HMS Networks AB (publ)

Good morning everybody. Welcome to this quarter two session by myself, Staffan Dahlström and Joakim Mirborn, our CFO. And the agenda for today is just a quick summary and introduction. I will continue with a short business update and Joakim will then dive into the financial numbers and we'll finish up with a Q&A. So let's take a look at the numbers. Many of you have seen the reports an hour ago and we have a very good quality. Record level on net sales up 33%. Fantastic order intake. We have a strong demand in the market but there's also one component that is more of shape buffering for my customers and Joakim will talk a little bit more about this because this is important to understand. And very good profit level, 121 million for the quarter. Good EV margin, good cash flow, good ETS. So we have a fantastic quarter. We're very happy with quarter two. And when we combine this good quarter two with the good previous quarter one, we get a very good first six months of the year. So we are approaching one billion, one billion sick on the first half year here. 929 on the net sales and a very good order intake. This also gives us a fantastic backlog for the remainder of the year. And also some of it actually into 2022. And same thing here. We accumulate two good quarters and this means that we have very good numbers. EV margin north of 25, much higher than we have expected. Actually good cash flow and good ETS. So let's move a little bit into the details. But before that, let me spend a couple of minutes just describing our business for you on the call who are quite new to our business. HMS, Hardware Meet Software. We do industrial connectivity, connecting devices. So this is a combination of hardware and software. And we allow our customers to connect different machines to interchange information, or also the machines to different cloud systems or IT systems. Our four major brands that is divided into our business units, Enibus, Eone, Invisis and Ixat have different connectivity and communication and information products. And they also hold for our common sales channels through our four different market units. We have two fairly recent acquisitions, German Web Factory Software Company. And last fall we acquired the Dutch Presente Company. And they all present the goals very well. And I'm sure Joachim will talk about this a little bit more. So this is our business and our brands. And if you look on where we do our business, we are talking about industrial ICT. ICT, Information and Communication Technology. This is our business and we do the industrial part of that. We're well established. We have more than 7 million products connected in automation. We have more than 300,000 machines connected into our cloud system. So we can help our customers to do remote diagnostics and remote access to these machines. At VR Technology Company, one third of our employees is in R&D. Another one third is in sales and marketing. So this is R&D and sales and marketing, of course, are two major activities. But we focus on new things such as 5G, IoT, wireless and this kind of things. And as a company size, we are slightly more than 700 employees around the world. We have operations with subsidiaries in 16 countries and partners in over 50 countries. And we're headquartered here on the southwest coast of Sweden. Sunshine also outside, not only on our numbers. It's a fantastic summer day here. Sunny, 30 degrees outside. Let's take a look on how we go to market. We have two types of customers. We have users of automation system. This is the smaller part, maybe 25% of our business. The system integrators, end users. And here we normally go to market through our partners and distributors. The larger portion is the makers of industrial equipment. Could be machine builders or device makers. And here we mainly go direct with our own Salesforce to these customers. We set a new strategy for the coming five years. Last fall, I think we presented this in December or maybe it was November. We're 20, 25 targets in three different areas. We have environmental targets. We have staff and customers and growth and profitability. And on the left side, the environment, we have the bold goals here. We wanna be net positive by 2025. So we put the stake in the ground. This is important for us, but it's also important for our customers. We wanna be net positive on our own internal operations, of course. But the main difference we can make is actually helping our customers to help them with their sustainability and their environmental targets. We have very good target numbers for staff and customers. We measure net promoter scores. We have high scores there. And we are approaching to our growth and profitability targets. 2025, we wanna have revenue of the pi billion, more than 3.14 billion Swedish. We wanna maintain an EBIT margin of 20%. And as you noted, we are much higher right now. And we keep a dividend policy of 30 to 50%. So these are targets and we work hard to fulfill all these three. And we think with these three targets together, we become a very good company. Short business update, if you look at quarter two, we can see that we have growth everywhere. All our brands is growing with an order intake more than 50%. So we see a very exceptional strong market at the moment. Couple of drivers is the machine building and robot manufacturing. New record levels goes very well. You also see this on industrial PMI, that is also very high. After a couple of years for us in automotive, we see also that the investments in e-cars is helping our any bus business in Germany, US. Of course, the combustion engine is now moved to an electrical drive plane. That there's a lot of pieces in the car that is still assembled and automated and things like that. So our customers in that market see very good situation at the moment. We also find there's some new businesses in renewable energy, in wind, but recently also more in battery manufacturing, where we see a lot of investments, then they need more automation here as well. But the point here is that we need to keep in mind that there's also a boost effect in our orders. We expect this to be a hundred million in the second quarter. We have component issues, both HMS, but it's a market problem in general. And we see that some of our customers are placing more orders just to make sure they have secure their shipments to Tromaz. So we estimate that there's extra orders, but without this, we still see a good, very good market. And we think this will continue for 2021. We see the good investment climate, but we have challenges in the component situations. And we believe that we will see more problems in quarter three. Some of these orders will be probably pushed out to quarter four, but all in all, we hope and we hope and expect that the end of the year, we should be more in balance. So what is kicked out of quarter three will probably be delivered out in quarter four. We made a new acquisition, first of July, small acquisition in Spanish-built bar. We bought 60% from the founders of this company. So the four founders, they keep 10% each and they remain very committed to the business. O-Buses is doing wireless gateways and platforms for what we call mobile machines. This could be utility vehicles, it could be AGVs and this kind of transportation, things that is moving that need local control, but also wireless technology, cellular or short-range wireless here. This small company revenues around six million, good EBIT level and also good growth, good customers, good growth and good technology. And we see CineG here to also take some of our software components and put that on top of the O-Buses product here. So nice, it's small, but it's a nice area for us and we believe that this is opening a new door for H&S into the interesting area of mobile machines. I'm sure you're very curious to hear more about the financial numbers that looks good.

Joakim. Thank you, Stefan. And as always, we're gonna start out with talking about the order intake. And if you start by taking a look at the graph on the upper left, we really dislike how this starts to look like. Stefan already mentioned we're 606 million in order intake, up 100%, nice round figure compared to obviously weeks, second quarter last year, but still very nice comparable. 88% of that is organic. So we can see that all our businesses are going very well indeed. The same number for the first half of the year is 1,170 million compared to 703. So 67% up organic, 60% up. So I just wanted to mention and talk a bit more about the stocking effects that we see. We have 100 million in Q2 roughly and 170 million here today. And of course, that will come back some time to impact the future order intake because what it really means is that we have orders that should be placed in Q3, Q4 that are being placed now. I think the reason is that we see sort of a ripple effect through the whole supply chain, starting with the semi-foundry saying that instead of placing forecasts, you need to place orders. And that message is escalating through the supply chain and also impacting us, of course, and our customers as well. So this 170 million is our best judgment of what we think is sort of out of period orders. And given the situation that is still quite strong in the market, we see very good GDP growth numbers, we see strong PMIs and macro experts say that this will continue in a good way. We don't really know where we will see this 170 million impacting us in a negative way. It might actually be that it will not even be this year, but we guess that there will be a slow process when the market is stabilizing and the components availability becomes better. But it's difficult to say exactly. Looking at the different markets, I think everything is good. Europe obviously very strong, more than 100% tough. We had also tough quarter in Q2 last year in Germany, France, Italy, and so on, when we see really good comeback in those markets. I also wanted to highlight E1, which is also performing extremely well. This is our remote access offering. And what we see is a bit changed behavior from some customers that used to have like an optional remote access feature and more of them are now standardizing to remote access. And that is obviously a very positive trend for us because that will be with us for the coming time as well. So going over to the next day of the situation, also here we have a good development, 474 million compared to 355. So 33% tough, out of which 28% is organic. For the first half we have 929, 30% tough or 33% organic. And I think also here we have a good development in all brands. I wanted to point out Percent Tech that is doing extremely well. We have doubled sales in Percent Tech. And I think we have to say that the brand has reached to a new level. And it's a combination of a strong development of existing customers, especially in the US, it's doing very well. But we also have some really interesting new customers, global customers that are choosing Percent Tech and that will have it. Also expect to have a good development going forward with this business. E1 as well, doing well, 45% tough. And it's also good to know that Intesis, our brand within building automation is doing well, growing 26%. This has been a few challenging quarters in the building automation space. And we haven't seen the rebounds as we have in the industrial automation space. But now we're doing okay also in the building space, which is good to see. I also wanted to comment a bit about the sourcing situation and with the availability of components, it is difficult for us to focus exactly how this will happen. We know that we have an impact in Q2 of about 30 million that we couldn't deliver. We had to push out those orders into Q3 and Q4. And then we will have some components coming in and of Q3. So it's a bit uncertain how much we'll be able to get out in Q3, it might be that we'll have a spillover into Q4. So I guess what we say is that it's likely that Q3 will be a bit weaker, Q4 a bit stronger. And I don't want to speculate exactly how much because we simply don't know. I think the main point we wanna make though is that the order book is very strong. It's the best order book we've had ever, more than double compared to the average order book last year. And even if we have to push out some deliveries, we have the orders and the customers don't really have any alternatives. So we're not that afraid of losing business, but it might be a bit of a timing issue when we can't deliver. Sales per reading overview, it looks about the same as the door always. Thus we have the Demia reading being the biggest one with 61% of our sales, a little bit from last year when I was heavily impacted. The US or America is up 22%, sorry, is 22% of the total and then APEC 17%. Going over to look at our results, also here we have a record quarter with 121 million EBITS, a good margin of 25.5%, upwards of 19.4. And the main driver here is the high volume, of course. We also have continued growth margins of 63.7%. So we're quite happy with that number. We see that the price increases and the work we did last year is paying off. We see full effect from the price increases. So even if we have a slight hit from component increases, we have that impacts about 1% negatively, we still managed to have a solid level on the gross margins. And of course, also the volumes in itself helped a little bit to get better utilization on our fixed costs. So that's also working in our favor. The OPEC is under control, we must say. We're up, I guess the relevant comparison is up 19 million compared to Q2, taking up some non-recurring items in Q2 2020, 12% up in the OPEC. So I think we're about in line with what we had in Q1, which we expected. What we can say going forward is that we have launched some interesting growth initiatives during the quarter that will impact slightly in Q3, but primarily in Q4. So I think Q4 will definitely be some 10% up from the OPEC levels that we see right now. So let's just have a look at EPS. I don't have a lot of comments. There's not a lot of interesting things happening here. I think we see good development, which is the result of a solid business. First time over two crowns with 2.02, Swedish crowns EPS, and compared to 1.24, that is a good increase of 63%. And also for the first six months, we have a nice 3.94 compared to 2.21 times six. Then having a quick look at the cash flow. I think we continue to have a good cash conversion. What we believe is positive is that we keep the working capital in good levels in these kind of difficult times. So we have just small steps from five million negative working capital impact in the quarter. So all 126 million compared to a very strong 115 that we had in Q2 2020. But there we had the working capital working in a favor a bit more. So for the first half of the year, 257 million, also very good number. And you see on the bars that we have a good trend on the cash flow, which brings us to our last slide, looking at the debt situation. And I think if you take away the leasing debt of 75 million, we're almost at three, only three million in debt. Also very positive that despite that we paid a dividend of 93 million in Q2, we managed to decrease the debt level. And then as you probably have seen all the stuff I've talked about, we made the OSIS acquisition first of July, which will of course impact the debt situation slightly, but it's under margin I'd say. So I think all in all, we can look back in Q2 with a screen balance sheet. And you know, about the M&A agenda, we're quite optimistic that we have the means we need to fulfill that. So I think with that, we will leave over to operator for some questions.

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 your turn to speak, you can dial 02 to cancel. And our first question comes from the line of Joachim Gunnell of DMV Markets. Please go ahead, your line is open.

Thank you. Good morning. So just one follow up on the stocking effect here. Can you comment a bit about the nature of this, whether it's broad based or whether it relates to collect the larger orders from fewer customers being put and also perhaps any comment on how, I mean, the trends you allude to how they have progressed throughout the first two weeks of Q3.

Sure, I can give it a shot Joachim. Thanks for the question. What do you want to take it Stefan? Hello, please go ahead. So I think your analysis is kind of right, the main effects come from our larger customers that have our products embedded. So it's mostly impacting the Anybus brand, but we also see it across all brands, but Anybus has the biggest impact. Well, they are taking some precautions and putting some extra orders in place to make sure that they get the volumes going out. For the smaller customers, we don't see the same effect. Then also we don't have the same effect on gateways and those kind of products that will be more needed right now in this type of business. The second part of your question, sorry, I missed to take, yeah, the first two weeks, sorry, of July. Right, so I think it's continued in a good way. It's pretty much the same business that we saw in Q2 that is continuing. So good to see that the market is still there.

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

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

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

I understood. And just one final one for me, with regards to that, you commented that, okay, we should just an OPEC step up of 10% going into Q4 from when we're stunned now, but still, I mean, with the demand backdrop, I mean, you will materially outperform your profitability target in the medium term. And I know that that could be diluted from acquisitions going forward, but how should we think about the OPEC space for the next year and what investments needs to be taken to continue to deliver a stellar growth?

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

Understood, very clear. Thank you both and have another solar.

Thank you. Thank you. Thank you. And our next question comes from the line of Victor Ekber of Danske Bank. Please go ahead, your line is there.

Hello, good morning. So checking on the cost side, the acquisition related cost six million SEC in Q2. Was that due to the overseas acquisition? It was done in Q3. So what that mean anything for Q3 then? That's the first question.

I'm not sure if I fully caught the question, Victor. Did you mean if we had an acquisition related cost in Q2, was that the question?

Yeah, in the backer report, EBIT excluded acquisition related cost 127 million. I don't know if that was a mistake or if there were any adjustments.

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

Okay. Okay, and in the cost guidance, you said the 10% in Q4, what's that for the full Q4 level or the round rate going out of Q4?

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

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

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

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

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

Okay, thank you very much.

Thanks. Thank you. And our next question comes from the line of Friedrich Stenskiel of Nordia, please go ahead.

Hi, good morning guys. So I have a question on Oasis. Is it fair to assume that the majority of sales is in Europe or perhaps even in Spain? I did see a British bus on the picture though, so I guess they have some in England. And also on that, can I have the plan around geographic expansion for them going into the US perhaps?

That's right. The business we have today, I would say it's mainly towards European OEMs, not so much in Spain, there's domestic sales. I would say that confidence in Europe is the big market for Oasis today. We see a potential in America and one of our ambitions together with Oasis is that they will use our infrastructure and hire some salespeople, Oasis salespeople in US that will see it all, use our backup system and things like this, because we see potential for this market in US. They've been too small to really target that. So you're right that US is a target market for us.

Okay, and that's prioritized ahead of each other and we'll do both.

Yes, in a small company, we see a lot of opportunities also in Europe here. I think that Western Europe and US is the two targets we focus on with Oasis. Okay, great.

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

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

detailed pictures. No, I don't have a lot more to add. I think it's, you know, the span would be rather big if we were to give a span, so we wouldn't do it. What we maybe can say is that we think that Q3, it will be difficult to reach the Q2 levels. I think that's what we probably can say. And it's not because we don't have the demand, it's because we can't get the components in the place that we need. But I think we'll probably leave it at that.

Excellent.

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

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