HMS Networks AB (publ)

Good morning, everybody. Welcome to this Q2 session by myself, Staffan Dahlström, and Joachim Nierborn, our CFO. And the agenda for today is just a quick summary and introduction. I will continue with a short business update, and Joachim 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 Q2. 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 a safe offering from our customers, and Joaquin 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 EBIT 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 $1 billion sick on the first half year here. $9.29 on the net sales and a very good all-in take. 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. EBIT margin north of 25, much higher than we have expected actually. Good cash flow and good ETFs. 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, Anybus, Evon, Indusys and Ixat have different connectivity and communication and information products and they're all sold through our common sales channel through our four different marketing units. We have two fairly recent acquisitions, German Web Factory, a software company, And last fall, we acquired the Dutch Presenter company. Presenter goes very well, and I'm sure Joachim will talk about this a little bit more. So this is our business and our brand. 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. They'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. But we are a 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. So let's take a look at how we go to market. We have two types of customers. We have users or automation system. This is the smaller part, maybe 25% of our business, the system integrators and 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, with 2025 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 bold goals here. We want to be net positive by 2025. So we put a stake in the ground. This is important for us. But it's also important for our customers. We want to be net positive on our own internal operations, of course. But the major 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 target 2025. We want to have revenue of 5 billion, more than 3.14 billion Swedish. We want to 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 are growing with an order intake more than 50%. So we see a very exceptional strong market at the moment. A couple of drivers is the machine building and robot manufacturing. New record levels goes very well. You also see this on industrial PMIs. That is also very high. After a couple of years for us in automotive, we see also that investments in e-cars is helping, or any bus business in Germany and U.S. Of course, the combustion engine is now moved to an electrical drivetrain, but there's a lot of pieces in the car that is being assembled and automated and things like that. So our customers in that market see a very good situation at the moment. We also find some new businesses in renewable energy, in wind. but recently also more in battery manufacturing, where we see a lot of investment, 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 100 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 from us. 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 expect that at 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 Bilbao. 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. Obasis is doing wireless gateways and platforms for what we call mobile machines. This could be utility vehicles, it could be ADVs, and this kind of transportation, things that is moving that need local control, but also wireless technology, cellular or short-range wireless. Small company, revenues around 6 million, good EBIT level, and also good growth, good customers, good growth, and good technology. And we see Synergy here to also take some of our software components and put that on top of the Ovasys product there. 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.

Thank you, Stefan. And as always, we're going to start out with talking about order intake. and then if you start by taking a look at the graph on the upper left we really just like how this start to start to look like uh stuff already mentioned we're 606 million in order intake up 100 nice round figure compared to obviously week second quarter last year but still very nice comparable um 88 of that is organic so um we can see that all our businesses are going very well indeed and the same number for for the first half of the year is 1 170 million compared to 703 so 60 67 percent up organic 60 percent up and so i just wanted to mention and talk a bit more about the the stocking effects that we see We have 100 million in Q2, roughly, and 170 million year-to-date. And, of course, that will come back sometime 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-foundries 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, you know, 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 it will be a slow process when the market is stabilizing and the component availability becomes better. But it's difficult to say exactly. Looking at the different markets, I think everything is good. Europe, obviously, very strong and more than 100% up. We had also a 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 net sales situation, also here we have a good development, 474 million compared to 355, so 33% up, out of which 28% is organic. For the first half, we have 929, 30% up, or 33% organic. And I think also here we have a good development in all brands. I wanted to point out Procentec that is doing extremely well. They have doubled sales in Procentec. And I think we have to say that the brand has reached a new level. And it's a combination of a strong development of existing customers, especially in the U.S. It's doing very well. But we also have some really interesting new customers, global customers that are choosing percent tech and that will also expect to have a good development going forward with this business. E1 as well, doing well, 45% up. And it's also good to note that Intesys, 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 rebound 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 forecast exactly how this will happen. We know that we have an impact in Q2 of about 30 million. we couldn't deliver and we had to push out those orders into q3 and q4 and then we will have some components coming in end 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 on exactly how much because we simply don't know and i think the main point we want to 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 region overview. It looks about the same as it always does. We have the EMEA region being the biggest one with 61% of our sales, up a little bit from last year when I was heavily impacted. The U.S. or America is up 22% of the total, and then APEC 17%. Going over to look at our results, also here we have a record quarter with 121 yearly EBIT. A good margin of 25.5%, up versus 19.4%. And the main driver here is the high volume, of course. We also have continued good gross 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 itself help a little bit to get better utilization on a fixed cost. So that's also working in our favor. The OPEX is under control, we must say. 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 OPEX. 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 Opus 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 just a result of a solid business. first time over two crowns with two 2.02 swedish crowns eps and um compared to 1.24 that is a good increase of 63 and also for the first six six months we have a nice 3.94 compared to 2.26 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 effects from 5 million negative working capital impact in the quarter. So 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 a very good number. And you see on the bars that we have a good trend also 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 that free only 3 million in debt also very positive that despite that we paid a dividend of 93 million due to we managed to decrease the death level and then as you probably have seen all the stuff i've talked about we made it was this acquisition first of july which will of course impact the um the death situation slightly but it's under margin i'd say So I think all in all, we can look back in Q2 with a strong balance sheet and, you know, about our 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 D&B 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 larger orders from fewer customers being put and also perhaps any comment on how, I mean the trends you alluded to, how they have progressed throughout the first two weeks of Q3?

Sure, I can give it a shot Joakim. Thanks for the question. What do you want to take it Stefan? No, please go ahead. So I think your analysis is kind of right what you imply. The main effects come from our larger customers that have our products embedded. So it's mostly impacting the Anibus brand, but we also see it across all brands, but Anibus has the biggest impact. 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. There will be more, I need right now, type of business. The second part of your question, sorry, I missed to take. Yeah, the first two weeks, sorry, of July. 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 overseas acquisition, the balance is growing stronger by the day as you continue to deliver excellent results here. but but any color here on on on mna pipeline uh with regards to that that okay you just completed the overseas acquisitions you have made some some recruitment with regards to your mna organization so so so what what can we expect there for for quality the coming six months and and also call it what what types of targets are you evaluating but it's because it seems like the overseas acquisition it's slightly a step outside of your core factory automation verticals so are there perhaps any specific verticals where you see uh put it larger opportunities to complement your existing business maybe i can start making something and you are thinking i think what we do with overseas is

and you're right it's not maybe in fact automation but it's industrial automation and we see more and more of this mobile machines also you know like agds in the in a plant with logistics and these things so we see a combination of mobile machine battery powered machines and communication it's a quite strong combination for new things so we believe that This is a market that will have more and more of telematics and communications. So we believe that this is a very close and adjacent market for us. And actually, we have a couple of customers already before Ovasys. So we think this is close to us and an 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 this kind of thing, 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 have the 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're starting 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 Staffan did a good job there.

I understood. And just one final one for me. With regards to that, you commented that we should see an OPEC step-up of 10% going into Q4 from when we're stumped now. But still, with the demand backdrop, 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 need to be taken to continue to deliver stellar growth?

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. I can't say exactly since we haven't made a plan, but we did some expansion into China this year, opened a second office. That will certainly be interesting to look more in that market where we 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 is 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. 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 going to have also a quite strong 2021 that we, of course, are going to beat in 2022. So we need to do some new things there. And in regards to the EBIT target, I think we also see that we're going to perform quite well in relation to that target at the moment. But I think we need to wait until the situation is back to 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 diluted effect to this level. So I think we just have to wait and see.

Understood. Very clear. Thank you both, and have a lovely summer.

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

Hello, good morning. Just checking on the cost side, the acquisition related cost, 6 million SEK in Q2. Was that due to the overseas acquisition? It was done in Q3, so won't 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 10 billion backer report, it said acquisition, EVs excluding acquisition related costs is 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 Oasis, but that was minor, so that's not a lot to talk about.

Okay. And in the cost guidance, you said the 10% up in Q4. Was that for the full Q4 level or the run rate going out of Q4?

I think for both. I think Q4 in comparison to the current level we are at, but that will also be affecting run 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 and these farm in a million levels given the the front loading of on on the the orders due to the stocking issues or component issues in the first half uh this is difficult to to speculate about but i think you're right that the the level beneath the the stocking effect is probably around the 500 but we don't really see that this uh this kind of adjustment 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 will even be some stock effects also in q3 people are concerned about component deliveries and we'll talk to foundries and especially tsmc and other big suppliers they are they are investing a lot but it will take time until this is back to normal so we believe that orders will the stocking effect will continue for the coming quarter as well

okay and you had some that you i i respect they don't know when it will have a backlash or if it will yeah but the prospects for q for 2022 orders and and deliveries with h1 and potentially part of q3 them being very high orders um do you have any comments on the 2022 order potential and delivery some of what to expect Will it be possible to grow orders next year? Give me what you know now.

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 investments 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 savings, sustainability. Maybe there's a post-COVID effect that many 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.

Thank you. And our next question comes from the line of Fridrik Stenskiel of Nordea. Please go ahead. Your line is open.

Hi, good morning, guys. So I have a question on Ovasys. 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 some in England. And also on that, the plan around geographic expansion for them going into the US perhaps?

That's fine. The business we have today, I would say it's mainly towards European OEMs. Not so much in Spain. There's domestic sales, but I would say that continental Europe is the big market for OBSIS today. We see a potential in America, and one of our ambitions together with OVAX is that they will use our infrastructure and hire some salespeople, OVAX's salespeople in the U.S. that will sit at our offices and use our back-office system and things like this, because we see potential for this market in the U.S. But they've been too small to really target that. So you're right that the U.S. is a target market for us.

Okay, and that's prioritized ahead of Asia, then, or will you do both? Yes.

It's a small company. We see a lot of opportunities also in Europe here. I think that Western Europe and the U.S. is the two targets we focus on with Ovasys.

Okay, great. 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. 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. Yeah.

Let me just start and Joakim can fill up with more details. I think we see a very high volatility at the moment. I have one example from one order from one of the major semiconductor companies that have been changed 24 times in 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 we have a good relationship and we are seeing some improvements with these suppliers that it's where if it comes in what goes out in q3 or q4 it's 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 material So we feel quite good, but it's very difficult to comment about queue-free deliveries. But Joachim, you can give maybe a more detailed picture of this.

No, I don't have a lot more to add. I think 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 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 just 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 there 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 a 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 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 will 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 of vacation now. So I would like to wish you all a very nice summer. Thanks.