HMS Networks AB (publ)

Thank you. Good afternoon, everybody. It is a 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 will dive 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 percent. We are slightly below that, only 99 up, but 99 percent, it's a fantastic growth for 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 market down due to, I would say mainly due to a little bit lower growth 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 free in a nutshell for the first nine months. This just concludes the strong growth continues. Order intake is super strong. Profitability, flow, everything goes in the right direction here. So, so far this year have been good, and we actually think the remainder of this year and going forward is also quite strong. And we just make a little bit of a dive into our business. Several of you already know it. We have our four main brands with Enibus, E1, Indus, Nixxon, and some acquired business the last couple of years, Webfactory, Procentech, and also Last quarter, Spanish O-Buses for wireless communication. So this is what we do. HMS is hardware-mid software. So it's a combination of hardware product with embedded software, but also cloud communication, visualization software, and that kind of thing. As a company, we are having more than seven million installed devices around the world, mainly for our Enibus 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 15 years. 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, Hampstead. So if we move into more of a 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 makes industrial equipment, and they embed our communication technology of 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 these. And at the moment, we are good over these levels, and 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 5 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. Did 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. 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, feel very good acceptance of customers today. And we think that a lot of the good developments 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 market, 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 2% 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 and we'll be back on higher, the traditional higher margins beyond 63%, probably from the middle of next year. So 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, O-Buses, we acquired them first of July, Spanish company, small company where we acquired 60% of the shares, the four founders are having 10% each and keep on running the business. We see a very nice business in 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 kinds of moving machines in factories. So good company and we are very happy about this, teaming Bilbao and we also see that we can use our technology that we have in other sectors in HMS and make sure that O-Buses can take this to grow faster. And the outlook is positive for remainder of the year. We see that the good investment climate for our 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 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. Well, 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, Stefan. I think we're gonna start with the order intake, which is also the highlight of the report. So starting looking at the graph up to the left, you can see that we've had a pretty good development for each 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're to take away this, 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 an Anibus, which is the main driver of this, with more than 100% organic growth in the quarter. And then obviously here is also where we have the strongest boosting effect in the Anibus embedded segment. We see a lot of customers placing our orders into also second half of 2022 to make sure that they will get deliveries. And 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. 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 move 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 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 will get there soon. What I also wanna 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 for us going forward as well. So I think this is the 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% of steel. 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 then the light blue bar would then be 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 wanna 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 is 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, 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 we have, I mean, all our customers are having very strong business on their 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, 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 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 small part for us. We have the vast majority of our order book normally within the coming two months. We see normally in 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, yeah, actually for the coming year, it will mean since we're now at the end of September. So this means that we're gonna 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 Stefan 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're doing now. So 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 an effect, due to of course, the big order backlog. Sales per region, here you see that the Europe is, or the major 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 OVASYS, with almost 100% of the business in Europe. But as I said, we tap with the development across the line. So it's simply the nature of the business that we have more, this is in the EMEA, with the quite 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, and that we have two good markets to work with. Then having a look at the profitability level, we are delivering then 101 million, equal to a marginal 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 point, comparison to Q1 and Q2. 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 been able to complete the product that we're gonna ship. But this is a continued fighting 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 then again, the effects will start to show, we believe mid 2022, even a strong order book. The other thing that's impacting the margin is the OPEC ramp up. We've been, 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 OPEC, 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 do these things, but of course it's gonna impact the margin. And the 21 and a half could maybe be a bit better with better gross margins, but otherwise we believe it's a fair level to be at. And we said this before, I'm just gonna say it again. We are continuing to see this. OPEC ramp up will also hit Q4 of course. We don't have the vacation effects that we have in July and August making OPEC come down a little bit in Q3. So we believe that we'll be roughly 10% up in OPEC in comparison to the levels that you see in Q3. Looking at the earnings per share then, also here good development, 36% off. There's not a lot interesting happening. 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 cashflow, also one of the highlights in the report, we're quite happy to be able to perform in the quarter. Cashflow 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, 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 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 cashflow as well. We're quite happy to be able to keep the working capital low. We're at .4% in relation to sales and 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 cashflow of 405 million. And even if we have a big growth, only minus 5 million in terms of the working capital changes impacting the cashflow. So final slide, which I think is maybe more important to explain now than most time and looking at our net gap situation because we have a big thing impacting a lot now. We acquired as you know, percentage last year, we acquired overseas this year. In both cases, we have both put and call option, which means that the probability that someone would acquire that the deal will happen that will acquire the rest is very high. And looking at IFRS, this means that if that is the case, you should be reporting the most likely purchase price and sorry, 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 that we would be debt free so I'm not 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 Gunnel from DNB Markets. Please go ahead.

Thank you. Good afternoon, Saffron and Joakim. So really helpful with this 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, will 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 Joakim. I think we've seen that now for the first quarters we've thought is more and more like a pen demand but this is coming quarter by quarter. So we believe now that there's a strong new investment fight 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, 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, maybe you can put more flavor on that.

I think you're right Saffron. 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 taken down for some time and the last two quarters it's more about securing the delivery capacity for the coming quarters. So we believe that what we see is a quite fair presentation that of course excluding these boost effects of where the market is. And 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 side, there is a strong demand and new investments going on.

Thank you. And with the book to be let this, I mean, at 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 are pretty clear. I mean, if you wanna have the goods, then you have to pay. And it's now. We try to, 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 there accepting the changes, but I mean, as you also commented yourself, it will take until mid 2022 because we start to see any 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 2022 until we are back recouped for these two margin percentage points in the draft that we've seen.

That's helpful. And just finally, if you can talk a bit about with even an emphasis 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. You wanna go, Stefan and July?

I'll start you.

Yeah, I think it's a coincidence. The things that we were having problems with, it varies from course to course. When we solve one problem, we have another one that's coming up. Right now, it's memories to a large extent. And it just been the components that we have in these products. The minute 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 EQ4. With the emphasis, 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, that it's just E1 and emphasis, I think that's just a coincidence.

Understood. I can just fill in there.

And I can only fill in there from, what we also see that we have a quite big mix of different products. We have five, 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 product that some have problems, but some keeps on running. And for this quarter, it was happened to be E1 and emphasis. I'm quite sure that next quarter it's something else.

That's clear, thanks.

Okay,

thank you, Joakim.

And we have one more question from the line of Victor Hörper 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 sitting in two different locations, so we don't see each other.

So I'll start, and you can... Please start.

Yeah, please start.

Yeah, so we believe that, I think we managed to, or I can say, 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 a really 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 200 million SEC, 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. 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 keep on growing there, have a high potential.

Okay, well, 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 and Q1 at these levels as well, 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 in that case is, of course, then the capacity constraints, because everybody, if this situation is resolved and 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 order step, 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 not the... That is dramatic, but it's not more dramatic than that.

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

Yes. That's our... Yeah, so we've only seen a part of it in our side. 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. So you changed the targets a year ago to include more, focus on M&A. What are you seeing out there? What are you focusing on? Is there a problem with the current situation on 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 ambitions as we talked about last year. And, you know, it's long processes in some of these cases. And we hope that we'll be able to have 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.

OK, I see. Thank you very much.

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

OK, thanks, operator. So, thanks a lot for joining this quarter pre-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.