining our Q4 call here. Myself, Staffan Dahlström, will start with some business updates, and then Joachim Nedeborn, our CFO, will guide you through the numbers. So the agenda for today is just a summary and introduction. I'll do a business update, and then Joachim 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 four. Joachim 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 habits, despite the fact that there's still been some challenges in this pandemic situation. So all in all, I think we are going in the right direction. But I leave the numbers to Joachim to browse 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 the data inside their machines and inside their devices. We have our four main brands, Anybus, E1, Indusys, Mixup, and two smaller recently acquired business, WebFactory from Germany and ProCenter from the Netherlands. But if you 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 technology 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 140 more of IT and high-tech and 140 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 a winter landscape. We are not too spoiled by that. We just released, or two months ago, we released our new long-term goals, our 2025 goals. We want to be at 2025 with annual revenue beyond pi billion, beyond 3.14 billion sec. We would like to stay on our operating goal of 20% EBITs. And as Joakim will explain, we have today, 2020, we have an earnings per share of 479%. Our business is primarily focusing on two 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 our 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 three 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 the 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. That'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 3.14 billion Swedish crowns 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. I think they have adopted to the pandemic situation. And I think we and many of our customers also see that things are improving for the future. We have two 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 the electronics industry is suffering from component shortages and things like this. This also means that some of our customers are 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 where we have seen challenges in 2020. America has been quite steady through the pandemic. They are 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, our technology inside their devices and then When they start selling their devices, we become included and they 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 we modeled. 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 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 two 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 very good performance in Procentec 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 Joachim, talking about the financial results for Q4.

All right. Thank you, Stefan. 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 great 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 Stefan 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 in organic growth in order intake in all our offerings. So then to go into the numbers, this ends up in 408 million order intake in Q4 versus 337. So an organic growth of 13%, also 30% help from Procentic. And then we have some headwind from currency effects, giving minus 5%. So in total, a growth of 21% reported. Some highlights looking at the EMEA market that 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 with any big numbers as a group. So very positive to see that that is actually back now with 13% organic growth in the market. Another big growth driver is Taima, which is performing very well. It's been doing that throughout the year, 79% organic growth in Q4, and year-to-date, 56%. So this has actually grown into becoming a quite important market for HMS, starting from low levels. The third item I want to mention is E1, 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 the new one. 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 a thing like this happening, as we see around the world. And percent, I guess, Stefan 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 1447 compared to 1470. We're not fully managing to get up the growth. We're minus 2% reported, organically minus 4%. But as you saw, it's going in the right direction. Going on to the sales summary, as you can see in the upper 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 $4.5 million in Q4. compared to 346 in Q4 2019. So a 17% growth reported and 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 percentic business with the main market in EMEA, organic plus 3%. And in Americas, we also see some percentic impact with plus 8% and organic plus 3%. Otherwise, the big growth driver is also Asia, where we now see the benefits of a strong ordering stake 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. We believe that we have a very good potential for future growth with a big exposure to the wind power industry, for instance, which is an important investment for China to reach there. to go in 2060 to be climate neutral. Full year, we're at 1467 compared to 2019, so minus 3% or minus 5% organic. I just want to make two quick comments on the sales distribution per region. What you can see is that EMEA is maintaining a high level, 62% of the group split. And the main reason for this is then, of course, the 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 one single market. And the other thing worth commenting is APEC. That is, despite the fact that there is no M&A impact in APEC, we are taking a larger share of the group sales. And then also you can see China is now 34% of APEC sales. Japan has before been by far the largest market in APEC. We think that maybe in a year or two, there will be two 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 75 million EBITs, corresponding to a margin of 18.5. And I think the fair comparison is actually 33 million in Q4-19, representing 9.5% adjusted margins. The reason for this adjustment is that we had an earn-out that we didn't have to pay to BEC that we acquired in 2018 that we resolved in Q4 2019, and we also could lay back a provision for the restructuring costs from the program that we initiated in Q3 2019. So we had a bit of a dope result by some $22 million in Q4 2019. Otherwise, I think it's a combination of the fact that we've seen our growth again We have good progress on the gross margin, and we have some help from lower OPEX. And just to explain that, I have a separate slide on OPEX, so we'll get to that in a second. It's also good to see when we now look at the full year, we reached 288 million and 19.6% margin, very close to our target of 20%. And the fact that we're dropping 50 million of sales or more than that, and still managed to improve EBIT by 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 supply chain costs, which has proven quite successful. We're 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 EBIT The main offering that's been suffering is the Anybus Custom business, where it has a bit of a lower margin than the rest of the offerings. Let me switch slides 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 non-recurring savings. We have still some short-time work effects, even if it's not much. Q4, 3 million related to Germany. Then we have another 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 this year. And of course, there 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. But it 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 2021. 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-term work in 2021. And on the acquisition of the 22 million that you see related to Procentech, this is a bit above the normal run rate. One reason for 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 on Q4. Going over to the full year, if I just take the items one by one, we have acquisitions of 29%. We have write-down of goodwill related to WebFactors that were made earlier this year, giving another $40 million burden. On the other hand, we have no restructuring costs from the restructuring program in 2019. We have the effect from the restructuring program of 35 million net in the year. In total, it was 45, but we saw 10 million upside already in Q4-19. And then we have 48 million in total that we call non-recurring savings. We have 30 million in total for the year related to short-term work. Out of 6 million is governmental support. And then another 35 million net. on traveling, fairs, trade shows, and those types 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 interactions 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 another post of five Amazon currency effects of four more years. Okay, so then let me go over to the earnings per share. When we talk about Q4 and the full year 2020, there's no big surprises. We have 1.21 in Q4. What is worth noticing, though, is the comparable of 1.46 reported in Q4 2019 is very dope by some different things. So the right comparison is maybe more 0.68 grounds. And just to take you through some of those items, we talked about the 22 million effect on EBIT before, but we also showed a positive tax of 20 million in Q4 2019. This was driven by 28 million, majority of that related to a positive tax decision in Belgium that was also given as an upside for both 2018 and 2019, came in in Q4 last year. and some other earn-out-related positive tax effects. Portfolio at 4.79, an improvement then with a fair comparison of 4.06. And earlier today, the board decided to propose a dividend of two crowns to the AGM. Then we have our cash flow, which has been very strong, especially Q2 and Q3. We still think this is quite good in Q4 with 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 effects of some 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 enough percentage goals in the business, which is running with a bit of a higher working capital level. I think we've been around about 10% than we expect to be, somewhere at 10%, 11% going forward as well. For the full year, $370 million in cash flow compared to $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 assets 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, it's on a low level. We managed to reduce the net debt by 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 EBITDA now at 0.49 with the reported number, including the IFRS 16 effects must be seen as It's quite low. We feel, of course, very comfortable on these levels and see that we have a very strong balance sheet and in good shape to continue to execute our new strategy with a higher M&A focus. Then my final slide. Yesterday, Stefan told me, Joakim, it's been a nice report, but I want to say something funny before we hand over to the questions. My problem is I'm just a dry CFO. I couldn't come up with a lot of funny things. But at least I managed to put in this nice picture of the light in the tunnel to the right. And 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 margins. Then on the order intake, as I commented on before, we had actually really two 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. Very happy with the gross margin improvements with one percentage point, 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 a continued good start in January. I think, in general, a bright outlook in the market, especially in relation to the last couple of months. And finally, I say yes that we think that we have a very solid financial position and that it's excellent to continue to execute our M&A strategy. So thank you for that. Let's head over to operator and see if you have any questions.

Thank you. If you wish to ask a question, please dial 01 on your telephone keypad now to enter the queue. Once your name is announced, you can ask your question. If you find it's answered before it's returned to speak, you can dial 02 to cancel. Our first question comes from the line of Fredrik Stinkel of Nordea. Please go ahead. Your line is open.

Hey, guys. 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 they're using. Is it E1? And also, maybe if you could give some background on how you got into serving these customers, it would be interesting to hear.

All right, maybe I can start. You can fill in, Joachim. Actually, it's not so much E1. We don't have such a big E1 business in China. There's 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 In China, it's partly related to ICSAT, where we have some infrastructure component inside wind towers. We have some any bus business with pitch control of the blades and things like that. So it's several different design winds, 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 parks themselves.

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 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.

Yeah, maybe I should take it from Stefan. Yeah, 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 EMF site. So we're taking that upfront investment now to make sure that we don't get into problems later on. We see that lead times are getting longer and longer. And right now we're on three months long lead times that we normally see. So that is what's causing us to make this build up. And then I didn't quite catch the question on the customer side. What's your question? Maybe I heard something that wasn't there.

No, it's more an intro. 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 they see issues, I would think that you might have issues in finding components as well. But you pretty much answered that one. um but so i have one last question and um it's about percent tech you said that you were happy with it how it's developing and you're right that they contribute 40 million in the quarter um so i'm just thinking if i take this times four it looks like very strong year-over-year growth for percent tech but maybe there is some seasonality in that business but Do you have a number of what their sales was in Q4 2019 or the growth numbers for Prozentec?

I must say I can't remember that number straight up. I think it was they did 11.8 million euros for the full year 2019 and they are slightly above that in 2020. But then they had the same as we've had. They had a tough Q2 and Q3 and then a a good Q4. I don't want to give a guess on exactly how much growth they're seeing in Q4, but 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 40 times four and say that that's the way they're going to perform in the future. I would love it to be that case, but I'm not sure if that is the right way to look at it. All right.

Well, thanks very much. That was all from me.

Thank you. Thank you.

Thank you. Our next question comes from the line of Victor Hogley. Please go ahead. Your line is open.

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

I think the only thing that we have as a data point is they normally have a very strong October. Other than that, I don't think there's any specific amounts. I don't know why that is the case, but that's been the same in the past. So maybe I wouldn't take 40 times 4, but I think that we expect, of course, to see growth from this level of, well, about 1 million euros per month, as you could say, if they don't have 11.8. 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 yet to give a more clear indication than that.

I think we are a little bit joking with the management team at Percentec that they really made a good first impression 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 was better than their own internal plan.

Okay. And on the cost side, you know, in Q4 you said a lot of money are not being present globally, trade fires 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 to 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?

I can start with a little speculation. I think we are long-term. Maybe we can say that maybe... One-third of these savings could be maintained over time, maybe in more digital things. Maybe two-thirds 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 season. So I think the cost will increase.

Okay. Thank you very much. Maybe just add a little bit to what Stefan 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 positions. 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 And we think that there might be some investments needed. 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? Was that late in quarter just affecting order intake? And what do you expect for Q1 in this regard?

Should I go first? Yes, please. So I think it's a very good question and it's very difficult to answer. I think we definitely have some effects of it in both order intake, probably more in the order intake, but also some in the sales already. We don't really see that they're placing longer orders than normal. So they're taking the volume. And I think that we've seen also going into 2021 that they've 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, we can only speculate, so it's difficult to say.

Okay, but in your discussions, does it seem like they're front-loading now and might be taking more easy in ordering the next couple of quarters due to this, or do you think it's on an overall basis would have a marginal effect on the yearly order intake for the full 21.

I think what we... Yeah, you go.

Yeah, let me start that. We think the major, 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, to see less risk going forward. But I think the main driver is that it's a more positive outlook. So the fact that they are increasing inventory is, I would say, a smaller part of that.

I see. Thank you very much. Thank you. Once again, if there are any further questions, please dial 01 on your telephone keypad now. Okay, there seems to be no further questions coming through, so I'll hand back to our speakers for the closing comments.

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 and our customers feel that we have the worst behind us, And I think Joachim's picture with this nice light in the tunnel that is really light with G 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.