HMS Networks AB (publ)

and gentlemen, welcome to the HMS Networks Audio Transcript Teleconference for Q4 2021. For the first part of this call, all participants will be in listening only mode and afterwards there will be a question and answer session. Today, I am pleased to present CEO Staffan Dahlström and CFO Joakim Niedeborn. Speakers, please begin.

Thank you. Good morning, everybody, and welcome to this Q4 call from HMS. So we're on the setup as we normally do here. I will start with a summary introduction, followed by a business update, and then Joakim will continue with more financial results and details on the analysis. Let's move into the Q4 numbers. Some of you may have already seen them in the morning. We see very good numbers for our net sales, growing by 41% in Q4, but we also see a continued very good order intake, up 71% to 699. Joakim will dig more into this. There's some boosting effect here as well, so we'll move over to that a bit later. Strong EBIT, good development. However, we have The things we are not super happy with is a little bit pressed gross margin, and Joakim will come back to this and also dig a little bit more into our OPEX in Q4. So our EBIT lands at 19.2, slightly under our long-term target of 20. Strong cash flow, EPS of 185, so all good. And this concludes to a very good 2021 with fantastic development of our revenue, up 34%. close to 2 billion, and order intake 2.5 billion, up 75%. So we do have a big order book that we will talk about with later. Good development on our EBIT level, good cash flow, and EPS at 761. And actually, yesterday night, our board proposed a dividend of 3.0 Swedish crowns. So that's for the numbers, but before Joachim digs more into this, let's talk a little bit about our business. Many of you are familiar with what we do. We are connecting devices. HMS is Hardware Meet Software, so we connect data and information from machines, between machines, up to systems in industrial applications. Our core brand is Anabas E1 indices ICSAT, but over the last two, three years, we've been acquiring Some new businesses, Webfactory, German software company, Procentec, Dutch network diagnostic company, and recently the Spanish OVAS is working with communication in mobile applications. And I would like today to dig a little bit, I wouldn't say deeper, but maybe scratch a bit more of the surface on our customer groups. I told you before that we have the makers of industrial equipment and the users of automation systems. But since it's the end of the year, I would like to give you some more flavor of what we talked about here. So if we look into, first of all, the makers of industrial equipment, start looking on the left side, we have device manufacturers. Very important for us, this is 43% of our revenue. The business model we have here is what we call design wins. This means that they integrate support for our technology in their devices and units. And when they sell these devices and units to their customers, they will buy things from us, put inside their device, and we become part of their delivery to their customers. So this design win model is very sticky. That's the good side. The bad side is that it takes quite a long time to win these customers and that's a quite long sales cycle. But again, the good thing is that these products keep on being manufactured for 8, 10, even 15 years. That's a long revenue cycle from these design wins. It's a complicated sales process, takes time. So here we work with direct sales engineers, own staff that talk to these customers. Very important. I will a bit later talk about the design win situation for 2021 as well. But before that, a few words about machine builders. Machine builders is 35% of our revenue. And here it's a slightly different business model. We would like to be part of their bill of material when they build the machines. And of course, we would like to be as a standard part of all their machines, but step one is normally to become an option so we can be selected as an accessory into this machine design when they go to their customers. And here we see a mix of direct sales to larger machine builders and distribution sales to smaller machine builders. If we move over to the users, these are industrial end users. Let's see if we get the right slides here. Thank you. Industrial end users could be like a Volkswagen plant or a chemical plant, someone that have a lot of automation equipment and want to connect different cells and machines together. Normally, we work directly with end user or through system integrators that have the assignment to solve some communication challenges there. This is 22% of our revenue. Either we work with like a project sales where there's a project of refurbishing a factory and we come in with a system integrated to help with communication there, or it's a pure product sales where we market our products with its specification on the website, in catalogs, et cetera, and we simply get orders based on the specification, traditional product sales. This goes primarily through traditional distributors and to a growing part also e-commerce distributors. So I think it's important to keep in mind that on the left side, it's a longer cycle and a very sticky business. And then when we move further right in this picture, it becomes quicker time to money in the businesses. All right, let's take a look at our vision and targets. Our vision is to become the world's greatest industrial ICT company. able to come close to that vision we keep a close eye on our mission where hms enables valuable data and insights allowing our customers to increase productivity and sustainability two really important areas for our customers so this is something they really want to talk to hms about we have our target for 2025 the top three targets is environmental becoming co2 net positive both in our own businesses but of course also helping our customers to achieve their environmental targets Staff and customers, we believe that happy and high-performing employees generate loyal customers, and we love loyal customers. So we have high ambitions on net promoter scores for our employees, plus 25, as well as our customers' net promoter scores, plus 25. And we want to maintain a good, solid growth and profitability. We really like to be a growth company. We are on a good path right now, but 2025, we should be at revenue beyond 5 billion Swedish crowns, greater than 3.14 billion. And we would like to have an EBIT level of 20% and beyond. So let's move into a quick business update, just a general thing before Joakim takes over and talk about the numbers. But as we write in the report, we see a very good demand across all geographies. We see drivers as increased automation, digitalization, energy monitoring, remote access and sustainability. And we see now that after COVID-19 is, if I say, losing its grip, but we see that our customers, they realize that the chemical and the paper and all these base industries, they are still running quite well. So even if there's a pandemic situation, quite many of these basic industries are delivering good products. good and well. So we see good development in all our brands throughout the year. What is notable is that continental Europe and North America is delivering the best record volumes in Q4. But we do still have a situation with limited components. This component situation continues. This also makes our customers place orders earlier than normal. we see that some part of our order intake is far out in 2022 and we estimate that the boosting effect in quarter two is 200 million it's a 200 million that we get orders earlier than we should normally do joaquin will talk more about this and what we are not super happy about is the gross margin where we see that it's lower in quarter four and this is a combination of um Higher purchasing price on components. We need to go out to the spot market to buy components to much, much higher price than normal. That's one part. We have started price increases, but made a decision to not increase prices on the accepted orders, confirmed orders. So this means that we need to get in new orders at new pricing to get good margins. So we are quite sure that we'll get back on good margins, the plus 63% going a couple of quarters ahead. But right now, we are not fully in phase with these two things. All right. And if we look on significant events during the year, we have talked about our acquisition of Ovasys here during the summer. It looks very good. We're doing some projects with Ovasys today. They are growing, and we get new businesses there. And it's really about mobile machines, etc. And we see that we can combine some of our technology with some of theirs. And this looks really promising. So about mobile, we also look on 5G. We've been reporting about this since a couple of years. And I would say that we see some kind of trend change that in automotive, but also in mining, especially I would say mining applications that some key customers are moving from early proof of concepts to early pilot installations, which means that the technology is working well and they see that 5G in mining solves problems that were difficult to solve with other technologies. But as we said many times about 5G, this will have an impact in the market, but that impact is probably a couple of years ahead since our customers are more conservative industrial companies and always a bit skeptical to new technologies. We also made a minority investment in the Swedish software company Connectitude in December. And we promoted our German colleague Alexander Hess to be part of our management team, and he will focus on our growing business of information centric. Finally, I would like to give you some more details about the design wins. As I mentioned, this is for makers, device manufacturers. And if you go 10 years back, this was 76% of our revenue. And we've successfully grown this business. And today it's only 43%. This doesn't mean that it's declining. It's the opposite way. But we also acquired other businesses and we had fantastic growth in other areas. So what used to be the lion part of HMS is today one important part, but we have more strong legs to stand on today. We see that we have a solid intake of new design wins. This means that we have an attractive offer to our customers. You can see year by year, we've been around this 150, 200 in the new design wins. What's interesting is that after the in-design phase, they go into production phase. And this is where we make active revenue. So we have today 1,820 active customers, which is over 10 years, a double number of customer base. So this is important for us, and this generates our growth in this segment of our business. What should be noted here is that we also have the red parts of the bar. We call them terminated. This means that it's a design win that is discontinued. Normally, it's a design win that we got maybe 10 years ago, so it's past its heydays or volumes, so it's declining. And we've seen that during these component shortages, several of our customers have been taking tougher decisions about old products to be able to focus their components on new things. So I think that we're seeing a higher number of terminated old design wins is more a signal that this is a market where customers are killing old stuff, I wouldn't say that this is an indicator that we are not successful. So this is the tale of old products that is killed more or less. So all in all, we see stable growth here and a stable business, and we don't see any big trend changes. This will continue for the coming years as far as we can see the market right now. With that, Joakim, more things about financial results. Thank you, Staffan.

So we're going to start off with the order intake as we normally do. And firstly, I just want to take a second to look at the graph to the upper left, which is continuing to move in the right direction with another record quarter of 699 million Swedish crowns, 71% growth or 65 organic, which is to compare with the organic number 66% for the full year. So you can see that despite that we have meeting tougher comparables in Q4 2020, we're maintaining the organic growth rate as we've had throughout the year. And the year-to-date number over 2.5 billion is, of course, a very strong number for us. I just wanted to comment a bit about the boost effect, the stuff I mentioned. We had in Q4 some 200 million in boosted orders. So if we adjust for that, we still have an organic growth of 16% on the order intake. So for the full year, we're up now at about 500 million in boost effect. But adjusted for that, we're still at 31% underlying organic order intake growth. So even so, it's a strong business that's going on and with a lot of good business opportunities that are materializing. The main driver that we see in terms of our offering is Anybus, where we have more than 80% organic growth, both in Q4 and for the full year. And the reason for any bus being so strong is that we have a large part of the business within the signings that Staffan just talked about. And here we see that customers are being a bit more careful, taking on bigger inventories to offset the long lead times and also building higher safety stocks to be on the safe side. We don't see the same effect for the rest of the offering. So there we have a much smaller boost effect in the orders. Just to mention some sectors that are doing good. You know that we don't necessarily follow this or have the full insight since we have a pretty horizontal offering. But we see a strong business throughout the year from robot manufacturers. We see industrial automation companies in general are being strong. We've been having good boost in the automotive business from our side in the transition to e-car manufacturing. As you know, we're not in the actual cars, but in the manufacturing facilities as such. And also good to note, even if it's a bit smaller, we've been seeing good uptick in wind power and battery applications, which we believe will be industries for the future to work with. So that's very positive. I also want to mention continental Europe that's been outperforming quite well and more than double ordering take now in Q4, which is we maybe did not expect that to continue in that high pace. And we think the reason is that we saw the pandemic in 2020 was burdening continental Europe the longest. And now we see recovery still going on in a solid pace in Europe. So going over to the sales, you can also see a rather nice graph on the upper left. And I must say that the 571 million that we managed to get out is a bit better than what we expected. I think our supply team has done a very good job in sourcing components. and the fact that we managed to get out 571 million in the quarter does not really mean unfortunately that we'll be able to maintain that pace in the beginning of 2022 so we still see a lot of challenges and the sourcing side there's still a lot of uncertainty and unfortunately we don't think that we'll be able to to follow up with a strong quarter in the coming quarters going forward So we had 37% organic growth in the quarter and almost 2 billion in sales for the full year with 26% organic growth. We're quite happy with this and we know that we have problems delivering, especially in Q2 and Q3, that could have driven a better sales down than we managed to push out. One thing I wanted to mention that is also main driver for the strong Q4 is that we managed to solve some sourcing problems with E1 products. that you might remember was a bit tough in Q3, and now we're delivering very good volumes in Q4 with 59% growth versus just Q3 on the E1 side. I think it's also worth mentioning for the whole year, we see good development within the two recent acquisitions, Oasis and ProSemtech, and I think both of them have been outperforming our expectations and we're very happy with the good development with our new family members. And then we started last quarter to try to illustrate what we believe is more the underlying demand since we see this boosted orders. So we made the same graphs now for Q4 as well. Starting on the left-hand side, you see the order intake where, as I mentioned on the order slide, we see a bit of a built-up boosting effect here escalating throughout the year and in total about 500 million for the full year. Now looking forward, this is of course quite difficult to foresee how this will continue. We didn't really expect to see that big of an effect that we've been seeing for the last quarter, maybe even the last two quarters. We see that January started on a good pace as well. So maybe this will continue for a bit more when we still have these uncertainties in the supply chain. We see that our customers want to secure the volumes and placing a lot of orders far out in the future. I'll also illustrate this on the next slide with another graph. On the net sales side, we've been succeeding better in getting the volumes out in Q4, as you see here, and we don't really expect that the net effect of re-prioritized orders have a big impact on our deliveries. We've been re-prioritizing some, but on the other hand, we've been able to deliver on some that we didn't expect. So all in all, we think that it's about a net zero on the re-prioritized order side. And then going forward, as we said, we think this will be a challenging level to continue. But we hope that we'll be able to solve as many problems as possible on the supply side. Just illustrating the backlog a bit on the same theme as we just talked about. You see that we have about a triple backlog in comparison to normal levels, so 864 million in backlog. And on the right hand side, you see that about half of this volume is for delivery further out in time than three months, which is very unusual for us to have such a big part. We're normally more between 16, 17, 18% somewhere there for deliveries further out in time than three months. And this is also back to the margin, the gross margin question that Staffan brought up as well. Since this is the case and we have decided not to change the pricing on confirmed orders, it means that we think that we'll have a slow recovery on the gross margin side, but it will not impact too much in the first quarter. Then we'll be a little bit more in the second quarter. And then after the third quarter, we believe that we will have a much better impact on the price increases that we're pushing onto the market. In terms of sales per geography, I think here we have continental Europe and EMEA performing extremely well. Also, Americas is in a very good volume and by far a record quarter. So normally we have about 60-20-20 split, and now it's 61-24 for Americas and only 15 for APAC, which is not bad. It's just that the other markets have been performing much better in this particular quarter. And worth noticing is that China, I think for the first time, is higher than Japan for us. And it's not, again, not that Japan is slow, it's that China has been performing quite well in the quarter. So that's good that we have another strong market to put to the collection. And then going over to talk about the results. And I think we can say with the strong deliveries that we had in Q4, we were maybe hoping for a slightly better result. Unfortunately, we have a tough situation on the gross margin side. We need to still make a lot of spot market purchases, and we need to pay for priority with our suppliers in order to be able to deliver. All in all, I think those are not difficult decisions. We need to do that, but it's, of course, hurting us short term. So all in all, we're getting to 109 million in EBIT, 19.2% margin versus 18.5 a year ago, and for the full year at 446 million and 22.3%. 6%, which is of course better than our long-term target and we're quite happy with that margin level. For the full year, the gross margin is 62.4 versus 62 a year ago. So I think we still managed to improve the margins over the year. And here we see that Q1 and Q2 was very strong and then Q3, Q4 a bit weaker. And for 2022, we expect to see the opposite, that we're going to start off a bit weaker and then, as I said, improve towards the end of the year and hopefully be able to show a second half of 2022 on slightly higher margins. For you who have read the report, you might be wondering on the OPEC side, that sticks out maybe as a bit high. So we were at 238 million versus 175. Organically, that's plus 36% or 63 million. and i think we've been communicating throughout the year that we've been adding on some some resources both from the development side but especially on the sales and marketing side and um here we've been getting a lot of those resources in through cute through q3 and then impacting q4 in with the full impact we also have about 20 million that we would say is like non-recovering expenses this is related to sales and marketing we're doing some marketing campaigns We've taken the opportunity to take some external help to make some projects on the development side. We've been doing some education sessions with our staff and so on. So there are 20 million of this that we do not believe to be recurring. But we're taking the opportunity when we have a good business climate to do some investments for the future. Looking for the full year, we have OPEX increase of 19%. And then you should also remember that we had very low OPEX in 2020 through the start of the pandemic. And even if we're still not traveling a lot, it's more than what we did a year ago. Then going over to earnings per share, not a lot of details to share here. More than that, we had 1.85 in the quarter versus 1.21. So a 53% increase, good to see. And for the full year, 7.61%. versus 4.79, and then, as Staffan said, the board is proposing a dividend of three crowns versus two crowns a year ago. The cash flow has been strong throughout the year, and I think we still have a rather good cash flow in Q4. We had very good deliveries both in end of November and December, which is building our receivables a bit, so I think the working capital impacts a little bit with minus 24 million. which is, of course, hurting the cash conversion ratio a little bit. But we're at 78%, which we still think is quite good. And we knew that we would not be able to maintain those really high levels that we've had for a couple of quarters. But still, we think overall for here, we're at a good level and good to see that we convert good to cash in our deliveries. For the year, we have cash flows from operating activities of 508 million in comparison to 370 a year ago. So also there are good developments. So my final slide I wanted to share with you, looking at the balance sheet and our net debt, we have reported 346 million. What I did this time was split up the bars so you can see what type of debt we're talking about. Some of you might remember that we added on some That's related to the options we have with Overseas and Procentec. We have both the put and call option. So we need to take this into consideration looking at our net debt, even if it's not interest bearing. So here we have about 390 million that we wanted to illustrate. So you could say it's consuming potential acquisition space for the future, but it's not really impacting us with any cost at the moment. So adjusted for this and for the IFRS 16 impact from leasing, we're actually in a net cash position, both in Q3 and also in Q4 with 108 million. And I think all the ratios, net debt, EBITDA looks quite solid with 0.63. So not really anything to worry about from our side. And we feel that we have about all the space we need for our future M&A agenda to continue to work with that. So with that, I'd like to hand over to Operator for some questions.