HMS Networks AB (publ)

Thank you. Good afternoon, everybody, to this beautiful Friday afternoon. So I'm Staffan Dahlström. I'll start this, and then Joakim will come in halfway and more about the numbers. But we do as we normally do. We start with a small quick summary and introduction to our business, and I do a small business update. Then Joakim dives more into the Q3 results and a bit of the analysis, and we finish up with a Q&A at the end. One hour ago, we published the Q3, a few headlines from that. Good net sales, good growth from last year, but compared to Q2, quite flat. But it was also a bit of challenges to deliver all the orders due to component shortages. We'll talk about this later. But what is fantastic to see is a continued order intake that is very, very good. Last quarter, we were up 100%. We are slightly below that, only 99% up. But 99%, it's fantastic growth orders. There's also partly a boosting element, and Joakim will talk more about these details going forward. EBIT, slightly over 100, good growth from last year. We are a few points on the EBIT more than down due to... I was mainly due to a little bit lower gross margin than usual due to some of the component challenges. We'll talk more about this later. Very strong cash flow, fantastic cash flow, and this looks very good, 148. And this results in a good growth of our earnings per share. That's quarter three in a nutshell for the first nine months. This just concludes. The strong growth continues. Order intake is super strong. profitability, everything goes in the right direction here. So far this year has been good, and we actually think the remainder of this year and going forward is also quite strong. We'll just make a little bit of a dive into our business. Several of you already know it. We have our four main brands with Anybus, E1, Indusys, Nixon, and some acquired business the last couple of years, WebFactory, Procentech, and also... Last quarter, Spanish OBSIS for wireless communication. So this is what we do. HMS is hardware-emitted software, so it's a combination of hardware products with embedded software, but also cloud communication, visualization software, and that kind of thing. As a company, we are having more than 7 million installed devices around the world, mainly for our Anybus brand. Our E1 brand is about remote access of machines, and we have over... 300,000 machines connected to our IoT systems called Talk2M. And our field is really industrial, ICT, information and communication technology. And we are a tech company. We focus quite much on 5G, IoT, wireless and these new technologies. But most of our customers are industrial customers where end users like paper mills and steel plants have a very long-term view on technology. So we also see that we see a mix of new technology, but also very long life cycle in our products. And that's part of the capacity we have in this company to make a good mix of new technology, but also maintain technology for over 20, 15 years. 15, 20 years, sorry. We are slightly more than 700 employees around the world, and we operate with subsidiaries in 16 countries, and we work with partners and distributors in over 50 countries. And we are here actually, I'm here today in our head office in West Coast of Sweden, in Halmstad. So if we move into more of the business, we have two types of customers. We have users of automation systems. This can be system integrators at the automotive plant, for example. This is 25-30% of our business. The majority of our business is towards machine builders, device makers who make industrial equipment and they embed our communication technology and software and hardware into their machines and have this as a part of their offer to their customers. Last year we communicated our 2025 ambitions and it's three things. We talk about the environment. Secondly, we talk about staff and customers and we talk about sustainable growth and profitability. And then we put ambitious targets for sustainability. We really focus on our CO2 impact. And we would like to become net positive, both from the internal perspective, what we do ourselves, but also from the external perspective, both downstream and upstream in our value chain. And that would do quite many activities, and this looks good. Secondly, we believe that happy and high-performing employees generate loyal customers. And our business is really about loyal customers. So we measure net promoter score. within our employee groups, but also with our customers. And we have targets of beyond 25 on both this. And at the moment, we are good over these levels. We are safe there and doing the right things. And then we have financial targets to continue growing and maintain a good profitability. We would like to have a revenue in 2025 of more than pi billion Swedish, more than 3.14 billion Swedish crowns, maintain a healthy EBIT margin, 20%, and keep our dividend policy of 30 to 50%. So all in all, this is things you have heard before. Just a short recap. We move into what you really would like to hear today. It's the business update for the third quarter. And we feel we deliver a strong report. We see a very strong demand across the line, both in geographies and in different automations. Automation sectors, we see drivers from increased automation and robotization. We see digitalization, we see energy monitoring, but also remote access of machines. And now in the post-pandemic view, of course, a lot of customers realize that it's been difficult to access remote sites at customers. So our technology is very, we have very good acceptance of customers today. And we think that a lot of the good development right now is mainly from our existing customer base, machine builders, device manufacturers, and users of these technologies. And we see that many of our machine builders have very good business in all our different geographies. We see a good order intake, but we estimate there's a stocking effect where we have, we call it boosting order by 140 million. Joakim will talk more about the details to help you understand how our order book looks like. But we see also that the continued challenging on, especially semiconductor markets, it makes our customer place more and more long-term orders so we get orders for 2022 to some quite big extent today we are seeing a gross margin push almost two percent down the reason why is that we are hit by increased component cost from our suppliers and this is coming quite quick to us and we are increasing our prices But we don't change the prices on the existing accepted orders. It's for new orders. And of course, we have a big order book. So we expect that we'll see effect on our price increases from mid-next year fully. So it's over the year until mid-next year. Then we have the full effect. So we will mitigate this. We'll be back on the traditional higher margins beyond 63%, probably from the middle of next year. Okay. the current level of 61 something is temporary due to the component shortages i think already last call in july we talked about this company obasis we acquired them first of july spanish company small company where we acquired 60 percent of the shares the four founders are having 10 each and keep on running the business we see a very nice business in um cellular applications for 4G, in the future 5G, another wireless technology where they use this in mobile machines. Mobile machines could be anything from excavators, but also for AGVs and these kind of moving machines in factories. So good company and we are very happy about this team in Bilbao and we also see that we can use our technology that we have in other sectors in HMS and make sure that Ovasys can take this to grow faster. And outlook is positive for remainder of the year. We see that the good investment climate for customers continues. Of course, there's a boost effect on the orders, but the underlying demand is high. We see a lot of investments. A lot of our customers are very successful in their business. And we think this good outlook will continue. We see that the current challenging component situation will continue to be a challenge for us the couple of more quarters. It will be a balancing out during 2022. It's not that we are seeing that we need to stop our supply chains or stop our production. We have a broad range of different products, but we have seen some of our products have long lead times. So this is a problem for us and our customers, but we also see that many of our customers understand that this is the situation and they also have other suppliers with long lead times. So we feel that we have a quite good acceptance for this difficult situation among our customers. All right. So with that, I would like to hand over to Joakim and talk more about the financial results in Q3.

All right. Thank you, Staffan. And I think we're going to start with the order intake, which is also the highlight of the report. So starting to look at the graph up to the left, you can see that we've had a pretty good development. We're reaching new all-time high of $669 million. which corresponds to 99% growth out of which 80% is organic. So it's a very good number for us. And I'll try to explain to you now a little bit with the boost effect, how that is impacting and what's actually more underlying business going in the right way. But first we can say that if we were to take away this boost effect, we still see about 43% underlying organic growth. So we still have a very strong business behind these numbers. And it's almost unfair to point out something, since everything is going well. All our markets are delivering, all our brands are delivering in a good way. But we should also mention Anibus, which is the main driver of this, with more than 100% organic growth in the quarter. And obviously, here is also where we have the strongest boosting effect in the Anibus embedded segment. We see a lot of customers placing their orders into also second half of 2022. to make sure that they will get deliveries. We have some small headwinds from currencies. You see we have minus five in the FX effects in the quarter and minus nine year-to-date, which we believe will even out a little bit as we go forward and leaving the kind of strange comparison numbers from the first half of 2020 behind us in a larger extent. So with that, let's go over to look at the net sales as well. Here you see, starting looking at the graph again up to the left, you see a bit of a more slower development on the curve. And we moved up 37% in comparison to third quarter in 2020, out of which 18% is organic and roughly flat compared to Q2 2021. And what we say is basically that the delivery rate Level where we are right now is what we expect to be able to get out in maybe the coming one or two quarters as well due to the component situation. So we see also that we could probably have achieved around 50 million more if we didn't have to push out orders in the quarter. That would have taken us a bit above the 500 million mark, which would have been a nice milestone. But I'm sure we'll get there soon. What I also want to like to point out is the percentage business that we acquired a year ago, quite exactly, which has been developing in a very positive way. And we started to see this already in the first quarter that we're moving in the right direction. And then it's just been getting almost better and better. And it's quite clear that we've been taking a step in that business with some new one accounts that will be very positive. positive for us going forward as well. So I think this is a level where we believe we should be able to stay at them and also continue to grow from. So very positive development of that acquisition for sure. Also here we see that small headwind from the currencies not impacting a lot actually now in the quarter only minus 2% but still. So then I've included this time a couple of extra slides to try to explain to you how we see the underlying market. I think that could be interesting to understand and also how the backlog has developed in relation to that. So here we have first looking at the left side of this graph. I'm trying to show you the order intake. So the full bar would represent what we have actually reported. And the dark blue bar would be showing them what we say is the underlying demand. And the light blue bar would then be the boosted order intake. So what you can see here is throughout the year, from Q1 to Q3, we've been seeing a larger impact from the boosted orders. And this is simply what we believe is an effect from the component situation. Our customers are seeing this as a bigger and bigger problem, and they want to be more and more careful and place orders further out in the future. I'll show you in the next slide also the effects of this, but it's quite clear that the underlying market is improving quarter by quarter. Even if we see the 9% improvement quarter by quarter that you see in total, it's maybe a bit over representative of the actually underlying demand. We've been trying to do the same things looking at the net sales. And here you have the dark blue bar would be representing the reported net sales. And then the total of the dark blue and the light blue bar would then be representing what we believe is the underlying demand. So also here you see that we have an up-ramping demand throughout the year, a little bit better each quarter. You also see that we have a larger share that we are not managing to deliver given the sourcing situation. But still we think this is a very positive trend that we're seeing. And as Staffan commented in the beginning, it's pretty much across all markets and all geographies that we see this improvement. And we believe it's very positive for the future. And all our customers are having a very strong business on that side, which is spilling over to us. Then just to also put in perspective, I think this is quite interesting, looking at the backlog. As you can see, if we now compare the closing balance of Q3 of $746 million, this is an improvement with more than 200% compared to a year ago. And you also see the ramp up throughout the year here with every quarter being higher. significantly better than the previous one. And also to put that in perspective, on the right-hand side, we have orders for delivery further out in time than three months. This is normally quite a small part for us. We have the vast majority of our order booked normally within the coming two months. We see normally between 15% to 20% that would be more than three months out. And you see here in January and February, We are on normal levels with 16 and 17%, and then you just see a pretty steep ramp up. Now we're up almost at 40% of our backlog, which is for delivery for the coming year, which will mean since we're now at the end of September. So this means that we're going to have a super strong backlog going into 2022, already with almost 750 million, and we expect that to build up also during Q4 to be even higher. It also means that, as Staffan commented on the price increases, we are not changing the confirmed orders, and we have long-term relationships with our customers, and they understand that we need to make price increases, which we are doing now. I think that discussions have gone well, and we expect to make up the margin drop, but we will have a limited impact over the coming two or maybe three quarters before this will get in effect. due to, of course, the big order backlog. Sales per region. Here you see that Europe is, or the EMEA region, I should say, is at 63% of net sales in the group, which is slightly higher than what we normally have. The main reason for that is that we have the strong development within Percentic and the new acquisition with Overseas with almost 100% of the business in Europe. As I said, we tap with the development across the line. So it's simply the nature of the business that we have more business in the EMEA with equine entities that is making this sort of change. We can also note that China is almost as big as Japan in terms of market, and that's quite interesting because we've been having a big gap there. Japan has been the main part of our APEC region, but now we have two strong markets, which would be great for the growth going forward that we have two good markets to work with. Then having a look at the profitability level, we are delivering 101 million equal to a margin of 21.5%, slightly down in margin compared to last year. And as you already understood, there are two drivers to this. One is that we are losing out a little bit in the gross margin. We're down about two percentage points in comparison to Q1 and Q2 this year. And that is, to almost full extent, driven by the price increases we're seeing in order to get source components. And this varies a lot from component to component. In some cases, we pay 10 times and even more than the normal price to make sure that we get that last piece that will make us be able to complete the product that we're going to ship. But this is a continued fighting trend. for our supply team, which has been doing a good job to keep the delivery performance as good as we've managed to perform so far. And we already covered the price increases that we are now working with. And again, the effects will start to show, we believe, mid-2022, given the strong order book. The other thing that's impacting the margin is the OPEX ramp-up. I think we've been pretty transparent with this throughout the year. We made some new investments in Q2, which we're now starting to see the effect of. We have 189 million in OPEX, which is organically up 33 million or 25% in comparison to Q3 last year. So it's a big change. Then you should also keep in mind that 2020 was not a fair comparison in that sense. We had a very low activity, no traveling and so on. Now we see the traveling is starting again. There is a built-up demand for meeting customers, for meeting the organization, and we see this is also some key activities to get things started again and to move on with our growth initiatives. So we believe it's quite positive that we're doing these things, but, of course, it's going to impact the margin, and the 21.5 could maybe be a bit better with very gross margins, but otherwise we believe it's a fair level to be at. And we said this before, I'm just going to say it again. We are continuing to see this. The OPEX ramp-up will also hit Q4, of course. We don't have the vacation effects that we have in July and August, making the OPEX come down a little bit in Q3. So we believe that we'll be roughly 10% up in OPEX in comparison to the levels that you see in Q3. Looking at the earnings per share then, also had good development, 36% up. There's not a lot interesting happening. We are pretty much debt-free in terms of interest-bearing debt, so that is not impacting the financials. So a solid conversion to 1.81 in earnings per share in the quarter and 5.75 Swedish crowns for year-to-date number. Looking at the cash flow, also one of, I think, the highlights in the report, we're quite happy to be able to perform in the quarter a cash flow of 148 million, which corresponds to cash conversion of 117%. And if you take the year-to-date number, we're very close to a cash conversion of 100%, which we believe is very positive, given that we have pretty high growth going on. The reasons for being able to convert this good in cash conversion is, I mean, first of all, we have the inventory. Despite the high increase in net sales, we basically don't have any finished goods. Everything is going out as fast as it's produced due to the high demand. The other thing is that we see our customers are paying us better than ever. So we have a pretty big gap between the DPO and our DSO, given that nobody wants to pay late because they know they won't be getting stuff. And everybody is desperate to get goods in time. So we have a very well-behaving bunch of customers in terms of paying on time, which is, of course, very good for our cash flow as well. We're quite happy to be able to keep the working capital low. We're at 7.4% in relation to sales compared to 10.7% a year ago. So it's a good improvement. It might not be sustainable over time, but it's good to see that we can be on this level also when we grow the business. Also for the full year, we have a very strong cash flow, $405 million. And even if we have a big growth, only minus $5 million in terms of the working capital changes impacting the cash flow. So final slide, which I think is maybe more important to explain now than most times. and looking at our net debt situation because we have a big thing impacting a lot now. We acquired, as you know, Percentic last year. We acquired Oasis this year. In both cases, we have both a put and call option, which means that the probability that someone would acquire or that a deal would happen that will require the rest is very high. And looking at IFRS, this means that if that is the case, you should be reporting that the most likely purchase price and the effect of the purchase price into the increasing debt level. So you take away the consolidated minority, and then you report the expected purchase price as a net debt. In total, this will add 390 million to our net debt. So you see, if you look at the dark blue bar, without this 390 million, which is of course not interest-bearing, in terms of interest-bearing debt, we would be debt-free, so I have net cash. So I think with that, we have a very good position. We have a big room still for continued M&A and a very solid balance sheet to work with, so quite satisfied with that situation. With that, I think we have said what we had to say, and Operator, why don't you see if we have any questions?

Thank you. And just to remind 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 Joakim Gunell from D&B Markets. Please go ahead.

Thank you. Good afternoon, Staffan and Joakim. So really helpful with this, I mean, more colorful order charts there, but can you help us just get a sense here on how much of this very strong order intake, excluding the stocking effects you highlighted, that are really, I mean, call it catch-up effects after years of low investment activity, that can be, so to say, sustainable, and how much of this upturn is green versus brownfield?

Maybe I can start with the general picture here, Joachim. I think we've seen that now for the first quarters we thought it was more like a demand, but this is coming quarter by quarter. So we believe now that there's a strong new investment cycle coming. And I think especially for brownfield that we see a lot of activities, a lot of more capacity built out. So I think a lot of our customers are investing in their supply chains and building more capacity. So we believe that this is not only a pent-up demand from the pandemic, it's even more, a new demand that is coming. And maybe Joakim Nidenborn, maybe you can put more flavor on that?

I think you're right, Staffan. It's, of course, very difficult to start to dig into how much could be one or the other. I think what we said in Q1, we were thinking it's more about an effect of building up that inventory that had been taking down for some time and the last two quarters it's more about securing delivery capacity for the coming quarters. So we believe that what we see is a quite fair presentation and of course excluding this boost effect of where the market is. We hear that from all our business managers that the customers are having a very strong demand on their side as well from them. As we sell mostly to the makers, so from the user's side there is a strong demand and new investments going on.

Thank you. And with the book to build at this, I mean, very high levels, can you talk a bit about how the order backlog margin is evolving? What I'm trying to get there is that, is it fair to expect that the operational leverage here, which was obviously slightly down now in Q3 versus the past quarters, is a good representation for what we can expect till mid 2022 when you expect to see the price increase initiatives?

Yeah, I think that's a fair assumption. The margins that we'll have on the order book will obviously be a bit squeezed since, I mean, we are getting the price increases now. And from the component suppliers, they're pretty clear. I mean, if you want to have the goods, then you have to pay. And it's now. And we try to, you know, we are very cautious with the relationships with our customers. And we could, of course, be a bit harder than what we are, but we believe that that might injure some of the relationships. So we're trying to be a bit cautious with how we handle it. We've had good discussions. They're accepting the changes. But, I mean, as you also commented yourself, Joakim, it will take until mid-2022 because we start to see big improvements. There might be some exceptions, of course. So we'll probably start to see maybe a small improvement in the beginning of next year, but it'll take up until mid-2032 until we are back recouped for these two margin percentage points in a drop that we've seen.

That's helpful. And just finally, if you can talk a bit about with Yvonne and Intesis being hit hard despite the delivery disruptions here, why is that and how do you see that develop into the coming quarters?

I think that is... Do you want to go, Stefan, or should I? I think it's a coincidence. The things that we're having problems with, it varies from quarter to quarter. When we solve one problem, we have another one that's coming up. Right now, it's memories to a large extent. It's just been the components that we have in these products. When it comes to E1, we expect to have that situation solved, I think, in mid-November. So we hope to be able to recoup a little bit in Q4. With Intesys, it's a bit tougher, and we're doing some redesigns to try to solve the problem. But I think it will be an ongoing struggle for the coming months to try to get this solved. But it's not a lot of, you know, that it's just even in Intesys, I think that's just coincidence.

Understood. Thank you. Fill in there.

I can only fill in there from... We also see that we have a quite big mix of different products. We have 500, 700 different part numbers. So I think we don't have supply problem on everything, but on some of them there are problems. So I think this is maybe also one benefit of having a broad range of products, that some have problems, but some keep on running. And for this quarter, it happened to be E1 and Intesys. I'm quite sure that next quarter it's something else.

That's clear. Thanks.

Okay. Thank you, Joachim.

And we have one more question from the line of Victor Höta from Danske Bank. Please go ahead.

Yeah, hi. So just a couple of questions. First one on percentage. It seems like impressive growth of the 2019 level of 120 million when you acquired it, up to 200 now. Did you say that you think that level is sustainable?

Yeah, I think we are there doing... Joakim, please go ahead. We're in two different locations, so we don't see each other.

Shall I start, Stefan, and you can kind of fill in? Please start.

Yeah, please start.

Yeah, so we believe that I think we've managed to, or I can say us, and I think the percentage management team has done a great job in driving the business up to this 200 million sec level. And that's been through some really good new customers coming in, plus I mean a strong underlying demand as well for them. And we think that is business that will be here to stay. So we think that we'll have a good base in this 20 million euros or 20 million SEK, and that we'll be able to grow from that level going forward. So we're quite happy with that.

I can only echo that. And we're also saying that we see also even more business opportunities in this market. So I think this is a very nice company, well run from the management team, and the potential is great. keep on growing there, have a high potential.

Okay. Well, it sounds good. And on the delivery capacity, you said short-term to expect it to be at these levels to improve slowly into 2022 or during 2022. What does slowly mean in this context? In terms of timing, Q1 at these levels as well, and potentially Q2, or would that be to stretch it too far?

Yeah, so I think the reason why we're not being super sharp in that comment is because it's so difficult to say. We know that in Q2 we have some things that will settle itself. I mean, if something wouldn't be very changed compared to what we know today. And then we see that we have a slightly better situation for various stuff in the beginning of the year. So we believe that we might have a similar situation in Q4, Q1, and then hopefully we'll start to be able to deliver out in Q2. And I mean, obviously, we have a big backlog. So if we just get components, we will be able to see a pretty big uptick in the sales to get the orders out. What we will end up in that case is, of course, the capacity constraints, because everybody, if this situation is resolved, then everybody's going to get the components and everybody want to have the deliveries at the same time. But, I mean, I think we're going to be careful to get too much now. We'll have to come back, I think, in Q4 and Q1 to give more flavor on that.

Okay, fair enough. And in the slide on the orders that have a duration longer than three months, 40% of the current backlog, did you say anything about how much of that were for the second half of 2022?

I did not say that. It's a part of it, but most of it is for the first half.

Okay. And in terms of price increases, what kind of magnitudes are we talking here to mitigate?

It's different on different customers, but I would say on average... high single digits in percentage. So that's what we are negotiating that kind of level. And we think our customers understand that we have increased costs. I think we are getting accepted for that. That is dramatic, but it's not more dramatic than that.

But is that in the same magnitude that you have been hit?

Yeah, so we've only seen a part of it on our side so far. We expect to get more also going forward. So our expectation is that with what we are doing towards our customers, with the price increase we are pushing out, we should be able to recoup on the full price increase that we will also see for the coming quarters on our side. Okay.

And final one on M&A. You still have a decent headroom in the balance sheet to do. Further acquisitions, you changed the targets a year ago to include more focus on M&A. What are you seeing out there? Are you focusing on, is there a problem with the current situation of sourcing that takes away, maybe not focus from you guys, but maybe the potential or the willingness from others to meet with you and to speed up the potential M&A talks?

Shall I go, Stefan?

Yes, please.

Yeah, so I think I wouldn't say that that has had an impact. The current situation, we have not seen that we've had some good discussions going on. And as you know, we're picky, we work with the same the same ambitions as we as we talked about last year. And, you know, it's, it's, it's long processes in some of these cases, and we we hope that we'll be able to have some some good things to present going forward.

I think meeting targets in Europe is now back on normal level. I think there's a challenge still in US, but especially in Asia, where there's a lot of restrictions still. So, of course, this is delaying some of the processes and some of the discussions. But we have local teams working in Japan and China, so we can meet them locally, but our global management team is not able to meet face-to-face with these targets yet.

Okay, I see. Thank you very much.

And if there are no further audio questions, I'll hand it back to the speakers.

Okay, thanks, operator. So thanks a lot for joining this Q3 presentation, and thanks for good questions to Victor and Joakim here. So thank you for participating, and please stay tuned. We have some interesting quarters coming up here. Have a nice weekend. Thank you.